Assistance For Small Businesses During Economic Uncertainty:  A Summary Of The Paycheck Protection Program

By: David E. Swihart, J.D. and Lauren M. Maxson, J.D.

As nation-wide efforts in response to the COVID-19 outbreak constantly change daily life, Americans worry about the financial damage such unprecedented measures could cause.  In an attempt to lessen the economic burden resulting from the COVID-19 crisis, Congress passed the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”).  A portion of the $2.2 trillion stimulus package focuses on keeping Americans employed during the Coronavirus outbreak, with $349 million dedicated to guaranteed small business loans through the Paycheck Protection Program of the CARES Act.

Loan Specifics

In an effort to keep Americans employed and small businesses viable during the COVID-19 crisis, the Paycheck Protection Program enables lenders approved by the Small Business Administration (“SBA”) to make 100% federally backed loans to eligible businesses.  Approved lenders can make loans under the Paycheck Protection Program beginning retroactively from February 15, 2020, through June 15, 2020.  Businesses may be eligible for loan forgiveness on a portion or all of the principal amount of the loan.  Additionally, lenders must defer loan payments for a minimum of 6 months and for up to a year after the date of the loan.  Interest rates cannot exceed 4%, and any amount of the loan not forgiven under the program must be repaid within 10 years. The Paycheck Protection Program also eliminates the “credit elsewhere” test in regular SBA loans, which determines whether the borrower can obtain some/all of the requested funds from other sources without undue hardship.

Eligible Businesses

Businesses that employ fewer than 500 people may participate in the Paycheck Protection Program.  Sole proprietors, non-profits, Veteran Affiliated Organizations, and Tribal Organizations are eligible businesses provided they meet the employee limitation.  Part-time, full-time, and seasonal workers count toward the 500 employee limit.

Loan Amount

The Paycheck Protection Program allows eligible businesses to borrow funds in order to cash-flow operating expenses during the COVD-19 pandemic.  Because the goal of the Paycheck Protection Program is to keep Americans employed and assist businesses with meeting short-term operating expenses, the amount a business may borrow depends on its average payroll costs.  A business may borrow up to 2.5 times its average monthly payroll costs incurred during the 12 months prior to the loan date, but loans are capped at $10 million per business. The CARES Act defines “payroll costs” broadly, so for purposes of calculating the loan amount, payroll costs include the following:

  • salaries, wages, and commissions;
  • tips;
  • vacation, parental, family, medical, or sick leave;
  • payments for dismissal or separation;
  • funds paid toward providing employee health care benefits, including employer portions of insurance premiums;
  • payment of retirement benefits; and
  • payment of state or local tax assessed on the compensation of employees.

There are a number of items specifically excluded from the definition of payroll costs. The portion of an employee’s salary which exceeds $100,000 per year is excluded from payroll costs.  Additionally, any compensation paid to employees who live outside the United States cannot be included in the loan calculation.  Federal tax on employee compensation and any amount paid toward qualified sick leave under the Families First Coronavirus Response Act[1] is also excluded from the definition of payroll costs.

Use of Loan Proceeds

Businesses may not use the loan proceeds for any purpose; rather, the Paycheck Protection Program restricts the spending of loan funds to certain short-term operating costs.  The uses permitted under the Paycheck Protection Program align with the underlying goal of the legislation.  In order to keep Americans employed and businesses viable, during the covered period, borrowers may use loan funds to pay the following:

  • Payroll costs;
  • Costs to continue group health care benefits during periods of paid sick, medical, or family leave, and insurance premiums;
  • Employee salaries, commissions, or similar compensations;
  • Payments on mortgage interest (but not principal);
  • Rent payments;
  • Utility payments; and
  • Interest payment on any debt obligations incurred prior to February 15, 2020.

Loan Forgiveness

The Paycheck Protection Program includes an attractive benefit to small businesses – a portion of the principal amount of the loan may be forgiven under certain circumstances.  Calculation of the amount forgiven depends on the business’s payment of certain operating costs.  If made during the 8-week period after the loan date (the “Eligible Period”), the following payments can reduce a business’s indebtedness:

  • Payroll costs;
  • Payment of interest on mortgage obligation on real or personal property incurred in the ordinary course of business prior to February 15, 2020;
  • Payment of rent obligations for a lease in existence prior to February 15, 2020; and
  • Payment of utilities, including electricity, gas, water, transportation, phone, or internet access for which service began prior to February 15, 2020.

Interest obligations on the Paycheck Protection Program loans remain in place as only the principal portion of the loan can be reduced. However, there are limitations on the amount of a loan that may be forgiven. Any business which decreases the average number of full-time employees or wages during the Eligible Period is subject to a reduction in the forgiveness amount.  But no loan forgiveness reduction occurs for those decreases which went into effect between February 15, 2020, and April 26, 2020, if a business re-hires employees and returns wages to pre-COVID-19 levels by June 30, 2020. Any loan amount forgiven under the Paycheck Protection Program is not considered income for tax purposes.  Loan forgiveness applications are made at the lender level.


Businesses that wish to participate in the Paycheck Protection Program must apply for a loan with an SBA-approved lender.  An applicant must certify that the loan request is necessary to support ongoing operations given the uncertainty of the current economic conditions. The Paycheck Protection Program waives fees which usually accompany applications for small-business loans.  Additionally, no personal guarantee or pledge of collateral is required.

SBA Regulations

The SBA is required to issue regulations within 15 days of the date of the CARES Act to assist with clarification of the Paycheck Protection Program and help lenders get the loan program up and running.

[1] See Yoder, Ainlay, Ulmer & Buckingham’s newsletter dated March 19, 2020 and titled “Paid Sick Leave and Family Medical Leave Expansion Becomes Law” for more information.

If you have questions about this article, contact a member of Yoder Ainlay Ulmer & Buckingham’s employment law practice group at (574) 533-1171.

Disclaimer: These materials are for informational purposes only and should not be construed as legal advice on any specific facts or circumstances. We recommend you consult a lawyer if you want professional assurance your interpretation of these materials is appropriate to your particular situation.

©  Yoder Ainlay Ulmer & Buckingham, LLP [March 31, 2020]