How the PPP Loan Amount Is Calculated

The Paycheck Protection Program (PPP) was a federal initiative designed to provide direct financial assistance to businesses impacted by the COVID-19 pandemic. Its primary goal was to help businesses retain their workforce and cover certain operating expenses. While the loans offered through this program were eligible for forgiveness under specific conditions, the initial amount a business could receive was determined by a defined calculation process.

Understanding Eligible Costs

Calculating a PPP loan amount began with identifying specific types of eligible costs a business incurred. These costs primarily centered around payroll, with a limited inclusion of certain non-payroll expenses.

Eligible payroll costs included salaries, wages, commissions, or similar compensation, along with payments for cash tips or their equivalent. It also covered payments for vacation, parental, family, medical, or sick leave, and allowances for dismissal or separation. Beyond direct compensation, the employer’s contributions for group health care benefits, including insurance premiums, and payments for retirement benefits were considered. State and local taxes assessed on employee compensation, such as state unemployment insurance, also factored into the calculation.

Certain costs were specifically excluded from payroll calculations. Compensation for any individual employee exceeding an annualized rate of $100,000 was capped at that amount. Federal employment taxes, such as the employer’s share of FICA taxes, were excluded. Additionally, qualified sick and family leave wages for which a credit was allowed under the Families First Coronavirus Response Act were not included. Payments made to independent contractors were also excluded from a business’s payroll costs because independent contractors could apply for their own PPP loans.

While payroll costs formed the foundation, a limited set of non-payroll costs were also relevant for the program, though they primarily impacted loan forgiveness rather than the initial loan amount calculation. These included interest payments on mortgage obligations (excluding prepayments or principal payments), rent payments, and utility payments. Utilities covered electricity, gas, water, transportation, telephone, and internet access.

Applying the PPP Loan Calculation Formula

Once eligible costs were identified, the next step involved applying a specific formula to determine the potential PPP loan amount. The standard calculation primarily relied on a business’s average monthly payroll costs.

To calculate the average monthly eligible payroll costs, businesses typically used either calendar year 2019 or 2020 as their reference period. The total eligible payroll costs for the chosen year were summed, divided by 12, and then multiplied by 2.5 to determine the maximum loan amount.

For example, if a business had total eligible payroll costs of $240,000 in 2019, its average monthly payroll would be $20,000. Multiplying this by 2.5 would result in a maximum PPP loan amount of $50,000. While non-payroll costs were important for loan forgiveness, they did not directly increase the initial loan amount determined by this formula. The loan amount was fundamentally based on the business’s payroll expenses.

Seasonal businesses had alternative methods for calculating their average monthly payroll. They could elect to use any consecutive 12-week period between February 15, 2019, and February 15, 2020, to determine their average monthly payroll costs. New businesses, not in operation for a full 12 months, could use a shorter period, such as January 1, 2020, to February 29, 2020, to calculate their average monthly payroll.

Special Rules and Loan Maximums

Beyond the standard formula, several special rules and overall maximums influenced the final PPP loan amount. These provisions addressed unique business structures and set upper limits on the assistance available.

Self-employed individuals, including independent contractors and sole proprietors who file IRS Form 1040 Schedule C, had a distinct calculation method. Initially, their loan amount was based on their net earnings from self-employment (line 31 of Schedule C), capped at an annualized $100,000. Later, program changes allowed these individuals to elect to use their gross income (line 7 of Schedule C) as the basis for their loan calculation, which often resulted in a higher loan amount.

For partnerships, the self-employment income of general partners, up to an annualized $100,000 per partner, could be included as a payroll cost when the partnership applied for a PPP loan. This ensured that partners’ compensation was accounted for within the partnership’s overall payroll calculation, rather than requiring individual partners to apply separately. Farmers and ranchers using Schedule F also had specific calculation methods, often involving gross income instead of net profit.

Overall caps were placed on the maximum loan amount a business could receive. For First Draw PPP loans, the maximum amount was $10 million. For Second Draw PPP loans, the maximum was reduced to $2 million. Businesses in the Accommodation and Food Services sector (those with NAICS code 72) were an exception for Second Draw loans, as they could calculate their loan amount using 3.5 times their average monthly payroll costs, still subject to the $2 million cap.

Affiliation rules also played a role, particularly for businesses under common control. Generally, these rules meant that entities under common ownership or control had to aggregate their employee counts for size standard purposes. This could impact eligibility for the program if the combined entity exceeded the employee threshold. While the CARES Act waived affiliation rules for certain businesses like those with NAICS code 72 and franchises, for others, the aggregation of employees could affect whether they qualified as a small business.