The COVID-19 pandemic presented unprecedented challenges for small businesses across the United States. In response to the widespread economic disruption, the U.S. government introduced the Cares Paycheck Protection Program (PPP), a crucial initiative designed to provide financialLifeline to these businesses. This program, initially authorized under the Coronavirus Aid, Relief, and Economic Security (CARES) Act of 2020, aimed to help small businesses and eligible nonprofit organizations maintain their payroll and cover essential operational costs during periods of economic hardship.
What is the Paycheck Protection Program (PPP)?
At its core, the CARES Paycheck Protection Program was structured to offer forgivable loans. These loans were specifically intended to enable small businesses to continue paying their employees and meet basic overhead expenses. The program was implemented through a network of banks and other lending institutions, with the federal government covering the fees associated with loan processing and administration. These fees are accounted for as nondefense consumption within the National Income and Product Accounts (NIPAs), reflecting the program’s economic impact.
Under the CARES Act, eligible small businesses, including self-employed individuals, could apply for loans up to $10 million. These funds were designed to cover up to six months of average monthly payroll costs, calculated from the previous year. Importantly, the program allowed for a portion of the loan – up to 40% – to be used for eligible non-payroll expenses. These expenses included crucial costs such as mortgage interest, rent, and utilities, providing a broader safety net for struggling businesses. All CARES Paycheck Protection Program loans were offered with a five-year term and a fixed interest rate of 1%, with a six-month deferral period for payments, although interest would accrue during this deferral.
Loan Forgiveness and Requirements under the CARES Act
A key feature of the CARES Paycheck Protection Program was the potential for loan forgiveness. Businesses could have their loans forgiven if the funds were used for permissible expenses, primarily payroll, mortgage interest payments, rent, and utilities. However, the amount eligible for forgiveness was subject to certain conditions. Reductions in the number of employees retained compared to the previous year, or a significant decrease (25% or greater) in employee compensation, would proportionally reduce the forgivable amount. This structure was designed to incentivize businesses to maintain employment levels and wage stability during the economic downturn.
Evolution of the PPP: Subsequent Legislation and Expansions
The CARES Paycheck Protection Program was not a static initiative. Recognizing the ongoing economic challenges, subsequent legislation built upon and modified the original program. The Coronavirus Response and Relief Supplemental Appropriations Act of 2021, for instance, reintroduced forgivable loans for both first-time and second-time small business borrowers. This phase expanded eligibility to include a wider range of nonprofits and earmarked funds specifically for very small businesses and community-based lenders, aiming to reach underserved segments of the business community. Second-time loans were made available to businesses with fewer than 300 employees that had experienced a significant decline in revenue – at least a 25% drop in gross receipts in a 2020 quarter compared to the same quarter in 2019. The maximum loan size for these second-draw loans was capped at $2 million.
Further enhancements came with the American Rescue Plan Act of 2021, which provided an additional $7.25 billion in funding for the CARES Paycheck Protection Program. This act eased access standards, particularly for nonprofit entities, digital media companies, sole proprietors, independent contractors, and self-employed individuals, broadening the reach of the program to more diverse business types.
The scope of qualifying expenses under the CARES Paycheck Protection Program also expanded over time. Beyond payroll and operating expenses like rent and utilities, businesses could use PPP funds for costs such as covered property damage, supplier costs, and worker protection expenditures, reflecting the evolving needs of businesses adapting to the pandemic environment. When used for these qualifying expenses, PPP loans remained eligible for forgiveness. Another significant modification was allowing borrowers to select their covered period, ranging from a minimum of eight weeks to a maximum of 24 weeks, providing greater flexibility in utilizing the funds. Furthermore, the loan payment deferral period was extended to 10 months under these later iterations of the program.
PPP Loans and their Classification as Subsidies
In the context of the NIPAs, forgiven CARES Paycheck Protection Program loans to businesses are classified as subsidies to employers. While initially structured as “loans,” the underlying intent was that these funds would be forgiven if program requirements were met. This structure served to ensure compliance with the terms of fund usage. For nonprofit institutions serving households, PPP loan subsidies are classified as social benefit payments within the NIPAs.
This classification of PPP funds as subsidies by the Bureau of Economic Analysis (BEA) acknowledges their role in supporting businesses to remain operational, retain employees, and facilitate a quicker economic rebound when conditions allowed. BEA’s initial subsidy estimates were based on projections of loan forgiveness, and these estimates were subject to revision as the Small Business Administration (SBA) determined the actual amount of loan forgiveness. Loans that are not forgiven are treated as conventional loans in national accounts, classified as financial transactions with no direct impact on NIPAs, except for interest payments.
The allocation of CARES Paycheck Protection Program subsidies within the NIPAs is aligned with the loan’s intended coverage period. BEA developed monthly loan estimates using SBA loan approval reports. These monthly figures were adjusted to account for the time lag between loan approval and disbursement and then distributed across the loan’s covered period. The distribution between corporate businesses, non-corporate businesses, and nonprofit institutions was based on additional data from the SBA.
Subsidies are treated as a subtraction in the calculation of Gross Domestic Income (GDI) because they are implicitly included in operating surplus (proprietors’ income and corporate profits). Conceptually, subsidies have no net effect on GDI. However, government saving is reduced because the subsidies and benefit payments to nonprofit institutions are part of government expenditures. Further details on the NIPA estimates can be found in BEA publications such as “Effects of Selected Federal Pandemic Response Programs on Personal Income” and “Effects of Selected Federal Pandemic Response Programs on Federal Government Receipts, Expenditures, and Saving,” available under “Federal Recovery Programs and BEA Statistics: COVID-19 and Recovery” on the BEA website.
Illustrative Examples: PPP and Gross Domestic Income (GDI)
The examples below clarify the effect of the CARES Paycheck Protection Program on GDI for businesses aiming to maintain employment. Example 1 depicts a scenario without a subsidy, while Example 2 illustrates a situation with a subsidy. Period 1 represents normal business operations, and Period 2 shows a business that is closed.
| Example 1: No Subsidy Period 1 – Normal Business Operations: Business has 101 sales, 100 compensation expense, 0 subsidy Period 2 – Business Closed: Business has 0 sales, 100 compensation expense, 0 subsidy |
|---|
| GDI |
| Compensation of employees, paid |
| Taxes on production and imports |
| Less: Subsidies |
| Net Operating Surplus |
| Corporate Profits/Proprietors’ Income |
| Revenue (+) |
| Subsidies (+) |
| Expenses (-) |
| Compensation |
| Other |
| CFC |
| Example 2: Subsidy in Period 2 Period 1 – Normal Business Operations: Business has 101 sales, 100 compensation expense, 0 subsidy Period 2 – Business Closed: Business has 0 sales, 100 compensation expense, 100 subsidy |
| GDI |
| Compensation of employees, paid |
| Taxes on production and imports |
| Less: Subsidies |
| Net Operating Surplus |
| Corporate Profits/Proprietors’ Income |
| Revenue (+) |
| Subsidies (+) |
| Expenses (-) |
| Compensation |
| Other |
| CFC |
In both scenarios, a decline in GDI is evident between Period 1 and Period 2. However, the impact on GDI in Period 2 remains consistent, regardless of the subsidy. The subsidy in Period 2 effectively shifts the cost of employment to the government, offsetting the decrease in net operating surplus. Compensation remains unchanged because the subsidy only alters the funding source.
In conclusion, the CARES Paycheck Protection Program served as a vital intervention, providing crucial financial support to small businesses during the COVID-19 pandemic. By offering forgivable loans, the program aimed to mitigate job losses and business closures, playing a significant role in the economic response to the crisis. Its classification as subsidies in national accounts reflects its intended purpose of directly supporting businesses and maintaining economic activity during an unprecedented period.
