What Small Businesses Need to Know to Get (Potentially Forgivable) Loans from the COVID-19 Stimulus Bill

April 02, 2020

The federal government has launched a loan program designed to help small businesses and their employees through this period of uncertainty due to the economic effects of COVID-19. The loan program, called the Paycheck Protection Program (PPP), lifts the burden of payroll costs (and other certain operational costs) from employers during this time and ensures that employee salaries and benefits continue to be paid.


The program is generally available for business with 500 or fewer employees. If you are in the accommodation and food services sector (NAICS 72), the 500-employee rule is applied on a per physical location basis. If you are operating as a franchise, the typical affiliation rules (for purposes of counting employees) may not apply.

Starting April 3, businesses can apply for a PPP loan through existing SBA lenders. Note that a business borrower cannot receive a PPP loan and an economic injury disaster loan (EIDL) through the SBA for a duplicative purpose, though an option exists to refinance an unrelated EIDL loan.  While businesses may have immediate needs, it will be important to determine whether one avenue of relief restricts another before moving forward.

Loan Amount and Basic Terms

To calculate the maximum PPP loan amount available, you determine what constitutes your business’s “payroll costs,” obtain a monthly average of your 2019 payroll costs and multiply that monthly average figure by 2.5 (subject to a cap of $10 million).

Payroll costs include the following:

  • The sum of payments of any compensation with respect to employees that is a: salary, wage, commission or similar compensation; payment of cash tip or equivalent; payment for vacation, parental, family, medical or sick leave; allowance for dismissal or separation; payment required for the provisions of group health care benefits, including insurance premiums; payment of any retirement benefits; or payment of state or local tax assessed on the compensation of employees.
  • The sum of payments of any compensation to or income of a sole proprietor or independent contractor that is a wage, commission, income, net earnings from self-employment or similar compensation and that is in an amount that is not more than $100,000 in one year, as prorated for the covered period.

Payroll costs do not include the following:

  • The compensation of an individual employee in excess of an annual salary of $100,000, as prorated for the covered period
  • Taxes imposed or withheld under chapters 21, 22, or 24 of the Internal Revenue Code of 1986 during the covered period
  • Any compensation of an employee whose principal place of residence is outside of the United States
  • Qualified sick leave wages for which a credit is allowed under section 7001 of the Families First Coronavirus Response Act (Public Law 116-127)
  • Qualified family leave wages for which a credit is allowed under section 7003 of the Families First Coronavirus Response Act (Public Law 116-127)

All loans will have a term of two years and a 0.5 percent fixed interest rate. All payments are deferred for six months; however, interest will continue to accrue over this period. There are no prepayment penalties or fees, no collateral is required, and there is no personal guarantee requirement.

Lender Requirements

Loans are made by SBA-approved lenders (and SBA authorization is not required for each loan). We recommend that businesses either go through their existing bank relationship (if that bank is approved to write and has experience with SBA 7(a) loans) or reach out to SBA-approved national or local banks.

During the application process, you will have to make a good faith certification that:

  • The uncertainty of current economic conditions makes the loan request necessary to support ongoing operations
  • Your business will use the loan proceeds to retain workers and maintain payroll or make mortgage, lease and utility payments
  • Your business does not have an application pending for a loan duplicative of the purpose and amounts applied for here

Allowable Use of Funds; Forgiveness Concept

Loan proceeds may be used for specified operating expenses, including payroll (including paid sick, medical, or family leave and costs related to the continuation of group health care benefits), mortgage interest payments, rent, utilities and certain other existing debt obligations.

The loan forgiveness amount is generally equal to the payroll costs, mortgage interest payments (not principal), rent and utilities (the “forgivable costs”) incurred or paid by a recipient during the eight-week period beginning on the date of the origination of the loan. The Treasury Department has provided that, due to likely high subscription, it is anticipated that not more than 25 percent of the forgiven amount may be for non-payroll costs. The loan forgiveness amount is excluded from taxable income. The business will be required to submit an application (including certain documentation and certifications) to the lender to support its claim that loan proceeds were used on forgivable costs, and the lender is required to render a decision on the application within 60 days.

Importantly, the amount forgiven will be reduced if there is a reduction in the number of employees or a reduction of greater than 25 percent in wages paid to any employee who made $100,000 or less in 2019 (before June 30). Businesses who experience a reduction in employees or wages from February 15 and April 26 can reduce the negative impact of these forgiveness reduction rules by rehiring employees or making up for wage reductions by June 30. 

The Phelps Business team continues to monitor responses to COVID-19. Please contact us if you have any questions or need advice on COVID-19 related issues.