The Coronavirus Aid, Relief, and Economic Security (CARES) Act introduced the Paycheck Protection Program (PPP) to provide vital economic support to small businesses impacted by the COVID-19 pandemic. This program, administered by the U.S. Small Business Administration (SBA) in collaboration with the Department of the Treasury, was designed to offer forgivable loans to help businesses maintain payroll and cover essential operating expenses during periods of economic hardship. This guide consolidates key information about the PPP, drawing from official sources and guidelines to provide a comprehensive overview for both borrowers and lenders.
Understanding the Paycheck Protection Program
Enacted on March 27, 2020, the CARES Act aimed to alleviate the economic strain caused by the COVID-19 emergency. Section 1102 of this act established the Paycheck Protection Program, temporarily adding it to the SBA’s 7(a) Loan Program. A crucial feature of the PPP, outlined in Section 1106 of the CARES Act, was the provision for loan forgiveness, allowing borrowers to potentially have the full principal amount of their qualifying loans forgiven.
The initial rollout of the PPP was followed by several interim final rules and amendments, including the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (Economic Aid Act) of December 27, 2020. The Economic Aid Act extended the PPP loan authority through March 31, 2021, and introduced revisions to program requirements. This guide incorporates these amendments and consolidates previously issued guidance to offer a clear and up-to-date understanding of the PPP.
Borrower Eligibility: Who Can Apply?
To be eligible for a CARES Act Paycheck Protection Program loan, businesses, organizations, and individuals must meet specific criteria.
General Eligibility Requirements
An applicant is generally eligible for a PPP loan if they meet the following conditions:
- Business Type: Be one of the following:
- An independent contractor, eligible self-employed individual, or sole proprietor.
- A business concern, a tax-exempt nonprofit organization (501(c)(3)), a tax-exempt veterans organization (501(c)(19)), or a Tribal business concern. These entities must employ no more than the greater of 500 employees or the size standard set by the SBA for their industry.
- A housing cooperative, an eligible section 501(c)(6) organization, or an eligible destination marketing organization, employing no more than 300 employees.
- A news organization (NAICS code 511110 or 5151 business or a nonprofit public broadcasting entity with a trade or business under NAICS 511110 or 5151) with no more than 500 employees per location (or the SBA size standard for their industry if applicable).
- Other entities as specifically defined under PPP rules.
- Operational Status: Be in operation on February 15, 2020, and either have employees with paid salaries and payroll taxes or paid independent contractors (reported on Form 1099-MISC), or be an eligible self-employed individual, independent contractor, or sole proprietorship with no employees.
Applicants must provide documentation to substantiate their eligibility and payroll amount, such as payroll records, tax filings, Form 1099-MISC, Schedule C or F, or bank records.
Affiliation Rules and Employee Limits
When determining eligibility based on employee counts, it’s crucial to consider SBA’s affiliation rules. These rules generally require businesses to include employees of their domestic and foreign affiliates when calculating employee size. However, there are specific waivers and exceptions to these rules, particularly for certain industries like news organizations, franchises, and businesses in the accommodation and food services sector (NAICS code starting with 72).
Image showing an example of document headings, relevant to the regulatory nature of the original article.
For news organizations with multiple locations, the 500-employee limit applies per physical location, provided they meet specific ownership and certification criteria related to locally focused or emergency information production.
Industry-Specific Eligibility Clarifications
Several clarifications have been provided to address eligibility for specific types of organizations:
- Hospitals: Hospitals owned by governmental entities may be eligible if they receive less than 50% of their funding from state or local government sources (excluding Medicaid).
- Gaming Businesses: Businesses receiving legal gaming revenues are not automatically ineligible, although those with illegal gaming revenue remain ineligible.
- Cooperatives: Electric and telephone cooperatives exempt from federal income tax (501(c)(12)) are considered “business entities organized for profit” and are eligible if other requirements are met. Housing cooperatives with 300 or fewer employees are also eligible.
- Nonprofit News Organizations: Nonprofit and tax-exempt news organizations meeting certain criteria are eligible, emphasizing their role in providing locally focused or emergency information.
- Destination Marketing Organizations & 501(c)(6) Organizations: These organizations are eligible under specific conditions, including limitations on lobbying activities and employee counts.
Ineligibility Criteria: Who Is Excluded?
Even if a business meets the general eligibility criteria, certain factors can render them ineligible for a PPP loan.
Reasons for Ineligibility
A business is ineligible for a PPP loan if any of the following apply:
- Illegal Activities: Engagement in any activity illegal under federal, state, or local law.
- Household Employers: Being a household employer (employing nannies, housekeepers, etc.).
- Criminal History of Owners: An owner with 20% or more equity is currently incarcerated, indicted for a felony, or has a recent felony conviction related to fraud, bribery, embezzlement, or false statements in loan applications.
- Delinquent Federal Loans: Having a currently delinquent or defaulted federal loan (direct or guaranteed) within the last seven years that caused a government loss.
- Not in Operation on February 15, 2020: Failure to be in operation on this date.
- Shuttered Venue Operator Grant Recipient: Receipt or planned receipt of a Shuttered Venue Operator Grant.
- Political Influence: Controlling interest held directly or indirectly by the President, Vice President, heads of Executive departments, Members of Congress, or their spouses.
- Publicly Traded Companies: Being an issuer with securities listed on a national securities exchange.
- Permanent Closure: Having permanently closed the business.
- Bankruptcy: Being in bankruptcy proceedings at the time of application or before loan disbursement.
- Hedge Funds/Private Equity Firms: Being primarily engaged in investment or speculation.
These ineligibility criteria are designed to ensure that PPP loans are directed to businesses genuinely in need of support and to prevent misuse of funds.
Loan Amount Calculation: How Much Can You Borrow?
The maximum loan amount for a First Draw PPP Loan is capped at $10 million, and the specific amount is calculated using a payroll-based formula. Borrowers can generally use payroll data from 2019 or 2020 to calculate their loan amount.
General Calculation Methodology
For most applicants, the loan amount calculation follows these steps:
- Aggregate Payroll Costs: Sum up payroll costs from 2019 or 2020 for employees whose primary residence is in the United States.
- Cap Individual Compensation: Reduce any employee’s compensation exceeding $100,000 on an annualized basis.
- Calculate Average Monthly Payroll: Divide the result from Step 2 by 12 to get average monthly payroll costs.
- Multiply by 2.5: Multiply the average monthly payroll costs by 2.5.
- Add EIDL Refinance Amount (Optional): Add any outstanding amount from an Economic Injury Disaster Loan (EIDL) made between January 31, 2020, and April 3, 2020, that you wish to refinance (excluding any EIDL advance).
Example Scenarios:
- Example 1 (No high earners): $120,000 annual payroll / 12 months = $10,000 monthly payroll * 2.5 = $25,000 maximum loan.
- Example 2 (High earners): $1,500,000 annual payroll (with some exceeding $100k cap) becomes $1,200,000 after capping. $1,200,000 / 12 months = $100,000 monthly payroll * 2.5 = $250,000 maximum loan.
- Example 3 (EIDL Refinance): Example 1 scenario + $10,000 EIDL = $25,000 + $10,000 = $35,000 maximum loan.
Specific Calculations for Self-Employed Individuals, Seasonal Employers, Farmers, and Ranchers
- Self-Employed (Schedule C Filers): Calculation varies based on whether you have employees. For those without employees, it’s based on net profit from Schedule C. If you have employees, it combines net profit with employee payroll costs.
- Seasonal Employers: Seasonal employers use average monthly payroll costs for any 12-week period between February 15, 2019, and February 15, 2020, to calculate their loan amount.
- Farmers and Ranchers (Schedule F Filers): Similar to self-employed, the calculation depends on whether they have employees. It can be based on gross income from Schedule F, adjusted for employee payroll if applicable.
Payroll Costs Defined
“Payroll costs” are broadly defined to include:
- Salary, wages, commissions, and similar compensation.
- Cash tips.
- Payments for vacation, parental, family, medical, or sick leave.
- Allowance for separation or dismissal.
- Payments for group health care, group life, disability, vision, or dental insurance (including premiums).
- Retirement contributions.
- State and local taxes assessed on employee compensation.
- For self-employed individuals, wages, commissions, income, or net earnings from self-employment.
Exclusions from Payroll Costs:
- Compensation for employees whose principal residence is outside the U.S.
- Individual employee compensation exceeding $100,000 annually.
- Federal employment taxes.
- Qualified sick and family leave wages for which a credit is allowed under the Families First Coronavirus Response Act.
Loan Terms and Conditions
CARES Act Paycheck Protection Program loans come with standardized and favorable terms to support small businesses.
Key Loan Terms
- Interest Rate: 1% fixed rate.
- Maturity: Five years.
- Guarantee: 100% SBA guarantee.
- Collateral and Personal Guarantees: Not required.
- Fees: No upfront guarantee fees, annual service fees, subsidy recoupment fees, or secondary market guarantee fees.
Deferment and Payment
- Payment Deferral: Loan payments are deferred for borrowers who apply for loan forgiveness within 10 months after the end of their loan forgiveness covered period. Payments are deferred until SBA remits the forgiveness amount to the lender or notifies the lender that no forgiveness is allowed.
- Payment Start: If a borrower doesn’t apply for forgiveness within 10 months, payments on principal and interest begin after this period.
Loan Usage and Restrictions
PPP loan proceeds are intended for specific uses to help businesses maintain operations and workforce.
Permissible Uses of Loan Funds
PPP loan proceeds can be used for:
- Payroll Costs: As broadly defined, covering salaries, wages, and benefits.
- Continuation of Group Benefits: Costs related to continuing health care, life, disability, vision, or dental benefits during leave periods and insurance premiums.
- Mortgage Interest Payments: Interest on business mortgage obligations (not principal or prepayments) for mortgages incurred before February 15, 2020.
- Rent Payments: Rent under lease agreements in place before February 15, 2020.
- Utility Payments: Payments for utilities for services that began before February 15, 2020.
- Interest on Other Debt Obligations: Interest payments on debts incurred before February 15, 2020.
- Refinancing SBA EIDL Loans: Refinancing EIDL loans made between January 31, 2020, and April 3, 2020.
- Covered Operations Expenditures: Payments for business software, cloud computing, and services that facilitate business operations.
- Covered Property Damage Costs: Costs for property damage due to public disturbances in 2020, not covered by insurance.
- Covered Supplier Costs: Expenditures to suppliers essential to operations, under contracts or orders in effect before the covered period.
- Covered Worker Protection Expenditures: Operating or capital expenditures to adapt business activities to comply with COVID-19 related health and safety guidelines.
At least 60% of the loan proceeds must be used for payroll costs to achieve full loan forgiveness.
Restrictions on Loan Usage
PPP funds cannot be used for:
- Lobbying activities.
- Lobbying expenditures related to state or local elections.
- Expenditures to influence legislation or regulatory actions.
Misuse of funds can result in required repayment and potential fraud charges for knowing misuse.
Loan Forgiveness: Turning a Loan into a Grant
A key incentive of The Cares Act Paycheck Protection Program is loan forgiveness. Borrowers can have their loans forgiven up to the full principal amount and accrued interest if they meet certain conditions.
Forgiveness Eligibility and Calculation
Loan forgiveness is based on eligible expenses incurred during the “loan forgiveness covered period,” which borrowers can select to be between 8 and 24 weeks from loan disbursement. Eligible expenses include:
- Payroll costs.
- Covered mortgage interest payments.
- Covered rent payments.
- Covered utility payments.
- Covered operations expenditures.
- Covered property damage costs.
- Covered supplier costs.
- Covered worker protection expenditures.
For full forgiveness, at least 60% of the loan must be used for payroll costs, with no more than 40% for nonpayroll costs. Loan forgiveness may be reduced if employee or compensation levels are reduced, although there are safe harbors and exemptions to mitigate these reductions.
Image showing agency signatures, representing the official and authoritative nature of the information.
Borrowers receiving loans of $150,000 or less have simplified forgiveness application processes, requiring fewer documents at the time of application. However, all borrowers must maintain records to substantiate their compliance with PPP requirements for potential audits.
EIDL Advance and Forgiveness
The Economic Aid Act repealed the provision that required SBA to deduct EIDL Advance Amounts from loan forgiveness amounts. EIDL Advances will no longer reduce PPP loan forgiveness amounts, and any previous deductions will be remitted to lenders.
Lender Responsibilities and Guidelines
Lenders play a critical role in the CARES Act Paycheck Protection Program, responsible for processing, disbursing, and servicing PPP loans.
Lender Eligibility and Requirements
Eligible PPP lenders include:
- All SBA 7(a) lenders.
- Federally insured depository institutions and credit unions.
- Farm Credit System institutions.
- Other financing providers meeting specific criteria, including BSA compliance and operational history.
Lenders must register in SAM.gov and adhere to SBA guidelines for PPP loan processing.
Lender Underwriting and Due Diligence
Lender underwriting responsibilities are streamlined for PPP loans:
- Certification Verification: Confirm receipt of borrower certifications on the PPP Borrower Application Form.
- Operational Status Verification: Confirm borrower operation on or around February 15, 2020.
- Payroll Documentation Review: Confirm the average monthly payroll costs based on submitted documentation.
- BSA Compliance: Follow applicable Bank Secrecy Act (BSA) requirements.
Lenders can rely on borrower certifications and documentation without independent verification of all information, provided they act in good faith and comply with other applicable regulations. They are also protected from enforcement actions related to loan origination or forgiveness if they rely on borrower-provided information in good faith.
Lender Fees and Operations
- Lender Fees: SBA pays lenders processing fees based on the loan amount, ranging from 1% to 5%.
- Secondary Market Sales: PPP loans can be sold in the secondary market after full disbursement.
- Pledging Loans: Requirements for loan pledges are simplified for borrowings from Federal Reserve Banks or Federal Home Loan Banks.
- Promissory Notes and Authorization: Lenders can use their own promissory notes or SBA forms, and a separate SBA Authorization document is not required.
- SBA Form 1502 Reporting: Lenders must electronically submit SBA Form 1502 within 20 calendar days of loan approval to report loan disbursement and collect processing fees.
Additional Considerations
Corporate Group Loan Limit
To ensure broad access to PPP funds, businesses within a single corporate group are limited to a maximum aggregate of $20 million in PPP loans.
Agent Fees
Agent fees for assisting borrowers with PPP loan applications are capped and cannot be paid from loan proceeds.
One-Time Disbursement
PPP loans are disbursed in a single, full disbursement within ten calendar days of loan approval. Multiple draws are not permitted.
Loan Increases and Recalculations
In certain circumstances, borrowers may be eligible to request an increase in their PPP loan amount, such as partnerships that initially excluded partner compensation or seasonal employers eligible for a higher loan amount under revised calculations. Borrowers who returned PPP funds may also reapply.
Nondiscrimination and Religious Liberty
PPP loans are subject to federal nondiscrimination laws, but also incorporate exemptions related to religious liberty, sex-specific admissions practices in certain educational institutions, sex-specific domestic violence shelters, coreligionist housing, and Indian tribal preferences in adoption or foster care practices.
Conclusion
The CARES Act Paycheck Protection Program was a critical lifeline for small businesses during the COVID-19 pandemic. Understanding the eligibility requirements, loan terms, permissible uses, and forgiveness options is essential for both borrowers and lenders. This guide aims to provide a comprehensive overview of the PPP, drawing from official sources to ensure accuracy and clarity. For the most up-to-date information and specific guidance, it’s recommended to consult the SBA website and seek advice from financial professionals or SBA Lender Relations Specialists.
This information is for informational purposes only and does not constitute legal or financial advice. Consult with a qualified professional for specific guidance related to your situation.
