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Publications | May 7, 2020
2 minute read

Paycheck Protection Program: 75/25 Rule

Paycheck Protection Program (PPP) borrowers are advised to use at least 75% of PPP loan proceeds for payroll costs in order to avoid potential penalties. The current rules are unclear and details are slowly emerging, but the following is an updated overview of issues for you to consider.

The PPP of the Coronavirus Aid, Relief and Economic Security Act (CARES Act) provides loans to small businesses. PPP loans may generally be used for: 

  • Payroll costs.
  • Costs related to the continuation of group health care benefits during periods of paid sick, medical or family leave and insurance premiums.
  • Payments of interest on a mortgage.
  • Rent costs.
  • Utilities.
  • Interest on any other debt obligations incurred before February 15, 2020.

The Small Business Administration (SBA) requires borrowers to use at least 75% of PPP loan proceeds for payroll costs and no more than 25% of PPP loan proceeds for non-payroll costs.

Payroll costs consist of the following forms of compensation to employees: (i) salary, wages, commissions or similar compensation; (ii) cash tips or the equivalent; (iii) payment for vacation, parental, family, medical or sick leave; (iv) allowance for separation or dismissal; (v) payment for the provision of employee benefits consisting of group health care coverage, including insurance premiums and retirement; and (vi) payment of state and local taxes assessed on compensation of employees.

At this point it is unclear what penalties borrowers will face for failing to use at least 75% of the loan proceeds for payroll costs. Borrowers could be required to repay (potentially immediately) the amount of the loan used for non-payroll costs exceeding 25% of the total loan. Alternatively, borrowers who do not adhere to the 75/25 rule may be required to repay the entire amount of the loan.

To avoid potential penalties, the best practice is for borrowers to ensure that they use at least 75% of PPP loan proceeds for payrolls costs.

The rules surrounding PPP loan use and forgiveness are complex and business specific. If you have concerns about the rules, please contact Ford Turrell, Timothy Hillegonds, Rob Davies, Matthew Crowe or your Warner attorney.