Need Liquidity? The Paycheck Protection Program Loan Under the CARES Act Can Help

Posted on Tue, Mar 31, 2020 ©2021 Drucker & Scaccetti

OPENAs guidance in this area is being released regularly, we recommend you read all of our blogs on this subject.  All the blogs in the Paycheck Protection Program series are here: #1, #2#3#4#5#6#7,#8,#9,#10,#11,#12,#13, #14, #15#16#17, #18,

#19, #20, #21, #22, #23



To assist small businesses through the coronavirus-related economic slowdown, the recently enacted Coronavirus Aid, Relief and Economic Security Act (CARES Act) provides emergency assistance through a significant expansion of the Small Business Administration Section 7(a) loan program.  The program is structured to incentivize employers to retain and pay their employees.  We will refer to these loans as Paycheck Protection Loans (PPL).  As you will see, by using the PPL as intended, it is more akin to a grant program given the forgivable feature to the loan.


Who is eligible for the PPL?

Generally, eligible borrowers are organizations that employ 500 or fewer employees.  Both for-profit and non-profit employers are eligible.  Both full-time and part-time employees are counted.  The employee count is tested on a combined basis for all affiliated enterprises with specific nuances for some industries.  For example, certain businesses in the hospitality and restaurant industries may have more than 500 employees in total but can apply on a location-by-location basis allowing them access to the PPL for those locations that employ 500 or less.


What amount can be secured?

Borrowers are eligible for loans up to 250% of their average monthly Payroll Costs based on the one-year period before the loan is made, not to exceed $10 million.  Payroll Costs include wages, commissions, group health, retirement benefits, and state and local payroll taxes imposed on the employer. Compensation for each employee included in Payroll Costs is limited to $100,000.


It is currently unclear what payments made to self-employed independent contractors can be included in Payroll Costs and if the $100,000 compensation limit applies to these individuals.  We anticipate future guidance will clarify.


Wages paid to any employee residing outside of the United States, any qualified sick and family leave wages qualifying for the Families First Coronavirus Response Act payroll tax credits and federal payroll taxes are excluded from Payroll Costs.


How can the loan be used?

The PPL can be used for payment of payroll costs (described above), mortgage interest, rent, utilities, insurance and interest on existing loans.  A common question we’re receiving is whether/not mortgage interest and rent paid to a related party are included.  The law does not address this issue but future guidance may.


What are the terms of the PPL?

  • If a PPL is obtained by a business, the business is not entitled to the new Payroll Tax Deferral or the Employee Retention Tax Credit created by the CARES Act
  • Generally, the SBA will guarantee the PPL through December 31,2020; after which the guarantee falls to the 75% to 85% range
  • Annual interest rate shall not exceed 4%
  • Maximum loan term of 10 years
  • PPL forgiveness, addressed below, is not includible in federal taxable income (state and local rules should be reviewed for your jurisdiction)
  • The loan is nonrecourse if used for the qualified purposes previously mentioned
  • No collateral requirements
  • No personal guarantees required
  • This is a self-certifying loan and does not require the use of a CPA to verify the information used in calculating loan forgiveness
  • The PPL cannot be combined with the SBA’s EIDL program, discussed below, but EIDL loans can be refinanced into a PPL


How is the PPL forgiven?

The amount of the PPL eligible for forgiveness is the amount spent in the eight-week period commencing with the loan origination.  These expenditures, described above, include Payroll Costs, interest payments on any mortgages incurred before February 15, 2020, rent on any lease in force before February 15, 2020, and utilities for which service began before February 15, 2020.  Note that the amounts that may be forgiven are slightly different than the allowed uses of the loan.  You should work with your advisor to ensure maximum forgiveness of the loans.


This forgiveness will be reduced in two instances:


  1. Proportionately for a reduction in monthly full-time equivalent employees (FTEE) when comparing a base-period to the eight-week post-loan period. The employer can choose between two base-periods: February 15, 2019, to June 30, 2019; or January 1, 2020, to February 29, 2020. 


  1. Dollar-for-dollar for any employee salary reductions in excess of 25% during the eight-week post-loan period for any employees employed in the fourth quarter of 2019. This analysis is done on an employee-by-employee basis and does not consider salary reductions for employees making more than $100,000 annually post-reduction.


Any reduction in loan forgiveness based on these provisions can be cured if a business rehires employees or remedies salary reductions by June 30, 2020.   


How do you apply for the PPL?

Applications must be submitted by June 30, 2020, via an approved SBA lender. Please check with your existing bank professional first to see if they are participating in the program.


The PPL is payroll cost based; What if my business does not have significant payroll costs?

The CARES Act also updated an existing SBA program, the Economic Injury Disaster Loan Program (EIDL).  This program is intended for an enterprise that has suffered a significant working capital decline.  It does not require an SBA approved lender and can be submitted directly by businesses at


The EIDL has a simple application process and the government is expected to respond with a decision within three weeks.  Actual funding of the loan is within five days of approval.


There is no forgivable feature to the EIDL loan and, in general, personal guarantees are required.


The PPL and EIDL are both nuanced.  Working closely with your bank professional and other advisors, you should begin determining your eligibility so when applications become available you can act quickly.  If you need help determining how these provisions affect you, call on us


In the meantime, please continue to visit our COVID-19 Tax Resource Center for up-to-date information on how the outbreak may affect your tax filing, payments and planning.  We encourage you to share the blog and our resource with other businesses.  Through this unprecedented series of events, you can count on The Tax Warriors® at Drucker & Scaccetti to help.

Topics: health insurance, employees, business owner, COVID-19, Coronavirus Response Act, CARES Act, loan, liquidity, payroll costs, loan forgiveness, Paycheck Protection Program, Small Business Administration

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