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Use of Loan Proceeds Under the Paycheck Protection Program

    Client Alerts
  • April 18, 2020

Many applicants for Paycheck Protection Program (PPP) loans under the CARES Act have begun receiving loan proceeds. Now that loan proceeds are beginning to be deployed, borrowers are now focusing on how they can use the loan proceeds and what requirements apply in order for the borrower to qualify for full or partial forgiveness of the loan amount. The rules for allowable uses and forgivability are separate but interconnected and both must be understood to make informed decisions regarding the use of PPP funds. Borrower beware: not all allowable uses may qualify for forgivability.

This client alert addresses allowable uses of PPP loan proceeds. For general information regarding PPP loan terms and eligibility, please see our April 7 alert. For more details on forgivability, click here. Also note that although guidance has been provided on some aspects of the PPP, there remain a number of provisions subject to interpretation. Of particular importance, the implementing regulations for loan forgiveness have not yet been released and are not required to be published until April 27, 2020. The analysis below may change depending on the content of the regulations.

Allowable Uses Generally

  • Proceeds of PPP loans may only be used to cover certain payroll costs and non-payroll costs (both defined below).
  • PPP loan proceeds may be used only for costs incurred and payments made during the “covered period” (from February 15, 2020 through June 30, 2020). The SBA has not issued guidance on the meaning of “costs incurred and payments made,” so it is unclear whether, for example, proceeds may be used to pay costs “incurred” during the covered period but prior to receipt of loan proceeds.
  • The SBA’s interim final rule published on April 2 (link is here) states that no more than 25% of the PPP loan proceeds may be used for non-payroll costs. Accordingly, PPP borrowers must use at least 75% of their PPP loan proceeds to cover payroll costs.

Payroll Costs

Payroll costs include:

  • For any type of employer:
    • Gross compensation paid to employees (whose principal place of residence is the United States) in the form of salary, wages, commissions, or similar compensation (including amounts withheld for the employee’s share of state and federal employment taxes).
    • Cash tips or the equivalent (based on employer records of past tips or, in the absence of such records, a reasonable, good-faith employer estimate of such tips).
    • Payment for vacation, parental, family, medical, or sick leave.
    • Allowance for separation or dismissal.
    • Payment for the provision of employee benefits consisting of group health care coverage, including insurance premiums, and retirement.
    • Payment of state and local taxes assessed on compensation of employees.
  • For an independent contractor or sole proprietor:
    • Wage, commissions, income, or net earnings from self-employment or similar compensation.

Payroll costs exclude:

  • Any compensation of an employee whose principal place of residence is outside of the United States.
  • The cash compensation of an individual employee in excess of an annual salary of $100,000, prorated as necessary.
  • Employer-paid federal employment taxes imposed on employee wages, including the employer’s share of Federal Insurance Contributions Act and Railroad Retirement Act taxes.
  • Qualified sick and family leave wages for which a credit is allowed under sections 7001 and 7003 of the Families First Coronavirus Response Act.
  • Any payments made to volunteers or independent contractors.

Non-Payroll Costs

Businesses can use no more than 25% of loan proceeds on non-payroll costs that include:

  • Costs related to the continuation of group health care benefits during period of paid sick, medical, or family leave, and insurance premiums.
  • Mortgage interest payments (but not mortgage prepayments or principal payments).
  • Rent payments.
  • Utility payments.
  • Interest payments on any other debt obligations that were incurred before February 15, 2020.
  • Refinancing an SBA Economic Injury Disaster Loan made between January 31, 2020 and April 3, 2020.

Covered Period

For purposes of allowable uses, the term “covered period” is defined in the CARES Act as the period from February 15, 2020 through June 30, 2020. It is currently unclear whether PPP loan funds are allowed to be used beyond June 30, 2020. The SBA has implied in its informal guidance that PPP loan funds may be used beyond June 30, 2020 in some instances, but those instances have not been specified. We are hopeful the SBA will issue guidance clarifying this issue.

We have a team of people at Parker Poe who are tracking all of this constantly. For more information, please contact us or your regular Parker Poe contact. You can also find our other COVID-19 related alerts here.