Payment Protection Program Loan Workflow

Practice Areas

By Jagrut Shah

The Paycheck Protection Program (PPP) was introduced to help small businesses impacted by COVID-19 survive. PPP is a loan extended to small businesses as a direct incentive for them to keep their workers on the payroll. PPP loans will be forgiven by the SBA if all employees are kept on the payroll for eight weeks and the money is used for payroll, rent, mortgage interest, or utilities.

PPP loan calculation includes following items as average monthly payroll cost:

Approved Payroll Cost (for last 12 months before loan application)

  1. Employee compensation – gross wages (capped at $8,333 a month per employee);
  2. Payments for vacation and leave (parental, family, sick, or medical);
  3. Severance payments;
  4. Insurance premiums and group health care;
  5. Retirement benefits, including employer 401(K) contribution; and
  6. State and local employment taxes (like SDI, ETT State UI tax).

Unapproved Payroll Cost (can’t be included in calculation)

  1. Fed income tax (for the period February 15, 2020 to June 30, 2020)
  2. SS/MED – Employee portion (for the period of February 15, 2020 to June 30, 2020)
  3. SS/MED – Employer portion (for the period of February 15, 2020 to June 30, 2020)
  4. Fed unemployment tax
  5. Workers comp premiums
  6. Stock compensation
  7. Compensation of employees whose principal place of residence is outside US
  8. Payments to independent contractors
  9. Employees that made more than $100,000 on an annualized basis. This cap applies to salary/wage/compensation per employee, not total payroll costs, which include the allowable health and retirement benefits paid to the employee. These benefits may be added above and beyond the $100,000 cap for purpose of determining payroll costs
  10. Qualified sick & family leave wages for which a credit is allowed under sections 7001 & 7003 of the Families First Coronavirus Response Act

Loan amount will be 2.5x of average monthly salary for last 12 months before loan application.

PPP loan can be utilized for the following expenses

Borrowers are eligible for forgiveness if costs paid during the eight- week period after the PPP is originated (Covered Period) are on account of (1) Payroll  (2) payment of interest owing on pre-existing mortgage obligations (secured by real or personal property) (3) covered rent obligations, and (4) utility payments that were in place prior to February 15, 2020 (the Amount of Loan Forgiveness).

So if PPP loan is utilized for office supply (non- covered expense) of $10,000 then such amount will not be forgiven and needs to be paid back in 2 years with 1% interest. This could be the reason SBA has reduced repayment loan terms from maximum allowable 10 years to 2 years.

Here’s an example

2.5x of average monthly salary as loan received to be used as below.

8 weeks of salary expens (approximately 2 months) + interest on mortgage obligations + covered rent + utilities

Avg monthly Salary of ABC $100,000
PPP Loan allowed (not to exceed $10M) 2.5 * $100,000 $250,000
Utilization
8 weeks of Salary – approx. 2 months 2 month *$100,000                     (assuming no reduction in salary) $200,000
Rent, mortgage interest, utilities During covered period $50,000
Total loan utilized $250,000
Loan amount forgiven Since ABC Co. maintain required number of employees and payroll amount at the same level as before, entire loan amount will be forgiven upon application to lender subsequently. $250,000

PPP Loan Forgiveness

To be eligible for forgiveness, at least 75% of PPP loan amount should be used for payroll cost. Only up to 25% can be used for other covered expenses like rent and utilities.

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