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

The loans are administered by banks and other lending institutions. The federal government pays the lending institutions fees for these services. In the NIPAs, the fees are recorded as nondefense consumption based on data from the Small Business Administration on loan approvals and the program’s fee structure.

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 to businesses 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. In the NIPAs, PPP loan subsidies to nonprofit institutions serving households are classified as a social benefit payment.

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. BEA's initial estimates of the subsidies, which assume a certain percentage of the loans will be forgiven, may be revised when the actual amount of loan forgiveness is determined by the Small Business Administration. 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.

The loans are intended to cover expenses over a six-month period from their disbursement, so the estimates of subsidies for businesses and benefit payments for nonprofit institutions in the NIPAs are allocated over the same period. BEA prepares monthly estimates of loans using reports of loan approvals from the Small Business Administration. These monthly values are then adjusted to account for the time between loan approval and disbursement, and then are distributed over the period covered by the loan. The allocation between corporate business, non-corporate business, and nonprofit institutions is based on additional information from the Small Business Administration.

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 and benefit payments to nonprofit institutions are part of government expenditures.

For information about the estimates in the NIPAs, see "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" at https://www.bea.gov/recovery.

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.

In effect, the subsidy in Period 2 transfers the cost of employment to the government and offsets the decline in net operating surplus. There is no change in compensation because only the source of funding has changed.

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 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

1The 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.