On March 27, 2020, the president signed into law the CARES (Coronavirus Aid, Relief, and Economic Security) Act. At $2 trillion, it is the largest economic relief package in United States history.
The CARES Act provides much-needed relief for individual taxpayers, small and medium-sized businesses, and corporations. It also injects necessary funding into hospitals and public health organizations, education, and state and local governments through one-time payments, grants, and loans.
While individuals and business owners breathed collective sighs of relief at the Act’s passing, one of its key efforts, the Paycheck Protection Program (PPP), ran out of funding in just 13 days. On April 21, however, the Senate approved an additional $321 billion to the PPP. This post explores the primary provisions of the Paycheck Protection Program that business owners need to know.
How the Paycheck Protection Plan Works
The PPP is the central element of the CARES Act and incentivizes business owners to keep employees on their payroll during the COVID-19 pandemic.
As a core function of the PPP, the Small Business Administration (SBA) offers 100% federally-backed, forgivable loans to cover small businesses’ specific payroll expenses through June 2020. The SBA also includes a forgiveness period of up to eight weeks for small businesses, qualifying non-profits, and the self-employed, provided that they continue to pay employees’ wages and salaries comparable to pre-COVID levels.
Businesses receive up to 250% of their average monthly payroll expenses, as long as they remain in operation and retain employees between February through June 30, 2020. Companies that have limited their operations after February 15 due to the COVID crisis—or shuttered completely—receive the maximum 2.5 times their average monthly payroll costs for January and February. The same amount applies to seasonal businesses in operation between March 1 and June 30, 2020.
Businesses that took out economic injury disaster loans (EIDL) between February 15 and June 30 are able to refinance the EIDL into a PPP loan. Although EIDLs grant up to $10,000 to businesses facing economic challenges, the Small Business Administration will no longer accept applications related to COVID-19 hardships due to available appropriations funding. These businesses may then apply remaining loan payments to payroll expenses used in their loan amount calculation.
What Does the Paycheck Protection Program Cover?
The amount of money businesses receive varies. This depends on a number of factors, including headcount and annual turnover. Businesses must calculate their loan amount before applying.
All funds received cover only the following expenses:
- Payroll costs (salaries, commissions, wages, cash tips and state and local taxes for employees’ compensation)
- Group healthcare benefits, including paid medical, sick, or family leave, or insurance premiums, and vacations
- Rent and utilities
- Interest on mortgages (though it does not cover prepayment fees or principal payments)
- Interest on all other debt accrued prior to the eligibility date of February 15, 2020, running through June 30, 2020
However, the PPP does not cover the following expenses:
- Compensation exceeding $100,000 per employee
- Employees who reside primarily in a country other than the United States
- Previously claimed, SBA-backed loans covering duplicate considerations
- Chapters 21, 22, and 24 taxes of the Internal Revenue Code
Businesses must repay any unused funds with a 10-year window; a 4% interest rate applies to this repayment plan. However, neither loan fees nor prepayment penalties apply.
Keep Your Business Operations Moving Forward—Wherever They Lead
The Paycheck Protection Program helps businesses maintain some semblance of operational and financial normalcy during the COVID-19 pandemic. For many, the program provides hope that when they return to full operations, they have the financial resources to pursue growth in any advantageous market, whether domestically or abroad.
If you’re cautiously considering global expansion in 2020, or want to learn more about how international expansion helps diversify revenue streams in times of uncertainty, reach out to Velocity Global to find out how we can help you get there on your terms.