The COVID-19 pandemic presented unprecedented challenges to small businesses across the United States. In response to the widespread economic disruption, the U.S. government introduced the Cares Act Payment Protection Program (PPP) as a lifeline. This program, officially known as the Paycheck Protection Program, was designed to provide crucial financial support to small businesses and certain non-profit organizations, enabling them to maintain payroll and cover essential operating expenses during periods of mandated shutdowns and economic uncertainty.
What is the CARES Act Payment Protection Program?
The Paycheck Protection Program was established as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, enacted in March 2020. The initial legislation allocated billions of dollars for forgivable loans to eligible businesses. Recognizing the ongoing and evolving economic impact, the program was later modified and reauthorized through subsequent legislation, including the Coronavirus Response and Relief Supplemental Appropriations Act of 2021 and the American Rescue Plan Act of 2021.
The fundamental goal of the CARES Act Payment Protection Program was to keep American workers employed and businesses operational during the crisis. It achieved this by providing loans that could be fully forgiven if borrowers met specific criteria, primarily related to maintaining employee payroll levels. These loans were administered through banks, credit unions, and other approved lending institutions, with the federal government compensating these institutions for their services.
Key Features of PPP Loans
The CARES Act Payment Protection Program loans were structured with several key features designed to be beneficial and accessible to small businesses:
- Loan Amount: Initially, businesses could borrow up to $10 million. The loan amount was generally calculated based on 2.5 times the average monthly payroll costs incurred in the year prior to the pandemic.
- Eligible Use of Funds: A significant portion of the loan was intended for payroll costs, ensuring employees continued to receive paychecks. However, the program also allowed a portion of the funds to be used for other essential operating expenses, such as:
- Mortgage interest payments
- Rent payments
- Utility costs
- Later expansions of the program broadened eligible expenses to include costs related to operations, supplier costs, property damage due to public disturbances in 2020, and worker protection expenditures.
- Interest Rate and Term: All PPP loans featured a fixed interest rate of 1% and a five-year term. This provided businesses with predictable and manageable repayment terms if the loan was not fully forgiven.
- Payment Deferral: The program initially allowed for a six-month deferral of payments, later extended to ten months under program modifications. Interest, however, accrued during this deferral period.
Loan Forgiveness Under the CARES Act Payment Protection Program
The most attractive feature of the CARES Act Payment Protection Program was the potential for loan forgiveness. Businesses could have their loans fully forgiven if they met certain requirements, making it effectively a grant. The primary conditions for forgiveness were:
- Use of Loan Proceeds: Loan proceeds had to be used for eligible expenses, primarily payroll, mortgage interest, rent, and utilities. Subsequent expansions included operational expenses, supplier costs, property damage, and worker protection.
- Employee Retention: To achieve full forgiveness, businesses generally needed to maintain employee headcount and salary levels. Reductions in employee numbers or significant pay cuts could lead to a proportional reduction in the forgivable amount. However, the rules were modified to account for situations where businesses could not rehire employees or return to pre-pandemic operating levels due to external factors.
Program Modifications and Expansions
As the pandemic evolved, so did the CARES Act Payment Protection Program. Several legislative updates were implemented to address emerging needs and refine the program’s effectiveness:
- Coronavirus Response and Relief Supplemental Appropriations Act of 2021: This act introduced “second draw” PPP loans, allowing businesses that had already received an initial PPP loan and experienced continued economic hardship to apply for a second loan. Eligibility for second-draw loans was generally limited to businesses with fewer than 300 employees that demonstrated at least a 25% reduction in gross receipts in a specific quarter of 2020 compared to the same quarter in 2019. The maximum size for second-draw loans was capped at $2 million. This act also expanded eligibility for certain non-profit organizations and allocated dedicated funds for very small businesses and community-based lenders, aiming to ensure the program reached the most vulnerable businesses.
- American Rescue Plan Act of 2021: This act provided an additional infusion of funding into the PPP and further broadened eligibility. It aimed to reach more diverse categories of businesses, including larger non-profits, digital media companies, sole proprietors, independent contractors, and self-employed individuals. It also formalized the expanded list of eligible expenses for PPP funds, providing businesses with greater flexibility in how they utilized the loans. Borrowers were also given the option to choose their loan covered period, ranging from 8 to 24 weeks, allowing for better alignment with their operational needs.
The CARES Act Payment Protection Program in National Accounts
In national economic accounting, specifically within the National Income and Product Accounts (NIPAs) maintained by the Bureau of Economic Analysis (BEA), the CARES Act Payment Protection Program loans that were forgiven are classified as government subsidies to employers. While initially structured as loans, the intent was for these funds to function as grants, provided businesses adhered to the program’s requirements. This classification reflects the economic reality that these payments were designed to support businesses in maintaining operations and employee retention during the economic downturn.
For non-profit institutions serving households, forgiven PPP loans are classified as social benefit payments within the NIPAs. This distinction acknowledges the different accounting treatment for non-profit entities in national accounts.
The BEA’s classification of PPP loan forgiveness as subsidies impacts the calculation of Gross Domestic Income (GDI). Subsidies are treated as a subtraction in GDI calculations because they are implicitly included in operating surplus (proprietors’ income and corporate profits). Conceptually, this classification ensures that the PPP’s effect on GDI is accurately represented in national economic statistics.
To illustrate the impact, consider two simplified examples of a business during normal operations (Period 1) and during a shutdown (Period 2):
| Example 1: No Subsidy
