To assist small businesses impacted by COVID-19, the federal government has passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act, which includes multiple initiatives to provide financial assistance to small businesses and their employees. One program created under the CARES Act is a Small Business Administration (SBA) loan program known as the Paycheck Protection Program (PPP). SBA PPP loans will provide low-interest loans, with a possibility for loan forgiveness, to small businesses affected by the COVID-19 (coronavirus) outbreak. Keep reading to learn how you can calculate the maximum PPP loan amount your business is eligible to receive.
*Please note: OnDeck is no longer accepting new PPP loan applications. Please visit the SBA website for other lenders.
What is a PPP Loan?
SBA PPP loans provide financial assistance to small businesses who have been affected by COVID-19 to help them keep employees on their payrolls. SBA PPP loans can be used for payroll costs, interest on mortgages, rent payments, utility payments, and/or interest on debt obligations incurred before 2/15/20. Loan amounts are up to 2.5x your monthly payroll costs, and some or all of your loan may be eligible for loan forgiveness. PPP loan payments are deferred until after you have applied for forgiveness and your forgiveness amount is approved by the SBA, but interest will continue to accrue during this time. Your payment deferral period may vary if you elect not to apply to loan forgiveness. The Paycheck Protection Program (PPP) Flexibility Act adjusted how loan forgiveness for PPP loans works – check out our guide to the PPP Flexibility Act for more information.
The loan comes with a 1% fixed interest rate. Loan term length is at least 5 years; for PPP loans made prior to June 5, 2020, the term length is 2 years.
How to calculate your PPP loan amount
In general, businesses are eligible to receive a loan of up to $2 million. The amount your business is eligible for is equal to 2.5X your average monthly payroll costs. However, the calculations can be more nuanced than that simple equation would suggest, since you’ll need to subtract any payroll costs that don’t qualify under PPP. Here is a step-by-step guide to calculating the maximum loan amount your business can receive under PPP.
Payroll costs that qualify
First, you’ll need to identify your payroll costs that qualify under PPP.
If you employ other people:
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 for group health care and retirement benefits
- payment of state or local tax assessed on the compensation of the employee
If you’re self-employed, a sole proprietor, or an independent contractor:
- 2019 net income not more than $100,000
Payroll costs that don’t qualify
Next, subtract your payroll costs that don’t qualify from your eligible payroll costs. These include:
- Compensation of an individual employee in excess of an annual salary of $100,000 (note: employer contributions to healthcare and retirement benefits are not part of amount deemed in excess of $100,000 annual salary)
- Employer portion of payroll taxes
- 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– 5 127); or qualified family leave wages for which a credit is allowed under section 7003 of the Families First Coronavirus Response Act
Example PPP loan calculation
Once you have your total eligible payroll costs calculated, divide that number by 12 to get your average monthly payroll. Multiply your average monthly payroll by 2.5 to get the total amount you are eligible to receive under PPP. Here’s an example calculation:
What time period should I show payroll data for?
As part of the PPP application process, you will need to provide payroll data that shows what you spend each month. The time period you show data for will depend upon your business’ operations.
If your business operates at the same capacity year-round:
If you have been in business for at least a period of 12 (consecutive) months before February 15, 2020, you will need to provide 2019 business tax documents and proof of payroll for February 2020.
If your business is seasonal:
If you were not in operation between February 15, 2019 and June 30, 2019, which may be the case if you run a seasonal business, you will need to provide payroll data for all pay periods during which you were in operation.
Check out our guide for a list of documents that you can use to show your payroll data.
I received an SBA Economic Injury Disaster Loan (EIDL) – can I refinance it?
If you were approved for an SBA Economic Injury Disaster Loan between January 31, 2020 and April 3, 2020, you can refinance it into your PPP loan. If you were approved for an EIDL during that period and you used your EIDL proceeds to cover payroll, you must refinance it into your PPP loan. However, if you refinance your EIDL, that loan amount will count towards your maximum PPP amount (up to $10 million).
If you plan to refinance your SBA Economic Injury Disaster Loan under PPP, be prepared to show documentation of funds received under EIDL as part of your application.
OnDeck is here to support small businesses – check out our COVID-19 Resource Hub for more helpful information for small businesses impacted by COVID-19.
*This article has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for health, tax, legal or accounting advice. You should consult your own health professionals or tax, legal and accounting advisors before implementing any business changes.