Paycheck Protection Program CARES Act: A Comprehensive Guide for Small Businesses

The Coronavirus Aid, Relief, and Economic Security (CARES) Act introduced the Paycheck Protection Program (PPP) to provide critical financial support to small businesses struggling amidst the COVID-19 pandemic. This program, administered by the U.S. Small Business Administration (SBA), was designed to offer forgivable loans to help businesses maintain their payroll and cover essential operating expenses. Understanding the nuances of the Payroll Protection Program Cares Act is crucial for both borrowers and lenders. This guide consolidates key information and updates, providing a comprehensive overview of the program as amended by the Economic Aid Act.

Understanding the Paycheck Protection Program (PPP) CARES Act

The Paycheck Protection Program CARES Act was initially launched on April 2, 2020, as an interim final rule to implement sections 1102 and 1106 of the CARES Act. The core objective of the Payroll Protection Program CARES Act was to inject economic relief into the small business sector, which was severely impacted by the Coronavirus Disease 2019 (COVID-19). The program was designed to be part of the SBA’s 7(a) Loan Program, but with specific temporary rules tailored to the pandemic crisis.

Image alt text: Professionals reviewing financial documents, symbolizing the application process for the Paycheck Protection Program CARES Act.

Key Objectives of the PPP CARES Act

The Payroll Protection Program CARES Act had two primary goals:

Economic Relief: To provide immediate financial assistance to small businesses facing economic hardship due to mandatory and voluntary measures to combat COVID-19.
Job Retention: To incentivize small businesses to keep workers on their payroll, preventing mass unemployment during the economic downturn.

Evolution of the PPP: Economic Aid Act Amendments

The initial Payroll Protection Program CARES Act was further extended and revised by the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (Economic Aid Act), enacted on December 27, 2020. These amendments were crucial as they:

Extended the PPP loan application period through March 31, 2021.
Revised certain PPP requirements to broaden eligibility and simplify the process.
Introduced the concept of second draw PPP loans for businesses that had previously received and exhausted their first PPP loan.

This interim final rule is designed to incorporate these Economic Aid Act amendments and consolidate all existing guidance to date, ensuring both borrowers and lenders have a single, comprehensive resource. It is important to note that this rule primarily governs new PPP loans and loan forgiveness applications submitted after the enactment of the Economic Aid Act.

Borrower Eligibility: Is Your Business Eligible for a PPP Loan?

Determining eligibility is the first step in accessing the Payroll Protection Program CARES Act. The program has specific criteria that businesses must meet to qualify for a PPP loan.

General Eligibility Criteria

To be eligible for a PPP loan under the Payroll Protection Program CARES Act, businesses must generally meet the following criteria:

Business Type: Be an independent contractor, self-employed individual, sole proprietor, business concern, non-profit organization (501(c)(3)), veterans organization (501(c)(19)), Tribal business concern, housing cooperative, 501(c)(6) organization, destination marketing organization, or certain news organizations.
Size Standards: Generally, businesses must have 500 or fewer employees, or meet the SBA industry size standard if applicable, or 300 or fewer employees for housing cooperatives, 501(c)(6) organizations, and destination marketing organizations. News organizations may have up to 500 employees per location under specific conditions.
Operational Status: Be in operation on February 15, 2020, and have either had employees with paid salaries and payroll taxes, or paid independent contractors (Form 1099-MISC), or been a self-employed individual, independent contractor, or sole proprietorship with no employees.

Image alt text: An entrepreneur working on a laptop, symbolizing small businesses seeking assistance through the Payroll Protection Program CARES Act.

Specific Eligibility Scenarios

The Payroll Protection Program CARES Act addresses various specific eligibility scenarios:

Foreign Affiliates: Employees of foreign affiliates are included when determining if a borrower exceeds the employee limit. PPP funds cannot support non-U.S. operations or workers.
Self-Employed Individuals: Individuals with self-employment income (Schedule C filers) are eligible, but partners in a partnership cannot apply separately. Partnerships themselves are eligible for PPP loans.
Businesses Owned by Lender Directors/Shareholders: Businesses owned by outside directors or <30% equity holders of a PPP lender are eligible to apply through that lender, provided they follow the same process as other customers and favoritism is avoided.
Seasonal Businesses: Seasonal businesses dormant as of February 15, 2020, are still eligible if they were operational for any 12-week period between February 15, 2019, and February 15, 2020.
News Organizations: News organizations with multiple locations can be eligible if they meet the employee limit per location and certify funds will support locally focused or emergency information production/distribution.
Industry-Specific Eligibility:
- Hospitals owned by governmental entities: Eligible if they receive less than 50% of funding from state/local government sources (excluding Medicaid).
- Businesses receiving legal gaming revenue: Eligible, unlike standard 7(a) loan rules.
- Electric and Telephone Cooperatives (501(c)(12)): Eligible as “business entities organized for profit.”
- Housing Cooperatives: Eligible if employing no more than 300 employees.
- Nonprofit and Tax-Exempt News Organizations: Eligible under specific conditions related to their trade or business and employee limits.
- Destination Marketing Organizations: Eligible if meeting specific criteria related to lobbying activities and employee limits.
- 501(c)(6) Organizations: Eligible (excluding professional sports leagues and political campaign organizations) if meeting specific criteria related to lobbying activities and employee limits.

Ineligible Businesses and Scenarios

Certain businesses and situations render an applicant ineligible for a Payroll Protection Program CARES Act loan:

Illegal Activities: Businesses engaged in illegal activities under federal, state, or local law.
Household Employers: Individuals employing household staff like nannies.
Owner Criminal History: Owners with a 20% or more equity stake who are currently incarcerated, indicted for felonies (fraud, bribery, embezzlement, false statement in loan application), or have felony convictions in the past five years (or any other felony in the past year).
Prior Government Loan Defaults: Businesses or owners with currently delinquent or defaulted (within last 7 years causing government loss) direct or guaranteed federal loans.
Not in Operation on February 15, 2020: Businesses not operational on this date (with exception for seasonal businesses meeting specific criteria).
Shuttered Venue Operator Grant Recipients: Businesses that have received or will receive a Shuttered Venue Operator Grant.
Politically Connected Businesses: Businesses where the President, Vice President, heads of Executive departments, Members of Congress, or their spouses hold a controlling interest.
Publicly Traded Companies: Issuers whose securities are listed on a national securities exchange.
Permanently Closed Businesses: Businesses that have permanently ceased operations.
Bankruptcy: Applicants or owners in bankruptcy proceedings at the time of application or before loan disbursement.
Hedge Funds and Private Equity Firms: Businesses primarily engaged in investment or speculation.

Loan Amount Calculation: How Much Can You Borrow?

Understanding how to calculate the maximum loan amount under the Payroll Protection Program CARES Act is essential for applicants. The loan amount is primarily based on payroll costs, with specific methodologies for different business types.

General Loan Amount Calculation

The maximum loan amount for a First Draw PPP Loan is capped at $10 million and is generally calculated using a payroll-based formula:

Aggregate Payroll Costs: Calculate total payroll costs from 2019 or 2020 for employees whose primary residence is in the United States.
Cap on Individual Compensation: For each employee, cap compensation at $100,000 on an annualized basis.
Average Monthly Payroll Costs: Divide the total from Step 2 by 12 to get the average monthly payroll costs.
Multiply by 2.5: Multiply the average monthly payroll costs by 2.5.
EIDL Refinancing (Optional): Add any outstanding amount of an Economic Injury Disaster Loan (EIDL) made between January 31, 2020, and April 3, 2020, that you wish to refinance (excluding EIDL Advance amounts).

Example Calculation:

If your annual payroll costs after capping individual salaries are $120,000, your average monthly payroll cost is $10,000 ($120,000 / 12). Multiplying this by 2.5 gives a maximum loan amount of $25,000 ($10,000 x 2.5).

Loan Calculation for Self-Employed Individuals (Schedule C Filers)

The calculation method for self-employed individuals depends on whether they have employees:

No Employees:

Net Profit: Use your 2019 or 2020 IRS Form 1040 Schedule C line 31 net profit amount (capped at $100,000). If net profit is zero or less, you are ineligible.
Average Monthly Net Profit: Divide the amount from Step 1 by 12.
Multiply by 2.5: Multiply the average monthly net profit by 2.5.
EIDL Refinancing (Optional): Add any qualifying EIDL amounts.

With Employees:

Payroll Costs: Sum the following:
- Your 2019 or 2020 Schedule C line 31 net profit (capped at $100,000).
- 2019 or 2020 gross wages and tips paid to employees (using Form 941 data, capped at $100,000 per employee).
- 2019 or 2020 employer contributions for employee health insurance, retirement, and state/local taxes.
Average Monthly Payroll Costs: Divide the amount from Step 1 by 12.
Multiply by 2.5: Multiply the average monthly payroll costs by 2.5.
EIDL Refinancing (Optional): Add any qualifying EIDL amounts.

Loan Calculation for Seasonal Employers

Seasonal employers calculate their maximum loan amount using their average total monthly payroll payments for any 12-week period selected between February 15, 2019, and February 15, 2020.

Loan Calculation for Farmers and Ranchers (Schedule F Filers)

Similar to self-employed individuals, the method for farmers and ranchers depends on whether they have employees:

No Employees:

Gross Income: Use your 2019 or 2020 IRS Form 1040 Schedule F line 9 gross income (capped at $100,000). If gross income is zero or less, you are ineligible.
Average Monthly Gross Income: Divide the amount from Step 1 by 12.
Multiply by 2.5: Multiply the average monthly gross income by 2.5.
EIDL Refinancing (Optional): Add any qualifying EIDL amounts.

With Employees:

Payroll Costs: Sum the following:
- The difference between your 2019 or 2020 Schedule F line 9 gross income and the sum of Schedule F lines 15, 22, and 23 (capped at $100,000).
- 2019 or 2020 gross wages and tips paid to employees (using Form 941 data, capped at $100,000 per employee).
- 2019 or 2020 employer contributions for employee health insurance, retirement, and state/local taxes.
Average Monthly Payroll Costs: Divide the amount from Step 1 by 12.
Multiply by 2.5: Multiply the average monthly payroll costs by 2.5.
EIDL Refinancing (Optional): Add any qualifying EIDL amounts.

Loan Calculation for Partnerships

Partnerships calculate their maximum loan amount by:

Payroll Costs: Sum the following:
- Net earnings from self-employment of individual general partners in 2019 or 2020 (Form 1065 K-1, capped at $100,000 per partner).
- 2019 or 2020 gross wages and tips paid to employees (using Form 941 data, capped at $100,000 per employee).
- 2019 or 2020 employer contributions for employee health insurance, retirement, and state/local taxes.
Average Monthly Payroll Costs: Divide the amount from Step 1 by 12.
Multiply by 2.5: Multiply the average monthly payroll costs by 2.5.
EIDL Refinancing (Optional): Add any qualifying EIDL amounts.

Corporate Group Loan Limit

Businesses that are part of a single corporate group are limited to a maximum aggregate PPP loan amount of $20 million.

Defining Payroll Costs

“Payroll costs” are broadly defined under the Payroll Protection Program CARES Act and include:

Salary, wages, commissions, or similar compensation.
Cash tips or equivalents.
Payment for vacation, parental, family, medical, or sick leave.
Allowance for separation or dismissal.
Payments for employee benefits (group health care, group life, disability, vision, or dental insurance, including premiums, and retirement).
Payment of state and local taxes assessed on employee compensation.
For self-employed individuals or independent contractors: wages, commissions, income, or net earnings from self-employment (capped at $100,000).

Exclusions from Payroll Costs

Certain items are expressly excluded from payroll costs:

Compensation for employees whose principal place of residence is outside the U.S.
Individual employee compensation exceeding $100,000 annualized.
Federal employment taxes (FICA, Railroad Retirement Act taxes, withheld income taxes).
Qualified sick and family leave wages for which Families First Coronavirus Response Act credits are claimed.

Loan Terms and Conditions: Interest Rate, Maturity, and Fees

The Payroll Protection Program CARES Act offered very favorable loan terms to support small businesses during the crisis.

Interest Rate and Maturity

Interest Rate: The interest rate for PPP loans is set at 1%, calculated on a non-compounding, non-adjustable basis.
Maturity: The loan maturity is five years.

Fees and Guarantee

Guarantee Percentage: PPP loans are 100% guaranteed by the SBA.
Collateral and Personal Guarantees: No collateral or personal guarantees are required.
Fee Waivers: There are no upfront guarantee fees, annual service fees, subsidy recoupment fees, or fees for guarantees sold on the secondary market.

Credit Elsewhere Test

Lenders are not required to apply the “credit elsewhere test,” which is a standard requirement for 7(a) loans, simplifying the approval process under the Payroll Protection Program CARES Act.

Loan Usage and Restrictions: How Can PPP Funds Be Used?

PPP loan proceeds are intended for specific purposes to support businesses and their employees during the pandemic. Under the Payroll Protection Program CARES Act, loan funds can be used for:

Allowable Uses of PPP Loan Proceeds

Payroll Costs: As defined previously, this includes salary, wages, and benefits. At least 60% of the loan proceeds must be used for payroll costs to achieve full loan forgiveness.
Continuation of Benefits: Costs related to the continuation of group health care, life, disability, vision, or dental benefits during periods of paid sick, medical, or family leave, and insurance premiums.
Mortgage Interest Payments: Interest payments on business mortgage obligations (not principal or prepayments) on real or personal property, incurred before February 15, 2020.
Rent Payments: Rent payments on leases dated before February 15, 2020.
Utility Payments: Utility payments for services that began before February 15, 2020.
Interest on Other Debt Obligations: Interest payments on other debt obligations incurred before February 15, 2020.
Refinancing EIDL Loans: Refinancing SBA EIDL loans made between January 31, 2020, and April 3, 2020.
Covered Operations Expenditures: Payments for business software, cloud computing, and services facilitating business operations, product/service delivery, payroll processing, HR, sales, billing, or tracking of supplies, inventory, records, and expenses.
Covered Property Damage Costs: Costs related to property damage, vandalism, or looting due to public disturbances in 2020, not covered by insurance.
Covered Supplier Costs: Expenditures to suppliers for essential goods, pursuant to contracts or orders in effect before the covered period (or for perishable goods, before or during the covered period).
Covered Worker Protection Expenditures: Operating or capital expenditures to adapt business activities to comply with COVID-19 related HHS, CDC, OSHA, or equivalent state/local requirements or guidance (e.g., drive-through windows, ventilation systems, sneeze guards, expansion of space, health screening, PPE).

Restrictions on Loan Usage

Lobbying Activities: PPP proceeds cannot be used for lobbying activities, expenditures related to state or local elections, or expenditures designed to influence legislation.
Misuse of Funds: Using PPP funds for unauthorized purposes can lead to required repayment and potential fraud charges.

Usage for Self-Employed Individuals (Schedule C Filers)

Self-employed individuals filing Schedule C have slightly modified allowable uses:

Owner Compensation Replacement: Based on 2019 or 2020 net profit.
Employee Payroll Costs: For employees, if applicable.
Business Mortgage Interest, Rent, Utilities: On deductible business expenses claimed on Schedule C.
Interest on Other Debt Obligations: Incurred before February 15, 2020 (not forgivable).
Refinancing EIDL Loans: As specified.
Covered Operations, Property Damage, Supplier, Worker Protection Expenditures: To the extent deductible on Schedule C.

Loan Forgiveness: Turning Your PPP Loan into a Grant

A key feature of the Payroll Protection Program CARES Act is loan forgiveness. Borrowers can have their PPP loans forgiven, effectively turning them into grants, if they meet certain requirements.

Loan Forgiveness Eligibility and Amount

Forgivable Amount: Up to the full principal amount and accrued interest of the PPP loan.
Eligible Expenses for Forgiveness: Payroll costs, mortgage interest payments, rent payments, utility payments, covered operations expenditures, covered property damage costs, covered supplier costs, and covered worker protection expenditures, incurred during the loan forgiveness covered period.
60/40 Rule: At least 60% of the loan forgiveness amount must be attributable to payroll costs; no more than 40% can be for non-payroll costs. Failure to meet this ratio results in reduced forgiveness.
Loan Forgiveness Covered Period: Borrowers can select a covered period between 8 and 24 weeks, starting from the loan disbursement date.

Maintaining Employee and Compensation Levels

Full loan forgiveness requires maintaining employee and compensation levels. Reductions in full-time equivalent (FTE) employees or salary/wages (for employees earning $100,000 or less annually) can reduce the forgiveness amount, unless safe harbors or exemptions apply.

Simplified Forgiveness for Loans Under $150,000

For borrowers with PPP loans of $150,000 or less, the forgiveness process is simplified. They are not required to submit extensive documentation beyond certifications and basic information, but must retain relevant records for potential audit.

EIDL Advance and Loan Forgiveness

The Economic Aid Act repealed the CARES Act provision that required deducting EIDL Advance amounts from PPP loan forgiveness. EIDL Advances will no longer reduce PPP forgiveness amounts.

Independent Contractors and Loan Forgiveness

Payments to independent contractors do not count towards a borrower’s payroll costs for loan forgiveness, as independent contractors can apply for their own PPP loans.

Lender Information: Role and Responsibilities

Lenders play a crucial role in the Payroll Protection Program CARES Act. They are responsible for processing, disbursing, and servicing PPP loans, with delegated authority from the SBA.

Eligible PPP Lenders

SBA 7(a) Lenders: Automatically approved to make PPP loans.
Federally Insured Depository Institutions and Credit Unions.
Farm Credit System Institutions.
Other Financing Providers: Depository or non-depository financing providers meeting specific criteria related to loan origination, compliance programs, and BSA requirements.
Community Development Financial Institutions (CDFIs) and Minority/Women/Veteran-Owned Lenders (non-bank) meeting lower origination thresholds.

Lender Responsibilities

Lenders are required to:

Verify Borrower Certifications: Confirm receipt of borrower certifications on the PPP Borrower Application Form (SBA Form 2483).
Confirm Operational Status: Verify that the borrower was in operation on February 15, 2020.
Validate Payroll Documentation: Confirm average monthly payroll costs by reviewing submitted documentation.
Comply with BSA Requirements: Follow Bank Secrecy Act (BSA) protocols, including customer identification programs (CIP) and suspicious activity reporting.
Loan Underwriting: Lender underwriting is limited to verifying borrower certifications and payroll documentation. Lenders can rely on borrower-provided documentation in good faith.
Loan Forgiveness Review: Lenders do not need to independently verify borrower-reported information for forgiveness if documentation and attestations are provided.

Lender Fees

For PPP loans made after December 27, 2020, SBA pays lenders processing fees based on loan size, ranging from 1% to 5% of the loan amount.

Secondary Market for PPP Loans

PPP loans can be sold on the secondary market after full disbursement.

Promissory Notes and SBA Authorization

Lenders can use their own promissory notes or SBA forms. A separate SBA Authorization document is not required for PPP loans.

SBA Form 1502 Reporting

Lenders must electronically submit SBA Form 1502 within 20 calendar days of loan approval to report loan disbursements and collect processing fees.

Key Dates and Deadlines

PPP Loan Application Deadline: March 31, 2021 (for First Draw PPP Loans under the Economic Aid Act).
Effective Date of Interim Final Rule: January 12, 2021.
Comment Date for Interim Final Rule: Comments must be received on or before February 16, 2021.

Compliance and Further Guidance

The Payroll Protection Program CARES Act is subject to various compliance requirements and regulatory oversight. Borrowers and lenders are advised to stay updated with the latest guidance from the SBA and Department of Treasury.

SBA Resources and Contacts

SBA Website: www.sba.gov – for program updates and guidance.
Local SBA Field Office: Contact information available at https://www.sba.gov/tools/local-assistance/districtoffices.
PPP Call Center: 833-572-0502.

This comprehensive guide provides a detailed overview of the Payroll Protection Program CARES Act, incorporating the amendments from the Economic Aid Act. Understanding these rules and guidelines is essential for small businesses seeking financial relief and lenders administering this critical program. Always refer to official SBA resources for the most up-to-date information and specific guidance related to your situation.