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Overview of Payment Protection Program (“PPP”) Loans – March 30, 2020

On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) was signed into law. The CARES Act provides a $2.2 trillion stimulus package to combat the effects of the novel coronavirus. The $2.2 trillion package provides paychecks to individuals, loans to businesses, and tax breaks. Specifically, Section 1107 of the CARES Act appropriates $349 billion for Small Business Administration (“SBA”) loan guarantees. The CARES Act plans to disburse such loans to eligible small businesses under the SBA 7(a) loan program. To be eligible, the qualifying small business must certify that the loan is necessary due to the current uncertain economic conditions.

The CARES Act expands the maximum amount of a loan under the 7(a) loan program to the lesser of $10 million or 250% of average total monthly payroll during the 1-year period before the loan is made. The CARES Act also waives the SBA 7(a) requirement that the borrower lack access to “credit elsewhere.”

Importantly, Section 1106 of the CARES Act, provides that funds obtained pursuant to the newly-established Payment Protection Program (“PPP”) may be forgiven if used for certain expenses, such as payroll costs, interest payments on mortgages incurred before February 15, 2020, rent on leases executed before February 15, 2020, and utilities for services initiated before February 15, 2020 (certain limitations apply). Furthermore, the forgiveness benefit maintains the following features: the forgiveness benefit cannot exceed the amount of the loan, the payroll costs eligible for forgiveness do not include compensation above $100,000, and the forgiveness benefit is not taxable.

This forgiveness benefit for PPP loans may be reduced if 1) the level of full-time employees is not maintained, or 2) the salary of the employees is reduced. The reduction under the foregoing scenario is applied by multiplying the otherwise forgivable amount by a fraction equal to the average number of full-time employees during the 8 week period beginning on the date of the covered loan (“Covered Period”) divided by either (i) the average number of full-time employees from 2/15/19 through 6/30/19 or (ii) the average number of full-time employees from 1/1/20 through 2/29/20 (the periods collectively are the “Non-Covered Periods”). For example, if the forgiveness benefit equals $100,000, and the business maintained a staff of employees during the Covered Period, which was equal to the amount of staff it maintained during the Non-Covered Periods, then the forgiveness benefit would not be reduced. However, if the staff during the Covered Period was 75 and the staff during the Non-Covered Periods was 100, the forgiveness benefit would be equal to $100,000 times 75/100, or $75,000.

Additionally, the PPP forgiveness benefit is also reduced by the amount of any reduction in salary for workers earning less than $100,000 during the Covered Period that exceeds 25%.

However, it is important to note that the reduction in PPP forgiveness benefit can be “cured” by re-hiring and reversing reductions in salary by June 30.


This alert is made available for educational purposes and to provide general information on current legal topics, not to provide specific legal advice. The publication of this alert does not create any attorney-client relationship and should not be used as a substitute for competent legal advice from a licensed professional attorney.

Please feel free to reach out to any attorney in our Business Transactions and Tax Practice Group with any questions.