Understanding the CARES Act: The Paycheck Protection Program

In what’s being called ‘Phase III’ of a stimulus plan that’s continually evolving in the fight against COVID-19, the Coronavirus Aid, Relief, and Economic Security (CARES) Act was ratified on March 28, 2020. While the bill covers a broad range of necessary provisions, it offers particular reprieve in the Paycheck Protection Program. The program provides financial incentives for small businesses, with the goal of encouraging them to retain employees and bring back those who have been laid off or furloughed.

Those considered eligible are listed below:

  • Small businesses (under 500 employees);
    • Exception: Restaurant, food service, caterers and hotels that employ not more than 500 employees per physical location of the business are also eligible to receive a single loan if they operate under the North American Industry Classification System code beginning with 72 (Accommodation and Food Services – U.S. Census Bureau).
  • An individual who operates as a sole proprietor;
  • An individual who operates as an independent contractor;
  • An individual who is self-employed, who regularly carries on any trade or business;
  • A tribal business concern that meets the SBA size standard;
  • 501(c)(3) nonprofit organizations; and,
  • 501(c)(19) Veterans organizations.

Other key components of eligibility mandate that companies must make good faith or provide self-certification that:

  • The uncertainty of current economic conditions makes necessary the loan request to support the ongoing operations.
  • Funds will be used to retain workers and maintain payroll or make mortgage payments, lease payments and utility payments.
  • The borrower does not already have an application pending for this type of loan for the same purpose.
  • During the covered period, the borrower has not received a loan for the same purpose (certain exceptions apply for other SBA emergency loans).

How much can I borrow?
The maximum loan amount must be the lesser of:

2.5x Average Monthly Payroll*

+ the outstanding amount of a loan that was made under the SBA’s disaster loan program during the period beginning January 31, 2020.



* = Calculated by taking the average total monthly payments by the business for payroll costs (see definition below) incurred in 2019 (based off info from SBA received yesterday, subject to change). For a seasonal employer, the business calculates the average total monthly payments for payroll during the 12-week period beginning February 15, 2019, or at the choice of the business, March 1, 2019, and ending June 30, 2019

When determining average monthly payroll, payroll costs include all of the following:

  • For employers, the sum of payments of any compensation with respect to employees:
    • 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 benefit
    • payment of state or local tax assessed on the compensation of the employee
    • payments made to independent contractors that would otherwise be employees (still to be determined by the SBA what is applicable)
  • For sole proprietors, independent contractors and self-employed individuals, the sum of payments of any compensation 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 pro-rated for the covered period.

The following payroll costs aren’t applicable to the calculation and should be excluded when determining loan amounts:

  • Annual salary amounts above $100,000
  • Payroll taxes, railroad retirement taxes, and income taxes
  • Any compensation of an employee whose principal place of residence is outside of the United States
  • Qualified sick leave wages (see Families First Coronavirus Response Act, §7001/§7003)

How much of the loan will be forgiven?
Loans issued through the PPP stipulations of the CARES Act are eligible for loan forgiveness, provided a) they’re used specifically for the purposes of supporting payroll, and b) those costs do not exceed the principal amount of the loan.

A borrower is eligible for loan forgiveness equal to the amount the borrower spent on the following items during the eight-week period beginning on the date of the origination of the loan:

  • Payroll costs
  • Interest on the mortgage obligation incurred in the ordinary course of business
  • Rent on a leasing agreement
  • Payments on utilities (electricity, gas, water, transportation, telephone or internet)
  • For borrowers with tipped employees, additional wages paid to those employees

What if the borrower cut back on staff or wages? Is the borrower’s loan still eligible for forgiveness?
Possibly. The forgiveness amount could be reduced if a borrower reduces staff or salaries within certain thresholds. If a borrower reduces full time employees, the forgiveness amount would be reduced by an amount determined by the following equation:

  • The total forgiveness amount, multiplied by:
  • The average number of full-time employees of borrower per month during the covered period, divided by:
    • At borrower’s option:
      • The average number full-time employees of borrower per month between February 15, 2019, and June 30, 2019; or,
      • The average number of full-time employees of borrower per month between January 1, 2020, and February 29, 2020; or,
    • If the borrower is a seasonal employer (as determined by the SBA), the average number of full-time employees per month between February 15, 2019, and June 30, 2019.

If a borrower reduces salaries or wages, the forgiveness amount would be reduced by the total amount of reductions in salaries or wages during the covered period in excess of 25% of the employee’s total salary or wages during most recent full quarter the employee was employed before the covered period. Note that for purposes of this equation, employees includes only those who, for any pay period in 2019, were paid at an annualized rate of $100,000 or less.

While the above calculations can only be used to reduce the forgiveness amount and not increase it, a borrower who employs tipped employees (as defined by Fair Labor Standards Act) could also receive forgiveness for additional wages paid to such employees.

Any loan amount not forgiven is carried forward as an ongoing loan. (Note: Terms are still being determined by SBA as there are currently different terms from the law to the SBA guidance.)

Applying for Loans Through the PPP—Don’t Short Yourself on the Loan Amount!
Small businesses seeking to apply for a PPP loan can do so through a qualified SBA lender. The process will feature an expedited approval time of roughly five to 10 days, according to the SBA. Small businesses can begin applying for full or partial loan forgiveness one year after receiving their loan and will be required to show proof they maintained payroll and retained vital employees during the loan’s coverage period. The SBA issued the application and borrower guide yesterday.

Based upon the information we’ve received from numerous qualified SBA lenders, we’ve compiled a checklist of information needed to apply for these loans. Please note that this is a time sensitive program, so we recommend that you apply ASAP!

Additionally, this application is not as simple as it seems – you could potentially short yourself with one incorrect calculation. Our CPAs can assist your business with making this calculation to determine your full and accurate loan amount. Contact James Moore & Co. today for help. We’ll continue tracking every development to keep you informed on the opportunities offered for small businesses in the CARES Act, as well as any upcoming COVID-19-related legislation.

PPP Overview and Loan Mechanics
Through the CARES Act, the government has set aside $349B for the purpose of small business cash flow assistance.

Loans available through the CARES Act will be administered via the Small Business Association (SBA) 7(a) Loan Program. These loans come backed by a 100% government guarantee through December 31, 2020, thereafter reducing to 75% for loans exceeding $150,000 and 85% for loans equal to or less than $150,000. The provision also increases the maximum SBA Express loan amount from $350,000 to $1 million through December 31, 2020.

Loans will be available to small businesses under special circumstances, with opportunity for 100% loan forgiveness if used accordingly. No collateral or personal guarantees will be required to cover the loan. Borrowing will be simplified via the removal of the credit elsewhere test, which requires businesses to seek alternative funding sources before requesting loan funds. Borrower and lender fees are also waived.

All content provided in this article is for informational purposes only. Matters discussed in this article are subject to change. For up-to-date information on this subject please contact a James Moore professional. James Moore will not be held responsible for any claim, loss, damage or inconvenience caused as a result of any information within these pages or any information accessed through this site.