Who Qualifies for the CARES Act Paycheck Protection Program? A Detailed Guide

The Paycheck Protection Program (PPP), established under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, aimed to provide crucial financial support to small businesses struggling due to the COVID-19 pandemic. Amended by the Economic Aid Act, the PPP offered forgivable loans to help businesses maintain payroll and cover certain operating expenses. Understanding who qualifies for this program is essential for businesses seeking financial relief. This guide breaks down the eligibility criteria, drawing from official guidelines and regulations to provide a clear picture of PPP qualification.

Eligibility: Is Your Business Qualified for a PPP Loan?

To determine if your business was eligible for a First Draw PPP loan, several criteria needed to be met. These qualifications primarily focused on the type of business, its size, operational status, and other specific conditions.

1. Types of Businesses and Organizations Eligible

The PPP was designed to be inclusive, covering a wide range of entities. Here’s a breakdown of eligible applicants:

Small Business Concerns: This is a broad category encompassing businesses that meet the Small Business Administration’s (SBA) size standards. Generally, this included businesses with 500 or fewer employees, or those meeting the SBA’s industry size standards if higher.
Independent Contractors, Self-Employed Individuals, and Sole Proprietors: If you operated as your own boss, whether as a freelancer, gig worker, or running your own business under your name, you were potentially eligible. This included individuals who file Form 1040 Schedule C.
Non-profit Organizations: Tax-exempt non-profit organizations described in section 501(c)(3) or 501(c)(19) of the Internal Revenue Code (IRC) were eligible, provided they met employee size standards.
Housing Cooperatives and Eligible 501(c)(6) Organizations: These organizations, including eligible destination marketing organizations, could qualify if they had no more than 300 employees.
News Organizations: Specific news organizations, including those majority-owned or controlled by NAICS code 511110 or 5151 businesses, or non-profit public broadcasting entities, were eligible if they met employee limits per location and certified that loan proceeds would support locally focused information.
Tribal Business Concerns: Businesses owned by tribal entities also fell under eligibility.
Electric and Telephone Cooperatives: Cooperatives exempt from federal income tax under section 501(c)(12) of the IRC were considered eligible business entities.

Image alt text: Paycheck Protection Program banner, highlighting loan availability for eligible businesses.

2. Operational Status and Employee Criteria

Beyond the type of entity, operational status and employee numbers were crucial:

In Operation on February 15, 2020: Businesses needed to be operational on this date to demonstrate they were established before the pandemic’s major impact. This requirement was adjusted for seasonal businesses.
Employee Thresholds: Most categories had employee limits. For standard small businesses, it was generally 500 employees (including affiliates). Certain sectors like news organizations and some non-profits also had location-based or specific employee caps (e.g., 300 for housing cooperatives).
Payroll Requirements: Applicants generally needed to have employees for whom they paid salaries and payroll taxes, or paid independent contractors (as reported on Form 1099-MISC), or be self-employed with no employees.

3. Ineligible Businesses and Situations

Certain situations and business types automatically disqualified applicants:

Illegal Activities: Businesses engaged in any illegal activity at the federal, state, or local level were ineligible.
Household Employers: Those employing household staff like nannies or housekeepers were not eligible.
Owner-Related Criminal History: Businesses with owners holding 20% or more equity who had recent felony convictions (especially related to financial misconduct) were ineligible.
Existing Government Loan Defaults: Businesses with currently delinquent or defaulted federal loans within the last seven years, causing government loss, were ineligible.
Bankruptcy: Applicants in bankruptcy proceedings at the time of application or before loan disbursement were ineligible.
Shuttered Venue Operator Grant Recipients: Businesses that received or would receive a Shuttered Venue Operator Grant were excluded from PPP for the same period.
Businesses with Controlling Interests Held by Government Officials: If certain high-ranking government officials (President, VP, Cabinet heads, Congress members, and their spouses) held a controlling interest, the business was ineligible.
Publicly Traded Companies: Issuers of securities listed on a national securities exchange were generally ineligible.
Hedge Funds and Private Equity Firms: Businesses primarily engaged in investment or speculation were ineligible.
Permanently Closed Businesses: Businesses that had permanently closed and did not intend to reopen were not eligible.

Image alt text: The official logo of the U.S. Small Business Administration, the agency administering the PPP.

Affiliation Rules: Understanding Business Relationships

Affiliation rules played a significant role in determining eligibility, particularly concerning business size. Generally, businesses were considered with their affiliates when assessing eligibility. Affiliates could be determined based on factors like:

Stock Ownership: Controlling ownership in another entity.
Overlapping Management: Shared management or control personnel.
Identity of Interest: Shared economic interests or family relationships.

However, there were specific waivers and exceptions to affiliation rules, notably for:

Businesses in NAICS code 72 (Accommodation and Food Services): Waivers applied for businesses in this hard-hit sector.
Franchises: Franchises with a franchise identifier code from the SBA.
Businesses Receiving SBIC Investment: Businesses financially assisted by a Small Business Investment Company.
Certain News Organizations: Specific rules applied to news organizations to prevent affiliation with larger parent companies from disqualifying them.
Faith-Based Organizations: Religious organizations were often exempt from affiliation rules if those rules substantially burdened their religious exercise.
ESOP Participation: Employee Stock Ownership Plans (ESOPs) did not automatically trigger affiliation.

Loan Amount Calculation and Payroll Costs

Eligible businesses could borrow up to 2.5 times their average monthly payroll costs, with a maximum loan amount of $10 million. Payroll costs were broadly defined and included:

Salaries, Wages, Commissions, Tips: Compensation to employees (US residents).
Paid Leave: Payments for vacation, sick, family, parental, medical leave.
Separation or Dismissal Allowance.
Employee Benefits: Costs for group health care, life, disability, vision, dental insurance, and retirement contributions.
State and Local Taxes: Taxes assessed on employee compensation.
For Self-Employed: Wages, commissions, income, or net earnings from self-employment (capped at $100,000 annualized).

Certain items were explicitly excluded from payroll costs, such as:

Compensation for non-US resident employees.
Individual employee compensation exceeding $100,000 annualized.
Federal employment taxes.
Qualified sick and family leave wages for which tax credits were claimed.

Loan Usage and Forgiveness

PPP loans were intended to be used for specific purposes to support business operations and were eligible for forgiveness if these conditions were met. Permitted uses included:

Payroll Costs: At least 60% of loan proceeds were required to be used for payroll.
Continuation of Group Health Care Benefits.
Mortgage Interest Payments (on mortgages before Feb 15, 2020).
Rent Payments (for leases before Feb 15, 2020).
Utility Payments (for services started before Feb 15, 2020).
Interest Payments on Debt Obligations (incurred before Feb 15, 2020).
Refinancing SBA EIDL loans (made between Jan 31, 2020 and April 3, 2020).
Covered Operations Expenditures: Business software, cloud computing services.
Covered Property Damage Costs: Costs due to public disturbances in 2020, uninsured.
Covered Supplier Costs: Essential goods from suppliers.
Covered Worker Protection Expenditures: Adaptations for COVID-19 safety compliance.

Loan forgiveness was contingent on maintaining employee and compensation levels and using loan proceeds for these eligible expenses. A significant portion (at least 60%) needed to be allocated to payroll to achieve full forgiveness.

Conclusion

The CARES Act Paycheck Protection Program offered a vital lifeline to numerous businesses during an unprecedented economic crisis. Eligibility was structured to encompass a wide range of small businesses and self-employed individuals, with specific criteria ensuring funds reached those most in need. Understanding these qualifications is crucial for businesses to determine past eligibility and to potentially inform future programs designed for economic relief. While the First Draw PPP loan application period has closed, this information remains relevant for historical context and understanding government support programs for small businesses.

For detailed information and the most current guidelines, always refer to official resources from the Small Business Administration and the Department of the Treasury.