What is the CARES Act Paycheck Protection Program? A Comprehensive Guide

The Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law on March 27, 2020, in response to the economic crisis triggered by the COVID-19 pandemic. Among its key provisions was the establishment of the Paycheck Protection Program (PPP). This program, administered by the U.S. Small Business Administration (SBA) in collaboration with the Department of the Treasury, was designed to provide direct economic aid to small businesses, nonprofits, and other eligible entities struggling due to the pandemic.

This article provides a comprehensive overview of the Paycheck Protection Program, drawing from official guidelines and regulations to offer a clear understanding of its purpose, eligibility criteria, loan terms, and key features.

Understanding the Basics of the Paycheck Protection Program

The Paycheck Protection Program was a new loan program temporarily added to the SBA’s existing 7(a) Loan Program by Section 1102 of the CARES Act. A crucial aspect of the PPP was Section 1106 of the CARES Act, which outlined the conditions for loan forgiveness. The core objective of the PPP was to offer rapid financial assistance to small businesses nationwide that were negatively impacted by the Coronavirus Disease 2019 (COVID-19).

To provide ongoing support as the pandemic evolved, the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (Economic Aid Act) was enacted on December 27, 2020. This act extended the PPP’s lending authority through March 31, 2021, and introduced revisions to certain program rules. These changes were incorporated into an interim final rule to ensure borrowers and lenders had updated guidance.

This guide consolidates information from multiple interim final rules and provides a single point of reference for understanding the PPP, especially for new loans made under the Economic Aid Act and for loan forgiveness on existing PPP loans.

An image excerpted from the Document Drafting Handbook, linked in the original article, illustrating the varied elements of document headings which can include agency names, CFR title and part numbers, docket numbers, and RIN numbers for regulatory actions.

Who Was Eligible for a PPP Loan?

Eligibility for a PPP loan was defined broadly to encompass a wide range of organizations and individuals affected by the pandemic. To be eligible for a PPP loan, applicants generally had to meet the following criteria:

General Eligibility Requirements:

Business Type:
- Independent contractors, eligible self-employed individuals, or sole proprietors.
- Business concerns, tax-exempt nonprofit organizations (501(c)(3)), tax-exempt veterans organizations (501(c)(19)), and Tribal business concerns, with no more than the greater of 500 employees or the SBA size standard for their industry.
- Housing cooperatives, eligible 501(c)(6) organizations, or eligible destination marketing organizations with no more than 300 employees.
- News organizations majority-owned or controlled by NAICS code 511110 or 5151 businesses, or nonprofit public broadcasting entities with a trade or business under NAICS 511110 or 5151, employing no more than 500 employees per location (or SBA size standard if applicable).
- Other entity types as specifically provided for by PPP rules.
Operational Status: In operation on February 15, 2020, and either:
- Had employees for whom salaries and payroll taxes were paid, or
- Paid independent contractors (as reported on Form 1099-MISC), or
- Were eligible self-employed individuals, independent contractors, or sole proprietorships with no employees.

Applicants were required to provide documentation to substantiate their eligibility and payroll amounts.

Affiliation Rules and Employee Count:

To determine eligibility based on employee size, businesses had to consider their affiliates. Employees of both domestic and foreign affiliates were generally included in the employee count, unless specific affiliation rule waivers applied. This meant that if a business, together with its affiliates, exceeded the employee thresholds (500 or 300 in some cases), it was ineligible for a PPP loan. PPP funds were explicitly prohibited from supporting non-U.S. workers or operations.

Specific Eligibility Scenarios:

Self-Employed Individuals: Individuals with self-employment income who filed Form 1040 Schedule C were eligible, provided their principal residence was in the U.S. and they were in operation on February 15, 2020. Partners in a partnership could not apply separately as self-employed individuals; only the partnership could apply.
Businesses Owned by Lender Directors/Shareholders: Businesses owned by outside directors or holders of less than 30% equity in a PPP lender could apply for a PPP loan from that lender, provided they followed the same process as other customers and favoritism was prohibited. This did not apply to officers or key employees of the PPP lender.
Seasonal Businesses: Seasonal businesses dormant or not fully operating on February 15, 2020, were still eligible if they were in operation for any 12-week period between February 15, 2019, and February 15, 2020.
News Organizations: News organizations with multiple locations could be eligible if each location employed no more than 500 employees (or applicable size standard) and they certified the loan proceeds would support locally focused or emergency information production and distribution.

Industry-Specific Eligibility Clarifications:

Hospitals Owned by Governmental Entities: Hospitals otherwise eligible as business concerns or nonprofits were not rendered ineligible due to state or local government ownership if they received less than 50% of their funding from government sources (excluding Medicaid).
Businesses Receiving Legal Gaming Revenue: Receipt of legal gaming revenue did not disqualify an otherwise eligible business. However, businesses receiving illegal gaming revenue remained ineligible.
Electric and Telephone Cooperatives: Electric and telephone cooperatives exempt from federal income tax under section 501(c)(12) of the Internal Revenue Code were considered “business entities organized for profit” and were eligible if they met size standards.
Housing Cooperatives: Housing cooperatives with no more than 300 employees were eligible.
Nonprofit and Tax-Exempt News Organizations: Nonprofit and tax-exempt news organizations, including public broadcasting entities, were eligible under certain conditions related to employee size and use of funds for local or emergency information.
Destination Marketing Organizations: Destination marketing organizations meeting specific criteria related to lobbying activities, receipts, and employee size were eligible.
501(c)(6) Organizations: 501(c)(6) organizations (excluding professional sports leagues and political campaign organizations) were eligible if they met criteria related to lobbying activities, receipts, employee size.

Who Was Ineligible for a PPP Loan?

Even if a business met the general eligibility criteria, certain factors could render them ineligible for a PPP loan. Ineligible businesses included:

Illegal Activities: Businesses engaged in any activity illegal under federal, state, or local law.
Household Employers: Individuals employing household employees (e.g., nannies, housekeepers).
Criminal History: Businesses where an owner with 20% or more equity was presently incarcerated, indicted for a felony, or had a felony conviction involving fraud, bribery, embezzlement, or false statements in a loan application within the last five years, or any other felony within the last year.
Prior Loan Defaults: Businesses or owners who had previously defaulted on a direct or guaranteed SBA or federal agency loan within the last seven years, causing a government loss.
Not in Operation on February 15, 2020: Businesses not in operation on this date (with exceptions for seasonal businesses meeting specific criteria).
Shuttered Venue Operator Grant Recipients: Businesses that received or would receive a grant under the Shuttered Venue Operator Grant program.
Political Influence: Businesses where the President, Vice President, heads of Executive Departments, Members of Congress, or their spouses held a controlling interest.
Publicly Traded Companies: Businesses that were issuers whose securities are listed on a national securities exchange. (With an exception for eligible news organizations under certain conditions.)
Permanently Closed Businesses: Businesses that had permanently closed.
Businesses Generally Ineligible for 7(a) Loans: Businesses ineligible for standard 7(a) loans under 13 CFR 120.110 (with specific exceptions and modifications for PPP). This included businesses like life insurance companies, businesses primarily engaged in lending, pyramid sales plans, and others listed in SBA SOP guidelines.
Businesses in Bankruptcy: Applicants or owners who were debtors in a bankruptcy proceeding at the time of application or before loan disbursement.
Hedge Funds and Private Equity Firms: Businesses primarily engaged in investment or speculation.

A representation of the SBA Form 2484, the Paycheck Protection Program Lender’s Application for 7(a) Loan Guaranty, which lenders were required to submit electronically for each PPP loan.

Loan Amount Calculation: How Much Could Be Borrowed?

The maximum loan amount for a First Draw PPP Loan was capped at the lesser of $10 million or a calculated amount based on a payroll-based formula. Borrowers could choose to use payroll costs from 2019 or 2020 to calculate their loan amount.

General Calculation Methodology:

Aggregate Payroll Costs: Sum up payroll costs from 2019 or 2020 for employees whose principal residence was in the United States.
Subtract Excess Compensation: Deduct any compensation paid to an employee exceeding $100,000 on an annualized basis.
Calculate Average Monthly Payroll: Divide the result from Step 2 by 12.
Multiply by 2.5: Multiply the average monthly payroll from Step 3 by 2.5.
Add Refinanced EIDL (Optional): Add the outstanding amount of an Economic Injury Disaster Loan (EIDL) made between January 31, 2020, and April 3, 2020, that the borrower sought to refinance (excluding any EIDL advance).

Specific Calculation Scenarios:

Self-Employed Individuals (Schedule C Filers):
- Without Employees: Based on 2019 or 2020 Schedule C net profit (line 31), capped at $100,000, divided by 12, then multiplied by 2.5, plus any refinanced EIDL.
- With Employees: Calculated using a combination of 2019 or 2020 Schedule C net profit (capped), gross wages paid to employees, and employer contributions for benefits and taxes.
Seasonal Employers: Used average total monthly payroll payments for any 12-week period between February 15, 2019, and February 15, 2020.
Farmers and Ranchers (Schedule F Filers):
- Without Employees: Based on 2019 or 2020 Schedule F gross income (line 9), capped at $100,000, divided by 12, then multiplied by 2.5, plus any refinanced EIDL.
- With Employees: Calculated using a combination of 2019 or 2020 Schedule F income minus certain expenses (capped), gross wages paid to employees, and employer contributions for benefits and taxes.
Partnerships: Based on a combination of net earnings from self-employment of general partners, gross wages paid to employees, and employer contributions for benefits and taxes.

Corporate Group Loan Limit:

Businesses that were part of a single corporate group were limited to a maximum of $20,000,000 in aggregate PPP loans.

Defining Payroll Costs:

“Payroll costs” were broadly defined to include:

Salary, wages, commissions, or similar compensation.
Cash tips.
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, retirement).
Payment of state and local taxes assessed on employee compensation.
For self-employed individuals/sole proprietors: wages, commissions, income, or net earnings from self-employment.

Exclusions from Payroll Costs:

Compensation for employees whose principal residence was outside the U.S.
Individual employee compensation exceeding $100,000 annualized.
Federal employment taxes.
Qualified sick and family leave wages for which a credit was allowed under the Families First Coronavirus Response Act.

PPP Loan Terms: Interest Rate and Maturity

PPP loans were offered on very favorable terms to maximize their accessibility and impact:

Interest Rate: 1% fixed rate, calculated on a non-compounding, non-adjustable basis.
Maturity: Five years.

Borrowers were generally not required to make payments of principal or interest for a period of time after loan disbursement.

How Could PPP Loans Be Used?

PPP loan proceeds were intended to be used for specific operational expenses to help businesses maintain their workforce and cover essential costs during the pandemic. Allowable uses of PPP funds included:

For All Eligible Borrowers:

Payroll Costs: As defined in the CARES Act and program rules.
Continuation of Benefits: Costs related to the continuation of group health care, life, disability, vision, or dental benefits during periods of leave and insurance premiums.
Mortgage Interest Payments: Interest payments on business mortgage obligations (not principal or prepayments) 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 or cloud computing services facilitating business operations.
Covered Property Damage Costs: Costs related to property damage due to public disturbances in 2020, not covered by insurance.
Covered Supplier Costs: Expenditures to suppliers of goods essential to operations, pursuant to 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 (e.g., drive-through windows, ventilation systems, physical barriers, PPE).

At least 60% of PPP loan proceeds were required to be used for payroll costs.

For Self-Employed Individuals (Schedule C Filers):

In addition to the above, self-employed individuals could use PPP funds for:

Owner Compensation Replacement: Calculated based on 2019 or 2020 net profit.
Business Mortgage Interest, Rent, and Utilities: For expenses claimed or deductible on Schedule C.
Covered operations expenditures, property damage costs, supplier costs, and worker protection expenditures deductible on Schedule C.

Prohibited Uses:

PPP funds could not be used for:

Lobbying activities.
Lobbying expenditures related to state or local elections.
Expenditures to influence legislation.

Misuse of PPP funds could result in required repayment, fraud charges, and other liabilities.

Loan Forgiveness: Turning a Loan into a Grant

A key incentive of the PPP was the potential for loan forgiveness. Borrowers could be eligible for forgiveness of up to the full principal amount of the loan and any accrued interest. Loan forgiveness was contingent on using the loan proceeds for forgivable purposes and maintaining employee and compensation levels.

Factors Affecting Loan Forgiveness:

Eligible Expenses: Loan forgiveness was based on documented payroll costs, covered mortgage interest, rent, utilities, operations expenditures, property damage costs, supplier costs, and worker protection expenditures incurred during the “loan forgiveness covered period.”
60/40 Rule: At least 60% of the loan forgiveness amount had to be attributable to payroll costs, with no more than 40% for nonpayroll costs. Failure to meet this ratio could result in reduced forgiveness.
Loan Forgiveness Covered Period: Borrowers could select a covered period between 8 and 24 weeks, starting from the date of loan disbursement.
Maintenance of Employee and Compensation Levels: Forgiveness could be reduced if a borrower reduced their full-time equivalent (FTE) employee count or reduced employee salaries/wages by more than 25% (with certain exceptions and safe harbors).

Simplified Forgiveness for Smaller Loans:

Borrowers with loans of $150,000 or less were provided with a simplified loan forgiveness application process, requiring less documentation at the time of application. However, these borrowers were still required to retain records for potential SBA review.

EIDL Advance and Loan Forgiveness:

The Economic Aid Act repealed the CARES Act provision that required SBA to deduct EIDL Advance amounts from PPP loan forgiveness. EIDL Advances no longer reduced PPP loan forgiveness amounts.

A representation of the SBA Form 2483, the Paycheck Protection Program Borrower Application Form, which applicants needed to complete and submit to their lender to apply for a PPP loan.

Lenders and the PPP: Who Facilitated the Loans?

A wide range of financial institutions were authorized to make PPP loans, ensuring broad access for small businesses. Eligible PPP lenders included:

All SBA 7(a) Lenders: Automatically approved to make PPP loans on a delegated basis.
Federally Insured Depository Institutions and Credit Unions: Any federally insured bank or credit union.
Farm Credit System Institutions: Certain Farm Credit System institutions meeting specific requirements.
Other Financing Providers: Depository or non-depository financing providers meeting criteria related to loan origination, compliance programs, and BSA requirements.
Community Development Financial Institutions (CDFIs), Minority-, Women-, or Veteran/Military-Owned Lenders: Non-bank lenders meeting certain loan origination volume and ownership criteria.

Lender Responsibilities and Underwriting:

Lender responsibilities in the PPP were streamlined to facilitate rapid loan processing. Lenders were generally expected to:

Confirm receipt of borrower certifications on the SBA Form 2483 (or equivalent).
Confirm receipt of documentation demonstrating the borrower was in operation on February 15, 2020.
Confirm the average monthly payroll costs using borrower-provided documentation.
Comply with applicable Bank Secrecy Act (BSA) requirements.

Lenders were allowed to rely on borrower certifications and documentation in good faith, and were held harmless for borrower non-compliance or fraud if they acted in good faith and met other requirements.

Lender Fees and Secondary Market:

Lender Fees: SBA paid lenders processing fees based on a tiered structure depending on the loan amount.
Secondary Market: PPP loans could be sold into the secondary market after full disbursement.

Key Considerations for Borrowers and Lenders

Loan Terms and Conditions:

PPP loans were characterized by:

100% SBA guarantee.
No collateral requirements.
No personal guarantees.
1% interest rate.
Delegated authority for lenders, allowing for faster processing.

Fee Waivers:

All upfront guarantee fees, annual service fees, subsidy recoupment fees, and secondary market fees were waived for PPP loans.

Agent Fees:

Agent fees were regulated and could not be paid out of PPP loan proceeds. Borrowers were responsible for agent fees unless the lender directly contracted with the agent. Limits were placed on agent fees as a percentage of the loan amount.

Loan Disbursement:

PPP loans were disbursed in a single, full disbursement within ten calendar days of loan approval. Multiple draws were not permitted to delay the covered period start.

Loan Increases and Reapplications:

Under certain circumstances, borrowers could request increases to their PPP loan amounts or reapply for loans, especially in situations where initial calculations did not include partner compensation or for seasonal employers under revised rules.

Conclusion: The PPP as a Vital Economic Relief Program

The CARES Act Paycheck Protection Program was a critical component of the U.S. government’s response to the COVID-19 pandemic. It provided a lifeline to millions of small businesses and nonprofits, enabling them to maintain payroll, cover essential operating expenses, and weather the economic storm. While the program’s lending phase has concluded, understanding its structure and provisions remains important for businesses that received PPP loans, particularly concerning loan forgiveness and compliance. This comprehensive guide has aimed to clarify the key aspects of the PPP, offering valuable information for businesses and stakeholders navigating the program’s legacy.

Disclaimer: This article provides a general overview of the Paycheck Protection Program based on publicly available information and official guidelines as of the last update of the source document. It is not legal or financial advice. Businesses should consult with legal and financial professionals for advice tailored to their specific situation.

References:

Interim Final Rule on Paycheck Protection Program as Amended by Economic Aid Act, published January 12, 2021. [Link to original document if available]
Document Drafting Handbook. https://www.archives.gov/files/federal-register/write/handbook/ddh.pdf
SBA Website: www.sba.gov