How to Apply for the CARES Act Paycheck Protection Program: A Complete Guide

I. Understanding the Paycheck Protection Program (PPP)

The Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law on March 27, 2020, to provide urgent relief to individuals, families, and businesses struggling due to the COVID-19 pandemic. Among its key provisions was the establishment of the Paycheck Protection Program (PPP), a new loan program under the U.S. Small Business Administration (SBA) 7(a) Loan Program.

The primary goal of the PPP was to offer economic support to small businesses across the nation that were severely impacted by the COVID-19 Emergency Declaration issued on March 13, 2020. This was achieved by providing forgivable loans to help businesses continue paying their employees and cover essential operating costs during the crisis.

This interim final rule officially announced and detailed the implementation of sections 1102 and 1106 of the CARES Act, which are the foundation of the Paycheck Protection Program. Section 1102 introduced the PPP as a temporary addition to the SBA’s 7(a) Loan Program, while section 1106 outlined the conditions for loan forgiveness, potentially covering the full principal amount of qualifying PPP loans.

Key Objectives of the PPP:

Economic Relief: To provide immediate financial assistance to small businesses facing economic hardship due to COVID-19.
Job Retention: To help businesses maintain payroll and avoid layoffs, keeping Americans employed during the crisis.
Loan Forgiveness: To offer the possibility of loan forgiveness, effectively turning the loans into grants for businesses that meet specific criteria.
Expedited Assistance: To quickly distribute funds through a streamlined application process, recognizing the urgency of the economic situation.

This program was designed to be implemented rapidly, with an effective date of April 15, 2020, and applications accepted until June 30, 2020, or until the allocated funds were exhausted. The urgency was driven by the dramatic decline in economic activity and the need to provide immediate support to struggling small businesses.

II. Eligibility: Do You Qualify for a PPP Loan?

Determining your eligibility is the first crucial step in applying for a Paycheck Protection Program loan. The SBA set specific criteria to ensure that the funds reached the intended recipients – small businesses genuinely in need of economic relief due to the COVID-19 pandemic.

Basic Eligibility Requirements:

To be eligible for a PPP loan, you generally needed to meet the following criteria:

Size Standards:
- 500 or Fewer Employees: Your business typically needed to have 500 or fewer employees whose primary residence is in the United States.
- Industry-Specific Size Standards: Alternatively, businesses operating in certain industries could qualify if they met the SBA’s employee-based size standards for their specific industry, even if exceeding 500 employees.
- Affiliation Rules: Standard SBA affiliation rules generally applied, which could combine employee counts across affiliated businesses, unless specifically waived under the CARES Act.
Business Type:
- Small Business Concern: As defined by section 3 of the Small Business Act.
- Tax-Exempt Nonprofit Organizations: Organizations described in section 501(c)(3) of the Internal Revenue Code (IRC).
- Tax-Exempt Veterans Organizations: Organizations described in section 501(c)(19) of the IRC.
- Tribal Business Concerns: As described in section 31(b)(2)(C) of the Small Business Act.
- Sole Proprietorships, Independent Contractors, and Self-Employed Individuals: Individuals operating as sole proprietors, independent contractors, or eligible self-employed individuals were also eligible.
Operational Status:
- In Operation on February 15, 2020: Your business must have been operational on or before February 15, 2020.
- Payroll or Independent Contractors: You must have either had employees for whom you paid salaries and payroll taxes or paid independent contractors (as reported on Form 1099-MISC) as of February 15, 2020.

Situations That Could Make You Ineligible:

Even if you met the basic eligibility criteria, certain circumstances could disqualify you from receiving a PPP loan:

Illegal Activities: Engaging in any business activity that is illegal under federal, state, or local law.
Household Employers: Individuals employing household staff like nannies or housekeepers were not considered businesses under this program.
Criminal History of Owners:
- Owners with 20% or more equity who were incarcerated, on probation, or parole.
- Owners presently subject to indictment, criminal information, or arraignment for felony charges.
- Owners convicted of a felony within the last five years.
Prior SBA Loan Issues: Having a currently delinquent or defaulted SBA loan (or loan from any federal agency) within the last seven years that caused a loss to the government.

It’s important to carefully review these eligibility requirements to determine if your business qualified for the Paycheck Protection Program before proceeding with the application process.

III. Calculating Your Maximum PPP Loan Amount

Once you’ve confirmed your eligibility, the next step is to determine the maximum loan amount you could apply for. The PPP loan amount was based on a payroll-based formula designed to cover approximately 2.5 months of your average monthly payroll costs. The maximum loan amount was capped at $10 million.

Payroll-Based Formula (Most Common Method):

This was the most frequently used method for calculating the maximum loan amount:

Step 1: Aggregate Payroll Costs: Calculate the total payroll costs from the previous twelve months for all employees whose primary place of residence is in the United States. “Payroll costs” include salary, wages, commissions, cash tips, paid leave (vacation, sick, family, medical, parental), separation or dismissal allowance, group health care benefits (including insurance premiums), retirement contributions, and state and local taxes assessed on employee compensation. For sole proprietors and independent contractors, this includes wages, commissions, income, or net earnings from self-employment.
Step 2: Exclude Excess Compensation: Subtract any compensation paid to individual employees exceeding an annualized salary of $100,000. Also, subtract any payments to independent contractors or sole proprietors exceeding $100,000 per year. Note: This $100,000 cap applied to individual employees, not the total payroll.
Step 3: Calculate Average Monthly Payroll: Divide the result from Step 2 (total qualifying payroll costs) by 12 to arrive at your average monthly payroll cost.
Step 4: Multiply by 2.5: Multiply the average monthly payroll cost from Step 3 by 2.5. This represents approximately 2.5 months of payroll coverage.
Step 5: Add EIDL Loan Amount (If Applicable): If you received an Economic Injury Disaster Loan (EIDL) between January 31, 2020, and April 3, 2020, add the outstanding loan amount to the result from Step 4. However, subtract any “advance” amount received from the EIDL COVID-19 loan, as these advances did not need to be repaid.

Example Calculations:

Let’s illustrate with a few examples:

Example 1: Small Business with No Employee Exceeding $100,000 Salary
- Annual Payroll: $120,000
- Average Monthly Payroll: $10,000 ($120,000 / 12)
- Multiply by 2.5: $25,000 ($10,000 x 2.5)
- Maximum Loan Amount: $25,000
Example 2: Business with Some Employees Earning Over $100,000
- Annual Payroll: $1,500,000
- Subtract Compensation Over $100,000: $1,200,000 (After removing amounts exceeding $100,000 annual salary per employee)
- Average Monthly Qualifying Payroll: $100,000 ($1,200,000 / 12)
- Multiply by 2.5: $250,000 ($100,000 x 2.5)
- Maximum Loan Amount: $250,000
Example 3: Business with No High Earners and an Existing EIDL
- Annual Payroll: $120,000
- Average Monthly Payroll: $10,000
- Multiply by 2.5: $25,000
- Add Outstanding EIDL Loan: $10,000
- Maximum Loan Amount: $35,000
Example 4: Business with High Earners and an Existing EIDL
- Annual Payroll: $1,500,000
- Subtract Compensation Over $100,000: $1,200,000
- Average Monthly Qualifying Payroll: $100,000
- Multiply by 2.5: $250,000
- Add Outstanding EIDL Loan: $10,000
- Maximum Loan Amount: $260,000

What Counts as Payroll Costs?

Payroll costs included a broad range of employee compensation components:

Salaries, Wages, Commissions, and Similar Compensation: Payments to employees residing in the United States.
Cash Tips: Based on employer records or a reasonable good-faith estimate.
Paid Leave: Vacation, parental, family, medical, and sick leave.
Separation or Dismissal Allowance: Severance payments.
Employee Benefits: Costs for group health care coverage (including premiums) and retirement contributions.
State and Local Taxes: Taxes assessed on employee compensation.
For Sole Proprietors/Independent Contractors: Wages, commissions, income, or net earnings from self-employment.

What is Excluded from Payroll Costs?

Certain items were specifically excluded from the definition of payroll costs for PPP loan calculations:

Compensation to Non-US Residents: Compensation for employees whose primary residence is outside the United States.
Excess Compensation Over $100,000 Annual Salary: The portion of any employee’s compensation exceeding $100,000 per year (prorated as necessary).
Federal Employment Taxes: Federal employment taxes imposed or withheld between February 15, 2020, and June 30, 2020, including FICA, Railroad Retirement Act taxes, and withheld income taxes.
Qualified Sick and Family Leave Wages (Covered by FFCRA): Wages for which a tax credit was claimed under the Families First Coronavirus Response Act.

Independent Contractors: Importantly, independent contractors were not counted as employees for your PPP loan calculation. They were eligible to apply for their own PPP loans as self-employed individuals.

IV. How to Apply for a Paycheck Protection Program Loan

Applying for a PPP loan involved a straightforward process, primarily focused on submitting an application through an approved SBA lender. Given the program’s urgency, the application process was designed to be as streamlined as possible.

Steps to Apply:

Find an Eligible Lender: PPP loans were issued by banks, credit unions, and other financial institutions that were approved SBA lenders. You could start by contacting your existing bank or credit union to inquire about their participation in the PPP. A list of SBA-approved lenders could also be found on the SBA website. It’s important to note that the program was designed to be “first-come, first-served,” so timely application was crucial.
Gather Required Documents: To complete the application, you needed to collect specific documentation to verify your eligibility and calculate your loan amount. This typically included:
- Paycheck Protection Program Application Form (SBA Form 2483): This form was available from lenders and the SBA.
- Payroll Documentation: To substantiate your payroll costs, you needed to provide documents such as:
  - Payroll processor records.
  - Payroll tax filings (e.g., IRS Form 941).
  - Form 1099-MISC (if you paid independent contractors).
  - Income and expenses from a sole proprietorship (if applicable).
  - Bank records (if other documentation was unavailable) to demonstrate qualifying payroll amount.
Complete the Application Form (SBA Form 2483): Fill out SBA Form 2483 accurately and completely. This form required you to provide business information, calculate your requested loan amount, and make several certifications.

Key Certifications on the Application Form:
- Operation on February 15, 2020: Certifying that your business was operational and had payroll or paid independent contractors on this date.
- Economic Uncertainty: Certifying that current economic uncertainty made the loan request necessary to support ongoing operations.
- Use of Funds: Certifying that the funds would be used for permissible purposes, primarily to retain workers and maintain payroll, or for eligible mortgage interest, rent, and utility payments. Crucially, you certified understanding that knowingly using funds for unauthorized purposes could lead to legal liability, including fraud charges, and that at least 75% of loan proceeds should be used for payroll costs.
- Documentation Provision: Certifying that you would provide documentation verifying employee counts and payroll costs, as well as eligible mortgage interest, rent, and utility payments for the eight-week period following the loan disbursement, for loan forgiveness purposes.
- Loan Forgiveness Understanding: Certifying understanding that loan forgiveness would be provided for documented payroll costs, and eligible mortgage interest, rent, and utility payments, with the stipulation that no more than 25% of the forgiven amount could be for non-payroll costs.
- No Dual Dipping: Certifying that you had not and would not receive another PPP loan during the period from February 15, 2020, to December 31, 2020.
- Accuracy of Information: Certifying that all information provided in the application and supporting documents was true and accurate. You acknowledged the penalties for knowingly making false statements to obtain an SBA-guaranteed loan, including potential imprisonment and fines.
- Tax Document Verification: Acknowledging that the lender would verify the loan amount using submitted tax documents, and affirming that these documents were identical to those submitted to the IRS. You also agreed to allow the lender to share tax information with the SBA and its authorized representatives for compliance and review purposes.
Submit Your Application to Your Lender: Once you completed the application form and gathered the necessary documentation, submit your application to your chosen SBA-approved lender. Lenders were responsible for reviewing applications, verifying borrower information, and submitting loan guaranty requests to the SBA.

Lender Responsibilities (Simplified):

Lenders played a crucial role in the PPP process. Their primary responsibilities included:

Confirming Receipt of Borrower Certifications: Ensuring the borrower completed and signed the SBA Form 2483 and made all required certifications.
Verifying Employee Status: Confirming that the borrower had employees and paid salaries and payroll taxes around February 15, 2020.
Reviewing Payroll Documentation: Checking the payroll documentation submitted by the borrower to validate the average monthly payroll costs.
BSA Compliance: Adhering to Bank Secrecy Act (BSA) requirements, including customer identification and anti-money laundering protocols. For existing customers, standard BSA protocols generally applied. For new customers or non-BSA-regulated lenders, establishing an AML compliance program was necessary.

Lenders were permitted to rely on borrower certifications and documentation provided in good faith, and were generally held harmless for borrower non-compliance or fraud, provided they fulfilled their basic verification duties.

V. Loan Terms: Interest Rate, Maturity, and Deferment

The Paycheck Protection Program loans came with very favorable terms designed to ease the financial burden on small businesses during the economic crisis.

Key Loan Terms:

Interest Rate: A fixed interest rate of 1% per year (100 basis points). This low interest rate was significantly below market rates and designed to make the loans highly affordable.
Maturity: A two-year maturity. While the CARES Act allowed for loans with maturities up to ten years, the SBA, in consultation with the Treasury Secretary, set a two-year term, anticipating that the economic disruption would subside within that timeframe.
No Collateral or Personal Guarantees: PPP loans did not require any collateral to secure the loan, nor were personal guarantees from business owners necessary. This further reduced the risk for small business borrowers.
100% SBA Guarantee: The SBA guaranteed 100% of the loan, significantly reducing the risk for lenders and encouraging their participation in the program.
No Lender or Borrower Fees: Borrowers did not pay any upfront guarantee fees to the SBA, and there were no ongoing lender service fees or subsidy recoupment fees. Fees for agents assisting borrowers were paid by the lenders, not the borrowers, and were capped by the SBA.

Payment Deferral:

Six-Month Deferment: Borrowers were granted an automatic deferment of principal and interest payments for the first six months from the date of loan disbursement. However, interest still accrued during this deferment period. The CARES Act allowed for deferment up to one year, but a six-month period was deemed appropriate given the low interest rate and loan forgiveness provisions.

Agent Fees:

If a borrower utilized an agent to assist with the PPP loan application (including referrals to lenders), agent fees were paid by the lender out of the fees they received from the SBA. Agents were prohibited from collecting fees directly from the borrower or from the PPP loan proceeds. Agent fees were capped as follows:

1% for loans up to $350,000
0.50% for loans between $350,000 and $2 million
0.25% for loans of $2 million or more

These loan terms were intentionally generous to encourage widespread participation and provide substantial financial relief to small businesses navigating the economic fallout of the COVID-19 pandemic.

VI. Loan Forgiveness: Turning Your Loan into a Grant

One of the most attractive features of the Paycheck Protection Program was the potential for loan forgiveness. Borrowers who used their PPP loan proceeds for eligible expenses and maintained their employee and compensation levels could have their loans forgiven, effectively converting them into grants.

Forgiveness Amount:

Up to 100% Forgiveness: The amount of loan forgiveness could be up to the full principal amount of the loan, plus any accrued interest.
Eligible Expenses: Loan forgiveness was based on the borrower’s spending of loan proceeds on specific “forgivable” expenses during an eight-week “covered period” following the loan disbursement. These expenses included:
- Payroll Costs: The most significant forgivable expense, and required to be at least 75% of the forgiven amount.
- Mortgage Interest Payments: Interest payments on business mortgage obligations incurred before February 15, 2020. Note: Principal payments and prepayments were not forgivable.
- Rent Payments: Rent payments on leases dated before February 15, 2020.
- Utility Payments: Payments for utilities under service agreements dated before February 15, 2020. Utilities included electricity, gas, water, transportation, telephone, or internet access.

75% Payroll Cost Rule:

Minimum Payroll Spending: A critical condition for full loan forgiveness was that at least 75% of the forgiveness amount had to be attributable to payroll costs. This meant that no more than 25% of the forgiven amount could be for non-payroll costs (mortgage interest, rent, utilities). It’s important to note that this 75% rule applied to the forgiveness amount, not necessarily 75% of the loan proceeds, although there was also guidance that 75% of loan use should be for payroll.

Reductions in Forgiveness:

The loan forgiveness amount could be reduced in two primary situations:

Reduction in Full-Time Equivalent (FTE) Employees: If the borrower reduced their FTE employee count during the covered period compared to a reference period (either February 15, 2019, to June 30, 2019, or January 1, 2020, to February 29, 2020 – borrowers could choose), the forgiveness amount would be reduced proportionally. There were exceptions for re-hiring employees and good-faith offers to rehire.
Reduction in Salary or Wages: For employees earning less than $100,000 annually, if the borrower reduced their salary or wages by more than 25% during the covered period compared to the most recent full quarter before the covered period, the forgiveness amount would be reduced by the amount of the salary/wage reduction exceeding 25%. This reduction did not apply to employees earning over $100,000 annually.

Applying for Loan Forgiveness:

After the eight-week covered period, borrowers could apply for loan forgiveness through their lender. The forgiveness application process involved:

Gathering Documentation: Collecting documentation to verify payroll costs and eligible non-payroll costs incurred during the covered period. This included:
- Payroll documentation (e.g., payroll tax filings, payment receipts, bank statements).
- Documentation for mortgage interest, rent, and utility payments (e.g., mortgage statements, lease agreements, utility bills, payment receipts).
- Documentation of FTE employee counts during the relevant periods.
Completing the Loan Forgiveness Application: Filling out the appropriate SBA loan forgiveness application form (SBA Form 3508 or a lender-equivalent form).
Submitting Application to Lender: Submitting the completed application and supporting documentation to your PPP lender.

Lenders were responsible for reviewing the forgiveness application and documentation, and making a determination on the forgivable amount, in accordance with SBA guidelines. Lenders were generally allowed to rely on borrower-provided documentation and attestations regarding the accuracy of their expense verification. The SBA provided guidance and held lenders harmless for good-faith reliance on borrower information.

Independent Contractors and Forgiveness: Similar to loan amount calculations, payments to independent contractors were not included in a borrower’s payroll costs for loan forgiveness purposes, as independent contractors were eligible to apply for their own PPP loans.

Loan forgiveness was a complex aspect of the PPP, and borrowers needed to carefully track their expenses and employee levels during the covered period to maximize their potential forgiveness amount.

VII. Permissible Uses of PPP Loan Funds

Understanding how you could use PPP loan funds was critical to ensure compliance with program rules and maximize your chances of loan forgiveness. The CARES Act and SBA guidelines specified the allowable uses of PPP loan proceeds.

Permitted Uses:

The primary uses of PPP loan funds were intended to help businesses cover essential operating costs during the COVID-19 economic disruption. Permitted uses included:

Payroll Costs: As defined in the program guidelines (salaries, wages, commissions, tips, benefits, etc.). Payroll costs were intended to be the primary use of funds, and were required to constitute at least 75% of the loan proceeds used, and 75% of the forgiveness amount.
Costs Related to Continued Health Care Benefits: Costs related to maintaining group health care benefits during periods of paid sick, medical, or family leave, and insurance premiums.
Mortgage Interest Payments: Payments of interest on mortgage obligations incurred before February 15, 2020 (not principal payments or prepayments).
Rent Payments: Rent payments on leases dated before February 15, 2020.
Utility Payments: Payments for utilities under service agreements dated before February 15, 2020 (electricity, gas, water, transportation, telephone, internet).
Interest on Other Pre-Existing Debt: Interest payments on any other debt obligations that were incurred before February 15, 2020.
Refinancing EIDL Loans: Refinancing an SBA Economic Injury Disaster Loan (EIDL) made between January 31, 2020, and April 3, 2020. If the EIDL was used for payroll costs, the PPP loan had to be used to refinance it. EIDL advances (up to $10,000) were deducted from PPP loan forgiveness.

75% Payroll Use Requirement:

Payroll Priority: As emphasized throughout the program guidelines, a significant portion of PPP loan proceeds was expected to be used for payroll costs. Both program rules and guidance indicated that at least 75% of the loan proceeds used and 75% of the forgiveness amount should be for payroll. This was intended to align with the program’s core goal of keeping workers employed.

Consequences of Misuse of Funds:

Using PPP loan funds for unauthorized purposes had consequences:

Repayment of Misused Funds: The SBA would direct borrowers to repay any loan amounts used for unauthorized purposes.
Potential Fraud Charges: Knowingly using funds for unauthorized purposes could lead to additional liabilities, including charges of fraud.
Recourse Against Owners: If shareholders, members, or partners of a business misused PPP funds, the SBA could have recourse against those individuals for the unauthorized use.

Borrowers were required to certify on their application that they understood the permissible uses of funds and the potential penalties for misuse. Maintaining accurate records of how loan proceeds were spent was essential for both demonstrating compliance and maximizing loan forgiveness.

VIII. Key Considerations and Conclusion

The Paycheck Protection Program was a critical lifeline for millions of small businesses during the unprecedented economic challenges of the COVID-19 pandemic. It provided rapid access to forgivable loans, helping businesses maintain payroll, cover essential operating expenses, and weather the storm.

Key Takeaways for PPP Applicants (and Future Reference):

Eligibility is Paramount: Carefully assess your eligibility based on business size, type, operational status, and any potential disqualifying factors.
Understand Loan Calculation: Accurately calculate your maximum loan amount using the payroll-based formula and gather the necessary payroll documentation.
Application Process is Streamlined: Apply through an SBA-approved lender, complete SBA Form 2483, and provide required documentation. Timeliness was important due to the “first-come, first-served” nature of the initial program funding.
Favorable Loan Terms: Benefit from the low 1% interest rate, two-year maturity, deferred payments, and no collateral or personal guarantees.
Loan Forgiveness is a Major Benefit: Maximize your loan forgiveness potential by using funds for eligible expenses (primarily payroll) during the covered period, and maintain employee and compensation levels to avoid forgiveness reductions.
Proper Fund Usage is Crucial: Adhere strictly to the permitted uses of PPP loan funds and maintain thorough records of how funds are spent to ensure compliance and facilitate loan forgiveness.

Conclusion:

The Paycheck Protection Program, while temporary, played a significant role in mitigating the economic impact of COVID-19 on small businesses. Understanding the program’s intricacies, from eligibility and application to loan terms and forgiveness, was essential for businesses seeking to access this vital support. While the initial PPP application period has concluded, the information and principles outlined in this guide can provide valuable insights for businesses navigating future economic challenges and considering potential government assistance programs. For the most current information and any potential future programs, always refer to the official SBA website and consult with approved lenders and financial professionals.