The Paycheck Protection Program (PPP) provides $660 billion in forgivable loans to help small businesses impacted by the COVID-19 pandemic and economic downturn make payroll and cover other expenses.1

Small businesses, including the self-employed, may take out loans up to $10 million that can be used for up to six months of average monthly payroll costs from the last year.  Up to 40 percent of the loan can be used for non-payroll expenses, such as most mortgage interest, rent, and utility costs. All loans are for five years and have a 1 percent fixed interest rate. All payments are deferred for 6 months; however, interest will accrue during the deferral period.

Loans may be forgiven if the loan is used for payroll, interest payments on mortgages, rent, and utilities. However, the amount that is forgiven would be reduced proportionally by non-exempted reductions in the number of retained employees compared to the prior year or a 25 percent or greater reduction in employee compensation.

In the NIPAs, PPP loans that are forgiven are classified as a subsidy to the employers. Although administered as a "loan", the general intention is that these loans will be forgiven if the program's requirements are satisfied. Effectively the structure of the program is intended to ensure compliance with the terms of use for the funds. BEA's classification of monies flowing through this program as subsidies recognizes that these payments support keeping businesses afloat and retaining employees to maintain current production or to re-open more quickly when permitted. Initial estimates for the subsidies may be revised when the amount of loan forgiveness is determined. Loans that are not forgiven will be treated as regular loans in the national accounts, which are classified as financial transactions and have no direct impacts on the NIPAs except for interest flows.

Subsidies have no net effect on GDI (NIPA table 1.10) because their inclusion in operating surplus (proprietors' income and corporate profits) is offset by their subtraction in the calculation of GDI; government saving (NIPA table 3.1) is reduced because the subsidies are part of government expenditures.

The following examples (in the chart below) illustrate the impact of the PPP on GDI for a business that attempts to maintain employment.  Example 1 shows a case where a business does not receive a subsidy.  Example 2 illustrates a case where a business receives a subsidy.  Period 1 represents a period of normal operations, while Period 2 shows the business as closed.

In both examples, one can see the decline in GDI between these two periods. However, the impact on GDI is the same in Period 2 -- regardless of whether there is a subsidy.

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
  Period 1 Period 2 Change
GDI 101 0 -101
  Compensation of employees, paid 100 100 0
  Taxes on production and imports 0 0 0
  Less: Subsidies 0 0 0
  Net Operating Surplus 1 -100 -101
    Corporate Profits/Proprietors' Income 1 -100 -101
      Revenue (+) 101 0 -101
      Subsidies (+) 0 0 0
      Expenses (-) 100 100 0
        Compensation 100 100 0
        Other 0 0 0
  CFC 0 0 0
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
  Period 1 Period 2 Change
GDI 101 0 -101
  Compensation of employees, paid 100 100 0
  Taxes on production and imports 0 0 0
  Less: Subsidies 0 100 100
  Net Operating Surplus 1 0 -1
    Corporate Profits/Proprietors' Income 1 0 -1
      Revenue (+) 101 0 -101
      Subsidies (+) 0 100 100
      Expenses (-) 100 100 0
        Compensation 100 100 0
        Other 0 0 0
  CFC 0 0 0

1 The Coronavirus Aid, Relief and Economic Security Act (CARES) of 2020 authorized $350 Billion, while the Paycheck Protection Program and Health Care Enhancement Act of 2020 authorized $310 Billion for loans through the Paycheck Protection Program. The Paycheck Protection Program Flexibility Act (PPPFA) modified several provisions of the program, including extending the time allotted to use PPP funds from eight to twenty-four weeks, reducing the amount of funds required to be used on payroll from 75 percent to 60 percent, and increasing the exemptions for reductions in head counts for the loan forgiveness requirements.