Navigating the Payroll Protection Program

Home COVID-19 Navigating the Payroll Protection Program

The application process for the Small Business Administration’s (SBA) Payroll Protection Program (PPP) loans began on Friday, April 3.

Updated guidance

According to the World Floor Covering Association (WFCA), $70 billion has been assigned by banks to those applying for loans; thus far, banks participating in the program are only working with pre-existing customers; many banks have opted not to take part in the program at all; already the federal government is committing to extend the loans beyond the $350 billion that was initially committed.

If small businesses have an existing relationship with a bank that is taking part in the PPP process, the WFCA recommends securing a loan as soon as possible.

Navigating PPP loans

The SBA has drafted rules on the PPP loans that were created in the Coronavirus Aid, Relief and Economic Security (CARES) Act. The draft rules take a very strict interpretation of the CARES Act provisions regarding PPP loans and the forgiveness of those loans.

Most significantly, the SBA’s rules exclude payments to independent contractors from a business’s payroll costs in calculating the loan amount. The CARES Act provides that the payroll cost is defined as the “sum of” a list of costs “and” the “sum of payments of any compensation to—or income of—a sole proprietor or independent contractor.” The draft of the SBA regulations, however, states that independent contractors “do not count for purposes of a borrower’s PPP loan calculation.” While it can be argued the SBA is incorrect based on the wording of the Act, SBA will be administering the loans—and it is recommended that its interpretation be followed until this issue can be resolved.

The SBA rules also limit how much of the loan can be forgiven. The CARES Act required that the amount forgiven could be reduced if the employer retained fewer employees than employed between February 25, 2019 and June 30, 2019 or, at the business’s election January 1, 2020 to February 29, 2020. The SBA rules, however, provide that “not more than 25% of the loan forgiveness amount may be attributable to non-payroll costs.


Can get a loan if:

  • The business has fewer than 500 employees
  • The count may include employees of affiliate or related companies
  • Business must have been in operation on February 15, 2020 and paid employees or independent contractors

Cannot get a loan if:

  • Delinquent or had defaulted on a SBA loan in last seven years
  • Are a household employee (nannies or housekeepers)
  • Is or has been convicted of a felony in last five years
  • Is currently incarcerated, on probation, on parole or subject to a criminal indictment
Basic terms
  • The term of the loan is two years
  • Interest rate on the loans is 1% (100 basis points)
  • Repayment on the loan is deferred for six months
  • Interest begins accruing immediately
  • No upfront fee payable to the SBA by the borrower
  • No personal guarantee or collateral required on these loans
  • No lender’s annual service fee
  • No recoupment fee if loan paid off early
Amount of the Loan

The maximum amount of the loans is calculated as follows:

The loan amount is the average monthly payroll costs for the 12 months prior to the loan multiplied by 2.5, plus any outstanding amount of an Economic Injury Disaster Loan (EIDL) made between January 31, 2020 and April 3, 2020 minus any “advance” under an EIDL COVID-19 loan (because it does not have to be repaid).

Payroll costs

Payroll cost include:

  • Compensation to employees (salary, wages, commissions, or similar compensation)
  • Cash tips or the equivalent up to $100,000 for any employee
  • Payment for vacation, parental, family, medical, or sick leave
  • Allowance for separation or dismissal
  • Payment for the provision of employee benefits consisting of group health care coverage, including insurance premiums and retirement
  • Payment of state and local taxes assessed on compensation of employees

Payroll cost exclude:

  • Payments to independent contractors, sole proprietors, self-employed (contractors who receive a 1099)
  • Payments to employees residing outside of U.S.
  • Compensation over $100,000 to any individual employee
  • Federal taxes imposed or withheld between February 15, 2020 and June 30, 2020, including the employee’s and employer’s share of FICA (Federal Insurance Contributions Act) and income taxes required to be withheld from employees
  • Any sick and family leave paid for which a credit is allowed under the Families First Coronavirus Response Act
  • Independent contractors

Independent contractors, sole proprietor, self-employed that were operating on February 15, 2020 can apply for a PPP loan. They must have paid salaries and taxes. Loan amounts are based on wage, commissions, income or net earnings or similar compensation.

What PPP loans can be used for

The proceeds of a PPP loan are to be used for:

  • Payroll costs (see above)
  • Costs related to the continuation of group health care benefits during periods of paid sick, medical, or family leave and insurance premiums
  • Mortgage interest payments (but not mortgage prepayments or principal payments)
  • Rent payments
  • Utility payments
  • Interest payments on any other debt obligations that were incurred before February 15, 2020
  • Possible refinancing on an SBA EIDL loan made between January 31, 2020 and April 3, 2020
  • PPP Loan and an EIDL
Loan Forgiveness

100% of a PPP loan can be forgiven. The amount forgiven is based on the following:

  • The loan must all be used for the allowable expenses as described above (payroll, rent, utilities, mortgage and business loan interest)
  • No more than 25% of loan forgiveness can be for non-payroll costs, with at least 75% used for payroll costs
  • Compensation levels are maintained

The costs must be documented:

  • Payroll processor records
  • Payroll tax filings, or Form 1099- MISC, or income and expenses from a sole proprietorship
  • Bank records, sufficient to demonstrate the qualifying payroll amount
  • Checks
  • Other documents showing money spent on allowable expenses
Application requirements
  • All PPP loans must be made on or before June 30, 2020
  • Applicants must submit SBA Form 2483 and payroll documentation
  • Lenders have to submit SBA Form 2484 and supplementing documentation
  • The applications can be electronically submitted and signed
  • Loans will be fulfilled on a first come first served basis

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