The Paycheck Protection Program is a fairly new program, created by the signing of the Coronavirus Aid, Relief, and Economic Securities (CARES) Act on March 27th, 2020. The CARES Act was a wide-ranging relief package designed to distribute over $2.3 trillion to businesses and individuals affected by Covid-19.
Among the programs established by the act is the Paycheck Protection Program. A $350 million loan package to be given out to small businesses. The idea behind the PPP is to allow small businesses to borrow money from the government that they can use to pay their employees and other vital expenses during the pandemic. These are meant to be loans in name only, as once the funds are received, any amount spent on payroll, mortgage interest, rent, and utilities is eligible to be completely forgiven and tax deductible. Any funds not spent on those specific expenses must be paid back over the next five years at an interest rate of only 1%.
What are the Benefits to My Business?
If you can get it, the benefits of the Paycheck Protection Program can be huge for your business. The funds you receive essentially allow you to keep running your business during the pandemic, protecting you from defaulting on your mortgage or having to cut payroll completely.
This can be the difference between surviving the next few months or shuttering your doors for good. If you run a business with fewer than 500 employees, there’s really no reason not to apply.
How Does the Loan Work?
Alright, so let’s get into the details.
- The Paycheck Protection Program is available for any business with fewer than 500 employees.
- You have to be able to certify that the current economic situation makes it impossible to keep your business running without the loan.
- If accepted, you can receive a loan of up to two and a half months of your average monthly payroll costs from the previous year.
- The loan is capped at $10 million (Even if your average payroll costs are higher, that’s the maximum amount allowed).
- Once you receive the loan, you have 24 weeks to spend the money before any left over balance is no longer eligible to be forgiven.
- The money can be spent on any business expenses, although only funds spent on certain expenses will be forgiven.
Repaying the Loan
The great thing about the PPP is that a significant amount of the funds received will never have to be repaid. This makes it something between a loan and a grant, depending on how you spend the money. The following categories are part of the approve list for non-repayment.
- Mortgage interest
- Building utilities
The forgiven portions of your PPP loan can be deducted from your taxes. However, making sure your employees are paid is the biggest hook of this program. You have to spend at least 60% of your received funds on employee payroll costs, or you won’t be eligible for forgiveness.
Portions of the loan that you don’t spend on forgivable expenses, must be repaid. After a six-month deferment period, you have five years to pay back the remaining part of your loan, with an interest rate of 1%.
Who Can Help Me with a PPP Loan?
You can get your PPP loan through a number of different private lenders. That includes any Farm Credit Union, traditional credit union, or bank that has federal insurance over its deposits. Additionally, the institution must also have been approved to participate in the Paycheck Protection Program.
You can also go to a personal bank or lender, but make sure that they are approved participants in the PPP. If you’re not sure where to go, you can get help from any CPA or financial attorney to guide you in the process.
Latest Updates to the PPP
On June 5th, 2020, the Paycheck Protection Program Flexibility Act was passed. The PPPFA made some changes to the Paycheck Protection Program, which is why some of the information in this article might be different from what you’ve already read on the web. As always, make sure you’re up to date on any changes to the program!
Some of the changes brought on by the PPPFA include extending the period you can spend the funds from 8 to 24 weeks, lowering the percentage of funds that must be spent on payroll expenses from 75% to 60%, and giving you five years to pay the loan back instead of two. The 1% interest rate has not changed, nor has the definition of what expenses are forgivable.
If you’ve been successful with the Paycheck Protection Program for your business, we would love to hear from you. Tell us about the process and how helpful it was to your business after approval and payment.