Paycheck Protection Program


The Paycheck Protection Program is a $953-billion business loan program established by the United States federal government during the Trump administration in 2020 through the Coronavirus Aid, Relief, and Economic Security Act to help certain businesses, self-employed workers, sole proprietors, certain nonprofit organizations, and tribal businesses continue paying their workers.
The Paycheck Protection Program allows entities to apply for low-interest private loans to pay for payroll and certain other costs. A PPP loan allows a business applicant to receive funds up to 2.5 times the applicant's average monthly payroll costs. Sometimes, an applicant may receive a second draw typically equal to the first. The loan proceeds to cover payroll costs, rent, interest, and utilities. The loan may be partially or fully forgiven if the business keeps its employee counts and employee wages stable. The U.S. Small Business Administration implements the program. The deadline to apply for a PPP loan was March 31, 2021.
Some economists have found that the PPP did not save as many jobs as purported and aided too many businesses that were not at risk of going under. They noted that other programs, such as unemployment insurance, food assistance, and aid to state and local governments, would have been more efficient at strengthening the economy. The program was criticized for its exorbitant cost, costing approximately $169k – $258k per job saved, and that the majority of benefits flowed to small-business owners, their creditors and their suppliers rather than to workers. It is estimated that only 25% of the funding allocated went to jobs that would have been lost. Supporters of the program note that the PPP functioned well to prevent business closures and cannot be measured on the number of jobs saved alone. By one estimate, the PPP reduced mortgage delinquencies by $36 billion in 2020.

Overview

The purpose of the Paycheck Protection Program and loan forgiveness is to provide economic relief to small businesses and certain other entities that have been adversely impacted by the COVID-19 pandemic.
According to a 2022 study, the PPP:
cumulatively preserved between 2 and 3 million job-years of employment over 14 months at a cost of $169K to $258K per job-year retained. These numbers imply that only 23 to 34 percent of PPP dollars went directly to workers who would otherwise have lost jobs; the balance flowed to business owners and shareholders, including creditors and suppliers of PPP-receiving firms. Program incidence was ultimately highly regressive, with about three-quarters of PPP funds accruing to the top quintile of households. PPP's breakneck scale-up, its high cost per job saved, and its regressive incidence have a common origin: PPP was essentially untargeted because the United States lacked the administrative infrastructure to do otherwise. Harnessing modern administrative systems, other high-income countries were able to better target pandemic business aid to firms in financial distress. Building similar capacity in the U.S. would enable improved targeting when the next pandemic or other large-scale economic emergency inevitably arises.

Provisions

Eligibility

In order to be eligible for the Paycheck Protection Program, an applicant must be a small business, sole proprietor, independent contractor, self-employed person, 501 nonprofit organization, 501 veterans organization, or a tribal business.
Applicants who operate as a sole proprietorship, an independent contractor, or an eligible self-employed individual must have been in operation on February 15, 2020. Other types of applicants must have been in operation on February 15, 2020, and must have either had paid employees or paid independent contractors.
The applicant and its affiliates must also:
  • Have 500 or fewer employees worldwide, including its U.S. and foreign affiliates; or
  • Meet the Small Business Administration's industry size standards based on average number of employees. or
  • Have a tangible net worth that did not exceed $15million on March 27, 2020, and an average net income that did not exceed $5million for the two full fiscal years prior the date of the PPP application.
The applicant must be located in the United States or its possessions. The applicant's primary operations must be located in the United States or its possessions or, alternatively, the applicant's business must make a significant contribution to the economy of the United States.
An applicant is ineligible for a PPP loan if:
  • It engaged in any activity that is illegal under federal, state, or local law; or
  • It is a household employer, such as an individual employing nannies, housekeepers, or other household employees; or
  • It is a passive business, such as a hedge fund or a private equity firm; or
  • It is in bankruptcy proceedings at the time of application or before the loan proceeds are disbursed; or
  • It is a public hospital that receives 50% or more of its funding from state- or local-government sources, excluding Medicaid; or
  • An owner of 20% or more of the business is incarcerated; or
  • An owner of 20% or more of the business is presently subject to an indictment, criminal information, arraignment, or other means by which formal criminal charges for felony offenses are brought in any jurisdiction; or has been convicted of a felony within the last year; or
  • An owner of 20% or more of the business is on either probation or parole, which began within the last five years for a felony involving fraud, bribery, embezzlement, or a false statement in a loan application or an application for federal financial assistance, and within the last one year for other felonies; or
  • The applicant, the business's owners, or any business owned or controlled by the applicant or the business's owners have ever obtained a direct or guaranteed loan from any federal agency that is currently delinquent or has defaulted within the last seven years and caused a loss to the federal government; or
  • The business is owned in whole or in part by an undocumented alien.
An applicant is not required to demonstrate that it cannot find credit elsewhere, but it is required to certify, in good faith, that "current economic uncertainty makes this loan request necessary to support the ongoing operations of the applicant".
Each business may receive one PPP loan with up to two draws.

Loan amount

The amount of the PPP loan is based on the applicant's payroll costs.
Payroll costs include salaries, wages, commissions, cash tips, paid leave, severance pay, clergy parsonage and housing allowance, and other compensation paid to employees. These costs are limited to $100,000 annualized per employee. Payroll costs also include group health benefits and insurance and retirement benefits. Payroll costs include taxes withheld from employees' wages and all state and local taxes assessed on compensation, but payroll costs do not include the employer's portion of social security tax, the employer's portion of Medicare tax, and federal unemployment tax. In the case of a sole proprietor, independent contractor, or self-employed person, payroll costs include net profits from self-employment, based on the 2019 Form 1040 Schedule C line 31, and limited to $100,000 annualized.
Payroll costs do not include payments to workers whose primary residence is outside the United States. Payroll costs also do not include payments to non-employees of the applicant.
In order to calculate the amount of the PPP loan, the applicant calculates its payroll costs between January 1, 2019, and December 31, 2019. Average monthly payroll costs are calculated by dividing this amount by 12.
The PPP loan amount is equal to 2.5 times the average monthly payroll costs. For applicants with an Economic Injury Disaster Loan made between January 31, 2020, and April 3, 2020, the PPP loan amount could be increased by the outstanding amount of the EIDL, less any advance received under an EIDL COVID-19.
Each PPP loan may not exceed $10million. In some cases, however, each affiliate of a company is allowed to apply and receive its own PPP loan. On April 24, NBC reported that there were at least eight cases where a company and its affiliates had received PPP loans, and half of them had received more than $20 million in total.
A borrower that accidentally made an error in its PPP loan application that resulted in larger PPP loan amount must take actions to correct the error.

Application process

An applicant applies for a PPP loan directly with an eligible private lender, such as a federally insured bank, a federally insured credit union, Farm Credit System institution, or a Small Business Administration-approved lender.
The Small Business Administration has a standard application form, although private lenders were allowed to use their own paper forms or electronic forms if they were substantially similar to the standard form. An applicant has to attach documentation to support the amount of the loan applied for, such as payroll reports, payroll tax filings, Form 1099-MISC, or a sole proprietor's income and expenses. If these records were unavailable, a lender could accept bank records if they sufficiently demonstrate the qualifying amount.
Applicants must make certain assertions, including that "current economic uncertainty makes this loan request necessary to support the ongoing operations of the applicant". While a lender does not need to require a business to demonstrate the basis its certification, the Small Business Administration may do so. The Small Business Administration does not believe that a publicly traded business with substantial market value and access to capital markets could make that certification in good faith. An applicant that, together with its affiliates, receives PPP loans totaling $2million or more should retain documentation of what basis it made this certification.
Applying for a PPP loan is free to the applicant. An applicant was not charged any application fees by either the private lender or the federal government. The Small Business Administration compensates lenders for processing PPP loans. Certified Public Accountants and accounting firms are not allowed to charge businesses to prepare their applications for PPP loans; instead, the lender is permitted to, and may, compensate them directly. Nevertheless, an accounting firm is allowed to charge a business for providing advice on deciding which loan program and tax relief program would be best for their business.
Some lenders only accept PPP applications from businesses that already have a depository account at the lender.
Loan applications are only accepted, and loans may only be made, through August 8, 2020.
Making a false statement to obtain a PPP loan is a crime subject to possible imprisonment, fines, or both.
Applications for PPP loans are accepted, approved, and disbursed in the order of first-come first-served, until the entire amount appropriated by Congress is depleted. The first appropriation of $349billion was depleted on April 16, 2020, and the Small Business Administration stopped accepting new applications from lenders as of that date. A bill to add $320billion of funding was passed by the Senate and the House of Representatives on April 21 and April 23, respectively, and signed into law by President Trump on April 24, and the Small Business Administration began accepting new applications from lenders on April 27.
The Equal Credit Opportunity Act requires lenders to notify an applicant of a decision on the PPP loan application within 30 days of the date the lender receives either a loan number or a response about the availability of funds from the Small Business Administration.
If a PPP loan application is incomplete, the Equal Credit Opportunity Act requires the lender to notify the applicant of the issue, and the lender must provide the applicant a period of time to make the application complete. A lender is allowed to deny an incomplete application only if the applicant does not make the application complete by the end of the time period provided by the lender. A lender is not allowed to deny a PPP loan application solely because the lender has not yet received a response from the Small Business Administration.
If a lender denies a PPP loan application, the Equal Credit Opportunity Act requires the lender to provide an adverse action notice to the applicant with specific reasons for the denial, even if the application is denied before sending the application to the Small Business Administration.