The Coronavirus Aid, Relief, and Economic Security (CARES) Act introduced the Paycheck Protection Program (PPP) to provide vital economic support to small businesses grappling with the impacts of the COVID-19 pandemic. This program, managed by the U.S. Small Business Administration (SBA) in collaboration with the Department of the Treasury, offered forgivable loans designed to help businesses maintain their payroll and cover essential operating expenses during periods of economic uncertainty. This guide consolidates key information about the PPP, drawing from official guidelines and amendments, to offer a comprehensive understanding of this critical relief initiative.
Understanding the Basics of the Paycheck Protection Program
The PPP was established under Section 1102 of the CARES Act, enacted on March 27, 2020, in response to the widespread economic disruption caused by the COVID-19 outbreak. It was designed as a temporary program to quickly inject capital into the small business sector, allowing them to continue operations and keep employees on the payroll. A significant feature of the PPP was the loan forgiveness provision outlined in Section 1106 of the CARES Act, which allowed borrowers to have their loans forgiven if they met specific criteria, primarily related to maintaining payroll levels and using the funds for eligible expenses.
Image alt text: Official document header examples from the Small Business Administration and Department of the Treasury, showing CFR part numbers, docket numbers, and RIN numbers, as per the Document Drafting Handbook.
The Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act, enacted on December 27, 2020, extended the PPP and introduced several key revisions and clarifications to the program rules. This included extending the application deadline, modifying eligibility criteria, and adjusting loan calculation and forgiveness rules. This guide incorporates these amendments to provide the most up-to-date information.
Who Was Eligible for a PPP Loan?
Eligibility for the Paycheck Protection Program was broad, aiming to include a wide range of small businesses and organizations affected by the pandemic. The primary criteria focused on business size and operational status as of February 15, 2020.
Types of Eligible Entities:
- Small Businesses: Generally, businesses with 500 or fewer employees, including for-profit businesses, non-profit organizations, and tribal businesses. In some cases, businesses exceeding 500 employees could still qualify if they met the SBA’s industry size standards.
- Self-Employed Individuals, Independent Contractors, and Sole Proprietorships: Individuals operating as independent contractors, sole proprietors, or self-employed were eligible, provided they were in operation on February 15, 2020.
- Non-profit Organizations: Tax-exempt non-profit organizations described under section 501(c)(3) or 501(c)(19) of the Internal Revenue Code were eligible.
- Housing Cooperatives and Certain Non-profits: Housing cooperatives and certain 501(c)(6) organizations and destination marketing organizations were also made eligible, with a stricter employee limit of 300 employees.
- News Organizations: Specific provisions were made for news organizations, including those majority-owned or controlled by NAICS code 511110 or 5151 businesses or non-profit public broadcasting entities, with certain employee limits per location.
- Faith-Based Organizations: Faith-based organizations were eligible and received exemptions from standard SBA affiliation rules to ensure their religious practices were not burdened.
- Electric and Telephone Cooperatives: Cooperatives exempt from federal income tax under section 501(c)(12) of the Internal Revenue Code were considered eligible business entities.
Key Eligibility Requirements:
- Operational Status: Businesses needed to be in operation on February 15, 2020, and either have employees with paid salaries and payroll taxes or have paid independent contractors (as reported on Form 1099-MISC). Self-employed individuals, sole proprietors, or independent contractors without employees also qualified.
- Size Standards: Most businesses had to meet the 500-employee threshold, including affiliates. Certain types of organizations, like news organizations and some non-profits, had specific employee limits per location or overall.
- Not Permanently Closed: Businesses that had permanently closed were ineligible. Temporary closures or suspensions due to COVID-19 did not disqualify an applicant if they intended to reopen.
Businesses and Organizations That Were Ineligible:
Certain types of businesses were specifically excluded from the PPP, regardless of size or other factors:
- Businesses Engaged in Illegal Activities: Any business involved in activities illegal under federal, state, or local law was ineligible.
- Household Employers: Individuals employing household staff like nannies or housekeepers were not eligible.
- Businesses with Criminal Owners: Businesses with owners holding 20% or more equity who were currently incarcerated, facing felony charges, or had felony convictions for fraud-related crimes within the past five years or any other felony within the last year were ineligible.
- Businesses with Delinquent Federal Loans: Businesses or owners who had defaulted on federal loans in the last seven years causing a government loss or had currently delinquent federal loans were ineligible.
- Certain Political Entities and Lobbying Organizations: Organizations primarily engaged in political lobbying or campaigns were generally ineligible, though some exceptions were made for specific types of non-profits under revised rules.
- Hedge Funds and Private Equity Firms: Businesses primarily engaged in investment or speculation, such as hedge funds and private equity firms, were ineligible.
- Businesses in Bankruptcy: Applicants or owners in bankruptcy proceedings at the time of application or before loan disbursement were ineligible.
- Issuers of Securities: Businesses whose securities are listed on a national securities exchange were generally ineligible, with exceptions for some news organizations.
- Grant Recipients: Businesses that had received or would receive a Shuttered Venue Operator Grant were ineligible for a PPP loan (to avoid double dipping in federal relief funds).
- Businesses with Controlling Interests Held by High-Ranking Government Officials: Businesses with controlling interests held directly or indirectly by the President, Vice President, heads of Executive departments, or Members of Congress, or their spouses, were ineligible.
How Much Could Businesses Borrow?
The maximum loan amount for a First Draw PPP Loan was capped at $10 million, but the actual amount a business could borrow was determined by a payroll-based formula. This formula aimed to provide loans proportional to a business’s payroll costs, ensuring that the funds were primarily used to support employee wages.
Calculating the Maximum Loan Amount:
The standard method for calculating the maximum loan amount involved several steps based on payroll costs from 2019 or 2020. Borrowers could choose to use either year, providing flexibility based on their specific circumstances.
- Aggregate Payroll Costs: Sum up the total payroll costs from 2019 or 2020 for employees whose primary residence was in the United States. “Payroll costs” included salary, wages, commissions, cash tips, vacation, parental, family, medical, or sick leave pay, separation allowances, group health, life, disability, vision, or dental insurance, retirement contributions, and state and local taxes on employee compensation.
- Cap on Individual Employee Compensation: For each employee, cap the compensation included in payroll costs at $100,000 on an annualized basis. This meant that for employees earning more than $100,000 per year, only the first $100,000 of their salary could be included in the calculation.
- Calculate Average Monthly Payroll Costs: Divide the total qualifying payroll costs (from step 2) by 12 to get the average monthly payroll.
- Multiply by 2.5: Multiply the average monthly payroll cost by 2.5. This formed the base loan amount.
- Add EIDL Refinancing (Optional): If the borrower was refinancing an Economic Injury Disaster Loan (EIDL) made between January 31, 2020, and April 3, 2020, the outstanding amount of that EIDL could be added to the loan amount. EIDL Advances were not included as they did not need to be repaid.
Example Calculation:
Let’s say a business has an annual payroll of $600,000, and no employee earns more than $100,000 annually.
- Total Payroll: $600,000
- Cap Adjustment: No adjustment needed as no salaries exceed $100,000.
- Average Monthly Payroll: $600,000 / 12 = $50,000
- Loan Amount: $50,000 * 2.5 = $125,000
In this case, the maximum PPP loan amount would be $125,000.
Special Cases for Loan Calculation:
- Self-Employed Individuals (Schedule C Filers): For those with self-employment income, the calculation was based on net profit from Schedule C of Form 1040. If the business had no employees, the net profit (up to $100,000) was annualized, divided by 12, and then multiplied by 2.5. If employees were present, calculations combined net profit and employee payroll costs.
- Farmers and Ranchers (Schedule F Filers): Similar to Schedule C filers, farmers and ranchers used gross income from Schedule F of Form 1040 to calculate loan amounts. The calculation method varied slightly based on whether they had employees.
- Partnerships: Partnerships calculated loan amounts based on the net earnings from self-employment of general active partners, along with payroll costs for employees.
- Seasonal Employers: Seasonal businesses could use a 12-week period between February 15, 2019, and February 15, 2020, to calculate their average monthly payroll, accommodating their unique operating cycles.
Documentation Required for Loan Amount Verification:
To verify payroll costs and calculate the correct loan amount, borrowers were required to provide documentation such as:
- Payroll Records: Form 941 (Employer’s Quarterly Federal Tax Return) or equivalent payroll processor records.
- State Quarterly Wage Unemployment Insurance Tax Reporting Forms.
- Form 1099-MISC: For independent contractors.
- Schedule C or F of Form 1040: For self-employed individuals, farmers, and ranchers.
- Partnership IRS Form 1065 (including K-1s).
- Evidence of Retirement and Health Insurance Contributions.
- Payroll statement from February 15, 2020: To prove operational status on that date.
Loan Terms: Interest Rate and Maturity
The PPP loans offered very favorable terms to borrowers, reflecting the emergency nature of the program and the need for quick and accessible financial assistance.
- Interest Rate: The interest rate was set at 1%, a very low rate designed to minimize the cost of borrowing for businesses. This rate was fixed and non-adjustable over the life of the loan.
- Maturity: The maturity for PPP loans was initially two years for loans made before June 5, 2020. However, the Paycheck Protection Program Flexibility Act extended the maturity to five years for loans made on or after June 5, 2020. For loans made before June 5, 2020, borrowers and lenders could mutually agree to extend the maturity to five years.
- No Collateral or Personal Guarantees: PPP loans did not require any collateral or personal guarantees, further easing access to credit for small businesses.
Loan Usage: How Could PPP Funds Be Used?
PPP loan proceeds were intended to be used for specific purposes to help businesses maintain operations and retain employees during the COVID-19 crisis. Eligible uses were expanded over time to include a broader range of operational costs.
Primary Eligible Uses:
- Payroll Costs: The largest portion of the loan, with a requirement that at least 60% of the loan proceeds be used for payroll costs. Payroll costs included salaries, wages, and benefits.
- Continuation of Healthcare 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: Payments for interest on business mortgages (but not principal payments or prepayments) on real or personal property incurred before February 15, 2020.
- Rent Payments: Rent payments for business leases dated before February 15, 2020.
- Utility Payments: Payments for business utilities for services that began before February 15, 2020.
- Interest on Pre-Existing Debt: Interest payments on any other debt obligations incurred before February 15, 2020.
- Refinancing EIDL Loans: Refinancing SBA EIDL loans made between January 31, 2020, and April 3, 2020.
Expanded Eligible Uses (Introduced Later):
The Economic Aid Act expanded the eligible uses of PPP funds to include:
- Covered Operations Expenditures: Payments for business software, cloud computing, and other services that facilitate business operations, product or service delivery, and payroll processing.
- Covered Property Damage Costs: Costs related to property damage due to public disturbances in 2020 that were not covered by insurance.
- Covered Supplier Costs: Expenditures for essential goods from suppliers, pursuant to contracts or purchase 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 safety guidelines from HHS, CDC, OSHA, or equivalent state/local guidelines. This could include drive-through windows, ventilation systems, sneeze guards, expanded business space, health screening capabilities, PPE, etc.
Restrictions on Loan Usage:
- Lobbying Activities: PPP funds could not be used for lobbying activities, expenditures related to state or local elections, or efforts to influence legislation.
- Misuse of Funds: Using PPP funds for unauthorized purposes could result in penalties, including being required to repay the misused amounts and potential fraud charges for knowingly misusing funds.
Loan Forgiveness: Turning a Loan into a Grant
The loan forgiveness aspect was a central and highly attractive feature of the PPP. Borrowers could have their loans fully or partially forgiven if they met certain conditions, effectively turning the loan into a grant.
Conditions for Loan Forgiveness:
- Use of Loan Proceeds for Eligible Expenses: The loan proceeds had to be used for eligible expenses, with at least 60% dedicated to payroll costs and no more than 40% for non-payroll costs.
- Maintenance of Employee and Compensation Levels: Borrowers generally needed to maintain their employee headcount and salary levels during the loan forgiveness covered period. Reductions in employee levels or significant salary reductions could reduce the amount of loan forgiveness.
- Loan Forgiveness Covered Period: Borrowers could choose a covered period for loan forgiveness ranging from 8 to 24 weeks from the date of loan disbursement. This flexibility allowed businesses to align their covered period with their operational needs.
Reductions in Loan Forgiveness:
Loan forgiveness amounts could be reduced in two primary scenarios:
- Reduction in Full-Time Equivalent (FTE) Employees: If a borrower reduced their FTE employee count compared to a reference period (either February 15, 2019, to June 30, 2019, or January 1, 2020, to February 29, 2020), the loan forgiveness amount would be reduced proportionally.
- Reduction in Salary or Wages: If salaries or wages for any employee earning less than $100,000 annually were reduced by more than 25% 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%.
Safe Harbors and Exemptions:
Several safe harbors and exemptions were introduced to mitigate reductions in loan forgiveness in specific situations:
- FTE Employee Reduction Safe Harbors: Two safe harbors allowed borrowers to avoid forgiveness reduction due to FTE employee reductions if they could document:
- An inability to rehire individuals who were employees on February 15, 2020, and an inability to hire similarly qualified employees.
- An inability to return to the same level of business activity as before February 15, 2020, due to compliance with COVID-19 related safety requirements or guidance.
- Salary/Wage Reduction Exemption: No forgiveness reduction applied if the borrower restored salary/wage reductions made between February 15, 2020, and April 26, 2020, by December 31, 2020.
Loan Forgiveness Application Process:
To apply for loan forgiveness, borrowers needed to submit a loan forgiveness application to their lender, along with documentation verifying payroll costs, eligible non-payroll costs, and FTE employee levels. For loans of $150,000 or less, a simplified forgiveness application was introduced, requiring fewer documentation requirements.
Lenders and the PPP
A wide range of financial institutions were authorized to make PPP loans, ensuring broad access to the program.
Eligible PPP Lenders:
- SBA 7(a) Lenders: All existing SBA 7(a) lenders were automatically approved to make PPP loans.
- Federally Insured Depository Institutions and Credit Unions: Any federally insured bank or credit union was eligible.
- Farm Credit System Institutions: Certain Farm Credit System institutions were also approved.
- Other Financing Providers: Depository and non-depository financing providers meeting specific criteria, including having a formalized compliance program and originating a certain volume of business loans, were also eligible.
Lender Responsibilities:
Lenders played a crucial role in the PPP, acting as the primary interface with borrowers. Their responsibilities included:
- Verifying Borrower Information: Confirming receipt of borrower certifications and documentation related to payroll costs and operational status. However, lenders were allowed to rely on borrower certifications in good faith.
- Following BSA Requirements: Adhering to Bank Secrecy Act (BSA) requirements, including customer identification and anti-money laundering protocols.
- Loan Underwriting (Limited): Lender underwriting was significantly streamlined compared to traditional SBA loans, primarily focusing on verifying borrower eligibility and calculating loan amounts based on provided documentation.
- Loan Servicing and Forgiveness Processing: Servicing the loans and processing loan forgiveness applications, relying on borrower-provided documentation for forgiveness eligibility.
Lender Fees:
The SBA provided fees to lenders for processing PPP loans, based on the loan amount. These fees were intended to compensate lenders for their administrative costs and incentivize participation in the program.
Key Dates and Deadlines
The PPP operated within specific timeframes, with deadlines for application and disbursement.
- Initial Application Deadline: Originally, the deadline to apply for a PPP loan was June 30, 2020.
- Extended Deadline: The Economic Aid Act extended the deadline to March 31, 2021. This was the final date to apply for and receive a First Draw PPP Loan.
- Loan Disbursement Deadline: Lenders were required to disburse PPP loans within ten calendar days of loan approval.
Conclusion: The Impact of the CARES Act Paycheck Protection Program
The CARES Act Paycheck Protection Program was a monumental effort to provide rapid financial assistance to small businesses during an unprecedented economic crisis. By offering forgivable loans, the PPP aimed to help businesses maintain payroll, cover essential expenses, and weather the storm of the COVID-19 pandemic. While the program had its complexities and evolving rules, it played a crucial role in supporting the small business sector and mitigating the economic fallout of the crisis. Understanding the intricacies of the PPP, including eligibility, loan calculations, eligible uses, and forgiveness rules, remains important for businesses that participated in the program and for future policy considerations in times of economic crisis.
For the most current and detailed information, always refer to official resources from the SBA and Department of the Treasury.
