Congress's coronavirus financial relief package, the Coronavirus Aid, Relief, and Economic Security (CARES) Act is the largest economic relief bill in United States history and will support individuals and businesses affected by the pandemic. This piece addresses the Paycheck Protection Program (PPP), the Economic Injury Disaster Loans (EIDL) and Emergency Economic Injury Grants (EIDL Grants), and has been updated in light of the Paycheck Protection Program Flexibility Act of 2020, which was signed into law on June 5, 2020. An updated Forgiveness Application Form 3508 and Instructions, as well as a new shortened Form 3508EZ and Instructions for certain eligible borrowers (eligibility criteria may be found here), has been issued by the SBA, in addition to Frequently Asked Questions regarding PPP loan forgiveness. Additional guidance is expected soon, and this post will be updated accordingly once such information is released. A separate Frequently Asked Questions article discusses PPP loan forgiveness in greater detail.
Table of Contents
Paycheck Protection Program
Eligibility and Affiliations
Q: Who is eligible to receive PPP loans?
Sole proprietors, independent contractors, and “eligible self-employed individuals” (as defined in the Families First Coronavirus Response Act) are also eligible, so long as they submit documentation evidencing eligibility (including payroll tax filings reported to the IRS, Forms 1099-MISC, and income and expenses).
An important exception has been made for a business that, at the time of loan disbursal, is assigned an NAICS code beginning with 72 (accommodation and food services). Such a business can have more than 500 employees, so long as that business employs not more than 500 employees per physical location.
In order to qualify for the PPP, a business must count all domestic and foreign employees of all of its affiliates in determining the 500-person limit unless:
Additionally, in evaluating eligibility, a lender is required to consider whether the business was in operation on February 15, 2020 and had employees for whom the business paid salaries and payroll taxes.
If a business meets the eligibility requirements set forth above, it will NOT be eligible for a PPP loan if it is a business identified in 13 C.F.R. 120.110 and described further in the SBA’s SOP 50 10 5, Subpart B, Chapter 2 (with the exception that specific nonprofit organizations authorized under the CARES Act are eligible, and a business that is otherwise eligible is not rendered ineligible due to its receipt of legal gaming revenues). Further, an SBA Interim Final Rule provides that hedge funds and private equity firms are ineligible, debtors in bankruptcy proceedings are not eligible, and portfolio companies of private equity funds are potentially ineligible. The Interim Final Rule can be found here.
Q: As of what date do businesses calculate their headcount?
A: As indicated in the SBA and Treasury’s April 6, 2020 Frequently Asked Questions (FAQs), Borrowers may choose to calculate their headcount using the average number of employees (1) during the previous 12 months prior to the date of the PPP loan application, (2) per month during calendar year 2019 or (3) per pay period in the 12 completed calendar months prior to the date of the loan application (or the average number of employees for each of the pay periods that the business has been in operation, if it has not been in operation for 12 months).
Q: How does a business determine its “affiliates”?
A: “Affiliate” status is determined under current SBA regulations, which provide generally for a broad definition based on control. Concerns and entities are affiliates of each other when one controls or has power to control the other, or a third party or parties controls or has power to control both. It does not matter whether control is exercised, so long as the power to control exists. Control/affiliation is a facts and circumstances test that includes both affirmative and negative control. Parties with significant equity, negative covenants, board seats, blocking rights, and other shareholder/contractual rights are generally considered affiliates, even when they don’t have a majority voting control or control of the board. Additional guidance from the SBA and Treasury on affiliate status was issued on April 3, 2020. Such guidance can be found here.
Q: If a business has adequate sources of liquidity to support its ongoing operations, is it still eligible for a PPP loan?
A: Maybe. Although the SBA has waived its “credit-elsewhere” test, the SBA and Treasury issued guidance on April 23, 2020, April 28, 2020 and May 5, 2020 that borrowers (public and private) must still certify in good faith that their PPP loan request was necessary, “taking into account their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business.”
The SBA did, however, create two safe harbors for certain borrowers: (1) any business that applied for a PPP loan prior to April 24, 2020 and repaid the loan in full by May 18, 2020 is deemed by the SBA to have made the required certification in good faith and (2) any business that, together with its affiliates, received PPP loans with an original principal amount of less than $2 million will be deemed to have made the required certification concerning the necessity of the loan request in good faith.
Q: How does a PPP loan coordinate with the SBA’s existing loans?
A: Businesses can apply for PPP loans and other SBA financial assistance, including Economic Injury Disaster Loans (EIDLs), traditional 7(a) loans, 504 loans, and microloans, and can also receive investment capital from a small business investment company (SBIC). However, the business cannot use the PPP loan for the same purpose as its other SBA loan(s). For example, if a business uses its PPP loan to cover payroll for the 24-week (or the 8-week, if elected by businesses that received an SBA loan number before June 5, 2020) covered period, it cannot use a different SBA loan product for payroll for those same costs in that applicable period, although it could use it for payroll not during that applicable period or for different workers.
Per the SBA’s Procedure Notice issued on June 19, 2020:
The amount of the EIDL loan to be refinanced does not include the amount of any EIDL “advance” (also referred to as an EIDL “grant”) received by the business, because the EIDL advance does not need to be repaid, but will reduce the amount of any PPP loan forgiveness.
Q: How does the PPP loan work with the temporary Emergency Economic Injury Grants (up to $10,000 each) awarded under the EIDL Program?
A: EIDL Grant (up to $10,000 each) and EIDL loan recipients may apply for and take out a PPP loan as long as there is no duplication in the uses of funds. Proceeds from an EIDL Grant will be deducted from the loan forgiveness amount on the PPP loan.
PPP Loan Amounts and Use of Proceeds
Q: What is the maximum amount of a PPP loan?
A: Businesses are eligible for the lesser of:
Please note that for seasonal employers, as determined by the SBA, the measurement period is either (1) the 12-week period beginning February 15, 2019 or (2) March 1, 2019 to June 30, 2019, at the election of the borrower. Per an Interim Final Rule from the SBA, a seasonal employer may alternatively elect to determine its maximum loan amount as the average total monthly payments for payroll during any consecutive 12-week period between May 1, 2019 and September 15, 2019. A seasonal employer that elects to use a 12-week period between May 1, 2019 and September 15, 2019 to calculate it maximum PPP loan amount must use the same 12-week reference period for calculation of any reduction in the amount of loan forgiveness.
If the business was not operating during the period from February 15, 2019 until June 30, 2019, the relevant measurement period is January 1, 2020 through February 29, 2020.
Q: What is included in “payroll costs” eligible for loan forgiveness?
A: “Payroll costs” eligible for loan forgiveness include compensation up to $100,000 (applies only to cash compensation, and not to non-cash benefits) on an annualized basis to employees with a principal place of residence in the U.S. in the form of:
The following caps on the amount of loan forgiveness apply to owner-employees and self-employed individuals’ own payroll compensation:
For a more in-depth discussion of payroll cost forgiveness, see the SBA’s PPP Loan Forgiveness FAQs.
Q: What is not included in “payroll costs”?
A: “Payroll costs” may not include:
The exclusion of compensation in excess of $100,000 annually applies only to cash compensation, not to non-cash benefits, such as payment for provision of employee benefits consisting of group health care coverage, payment of taxes assessed on compensation, and employer contributions to defined-benefit or defined-contribution retirement plans.
“Applicable Covered Period” means either the “Covered Period” or the “Alternative Covered Period.” “Covered Period” means either: (1) the 24-week (168-day) period beginning on the disbursement date of the PPP loan, or (2) if the borrower received an SBA loan number before June 5, 2020, the borrower may elect to use an 8-week (56-day) period beginning on the disbursement date of the PPP loan. The SBA has also established an “Alternative Payroll Covered Period” for borrowers with bi-weekly (or more frequent) payroll periods. Such borrowers may elect to calculate eligible payroll costs using the 24-week (168-day) period (or if the borrower received an SBA loan number before June 5, 2020 – at the borrower’s election – the 8-week (56-day) period) that begins on the first day of the borrower’s first pay period following its PPP loan disbursement date. It is important to note that the “Alternative Payroll Covered Period,” if applicable, is only to be used in relation to payroll costs and cannot be used to determine non-payroll expenses included in the forgiveness calculation. Additionally, in no event, may the Applicable Covered Period extend beyond December 31, 2020.
Q: May a PPP borrower deduct, for Federal income tax purposes, those expenses incurred in its business for which the borrower received a covered PPP loan and for which expenses the borrower received forgiveness of such covered loan?
A: No. The IRS issued a notice on April 30, 2020 stating that no deduction is allowed under the Internal Revenue Code for an expense that is otherwise deductible if the payment of the expense results in forgiveness of a covered loan pursuant to section 1106(b) of the CARES Act and the income associated with the forgiveness is excluded from gross income for purposes of the Code pursuant to Section 1106(i) of the CARES Act.
Q: May a taxpayer delay its portion of social security taxes if it received debt forgiveness under the CARES Act?
A: Yes, a taxpayer may delay these taxes if it had certain indebtedness forgiven under the CARES Act.
Q: Can the loan proceeds be used to pay any expenses in the borrower’s discretion?
A: No. Proceeds can only be used for the following:
Although interest on unsecured credit incurred before February 15, 202 is a permissible use of PPP loan proceeds, this expense is not eligible for forgiveness.
Additionally, as part of the loan process, the business will need to acknowledge that the funds will be used to retain workers and maintain payroll or make mortgage payments, lease payments and utility payments as specified under the CARES Act.
Further, to be eligible for full loan forgiveness, at least 60% of the loan proceeds must be used to pay payroll costs, and not more than 40% of the loan forgiveness amount may be attributable to eligible nonpayroll costs.
PPP Lending Criteria and Loan Forgiveness
Q: What will the banks require to make the loan?
A: The CARES Act requires a lender to confirm the following:
The borrower must also submit a loan application and payroll documentation, acceptable to its lender. Lenders must also submit an SBA form Lender’s Application. All forms and supporting documentation must be maintained for 6 years after the date the loan is forgiven or repaid in full.
Q: Are PPP loans eligible for loan forgiveness?
A: Yes. Under Section 1106 of the CARES Act, a borrower is eligible for forgiveness of part or all of the loan balance, subject to the adjustments and limitations described below, if the proceeds are used for eligible purposes (see below) and the borrower can provide required supporting documentation to demonstrate that it qualifies for forgiveness. The SBA previously released the PPP Loan Forgiveness Application Form 3508, which can be accessed here. This Loan Forgiveness Application (and Instructions) have been updated to incorporate the changes from the PPP Flexibility Act. Additionally, the SBA released a new shortened Form 3508EZ and Instructions for certain eligible borrowers, which can be accessed here and here. For more information on loan forgiveness, see our separate FAQ available here. On August 5, 2020, the SBA also issued FAQs on PPP loan forgiveness available here.
Q: Which borrowers may use the Loan Forgiveness Application Form 3508EZ?
A: As indicated in the Form 3508EZ Instructions, a borrower may apply for forgiveness using Form 3508EZ if at least one of the following are true:
Q: What will be the terms of loan forgiveness?
A: The CARES Act states that the loan obligations eligible for forgiveness include amounts expended for those obligations and services listed below that are either incurred or paid during the Applicable Covered Period (as defined, previously), but only where such obligation or service (in the case of mortgage obligations, rent and utilities) was an existing obligation as of February 15, 2020:
The limitations and adjustments to forgiveness of the Covered Period Costs include the following:
Q: How do I calculate the amount by which forgiveness of the Covered Period Costs will be reduced (under subsection (2), above) if I do not fully maintain my workforce?
A: The Covered Period Costs shall be reduced by multiplying the amount of the Covered Period Costs by the Reduction in Number of Employees. The “Reduction in Number of Employees” shall be calculated by dividing the (i) average number of full-time equivalent employees per week employed by borrower during the Applicable Covered Period by (ii) at the election of borrower (not including seasonal employers, as determined by the SBA): (y) the average number of full-time equivalent employees per week employed by the borrower during the period beginning on February 15, 2019 and ending on June 30, 2019 or (z) the average number of full-time equivalent employees per week employed by borrower during the period beginning on January 1, 2020 and ending on February 29, 2020. Seasonal employers must use either of the preceding periods or a consecutive 12-week period between May 1, 2019 and September 15, 2019; however, a seasonal employer that elects to use a 12-week period between May 1, 2019 and September 15, 2019 to calculate its maximum PPP loan amount must use the same 12-week period as the reference period for calculation of any reduction in the amount of loan forgiveness. The same reference period must be used for each employee.
In this paragraph, the “average number of full-time equivalent employees” is determined by calculating the total average weekly number of full-time equivalent employees for each pay period falling within a month. There are 2 methods for calculating a full-time equivalent employee (FTE). Option #1 is to take the average number of hours paid per week for each employee, divide by 40, and round to the nearest tenth. The maximum for each employee is capped at 1.0. Option #2 is to assign a 1.0 for employees who work 40 hours or more per week, and 0.5 for employees who work fewer hours. Borrowers may select only 1 of these 2 methods, and must apply that method consistently to all of their part-time employees.
There are certain safe harbors and exemptions that may be applicable, meaning that certain reductions in FTEs may not result in a reduced amount of forgiveness.
Q: How does the borrower receive forgiveness on its PPP loan?
A: The CARES Act requires that, in order to be eligible for forgiveness, the borrower must apply to the lender by submitting:
A borrower must retain all records relating to its PPP loan application, PPP loan, and loan forgiveness application for 6 years after the date the loan is forgiven or repaid in full.
On May 22, 2020, the SBA issued its loan review procedures, which can be found here, and which were amended, in part, by the Interim Final Rule posted by the SBA on June 22, 2020. Furthermore, the SBA has indicated that lenders will be able to submit forgiveness applications on its PPP Loan Forgiveness Platform beginning August 10, 2020.
Q: What happens after the forgiveness period?
A: Any loan amounts not forgiven must be repaid by the borrower on or before the borrower’s applicable maturity date (two years for those loans “made” prior to June 5, 2020 – unless the borrower and its lender mutually agree to extend to five years – and five years for those loans “made” on or after June 5, 2020) at an interest rate of 1.0%. The SBA has indicated that a PPP loan is considered to be “made” on the date that the SBA assigns a loan number to the PPP loan.
A borrower may submit a loan forgiveness application at any time before the maturity date of the loan – including before the end of the Applicable Covered Period – if the borrower has used all of the loan proceeds for which the borrower is requesting forgiveness. However, it should be noted that if a borrower applies for forgiveness before the end of the Applicable Covered Period, and it has reduced certain employee’s salaries or wages in excess of 25%, the borrower must account for the excess salary reduction for the full 8-week or 24-week covered period.
If a borrower submits a loan forgiveness application before the end of the Applicable Covered Period, or within 10 months after the end of its Applicable Covered Period, it will not have to make any payments of principal or interest on its loan before the date on which the SBA remits the loan forgiveness amount to the lender (or notifies the lender that no loan forgiveness is allowed). The lender will notify the borrower of the date that its first payment is due.
If a borrower does not submit its loan forgiveness application within 10 months after the end of its Applicable Covered Period, or if the SBA determines that the loan is not eligible for forgiveness (in whole or in part), the PPP loan is no longer deferred and the borrower must begin paying principal and interest. If this occurs, the lender must notify the borrower of the date the first payment is due.
Q: Will a borrower’s PPP loan forgiveness amount be reduced if the borrower reduced the hours of an employee, then offered to restore the reduction in hours, but the employee declined the offer?
A: No. In calculating the loan forgiveness amount, a borrower may exclude any reduction in full-time equivalent employee headcount that is attributable to an individual employee if:
Q: Will a borrower’s PPP loan forgiveness amount be reduced if the borrower is unable to rehire individuals who were employees of the borrower on February 15, 2020?
A: In calculating its loan forgiveness amount, a borrower may exclude any reduction in full-time equivalent employees during the Applicable Covered Period, as long as the borrower is able to document, in good faith, the following:
Further, borrowers are required to inform the applicable state unemployment insurance office of any employee’s rejected rehire offer within 30 days of the employee’s rejection of the offer. The documents that borrowers should maintain to show compliance with this exemption include the written offer to rehire an individual, a written record of the offer’s rejection, and a written record of efforts to hire a similarly qualified individual.
Q: Will a borrower’s PPP loan forgiveness amount be reduced if the borrower is unable to return to the same level of business activity as the borrower was operating at before February 15, 2020?
A: No. A borrower is exempted from the loan forgiveness reduction arising from a proportional reduction in full-time equivalent employees during the Applicable Covered Period, as long as the borrower is able to document, in good faith, an inability to return to the same level of business activity such borrower was operating at before February 15, 2020 due to compliance with requirements established or guidance issued between March 1, 2020 and December 31, 2020 by HHS, the CDC or OSHA, related to the maintenance of standards for sanitation, social distancing or any other worker or customer safety requirements related to COVID-19.
Such documentation must include copies of applicable COVID-19 requirements or guidance for each business location and relevant borrower financial records.
This exemption includes both direct and indirect compliance with such COVID-19 requirements or guidance.
Q: Will a borrower’s PPP loan forgiveness amount be reduced if the borrower fired an employee for cause during the Applicable Covered Period?
Q: Will a borrower’s PPP loan forgiveness amount be reduced if an employee voluntarily resigned during the Applicable Covered Period?
Q: Will a borrower’s PPP loan forgiveness amount be reduced if an employee requests and receives a reduction in its hours during the Applicable Covered Period?
Q: If a borrower restores reductions made to employee salaries and wages or FTE employees by no later than December 31, 2020, can the borrower avoid a reduction in its loan forgiveness amount?
A: Yes. If certain employee salaries and wages were reduced by more than 25% between February 15, 2020 and April 26, 2020 (the safe harbor period), but the borrower eliminates those reductions by December 31, 2020 or earlier, then the borrower is exempt from any reduction in loan forgiveness amount that would otherwise be required.
Similarly, if a borrower eliminates any reductions in FTE employees occurring during the safe harbor period by December 31, 2020 or earlier, then the borrower is exempt from any reduction in loan forgiveness amount that would otherwise be required.
PPP Application Process
Q: Is there a deadline to apply for a PPP loan?
A: Yes. The last day on which a lender can obtain an SBA loan number for a PPP loan is August 8, 2020. The SBA will not issue a loan number unless and until a completed loan application has been submitted and reviewed. This means that a borrower will need to have submitted a completed PPP loan application well ahead of this August 8, 2020 deadline in order for the SBA to have sufficient time to review the loan application and issue an SBA loan number prior to this August 8, 2020 deadline.
Q: How do small businesses apply for a PPP loan?
A: PPP loans are made through an SBA-approved lender and are guaranteed by the SBA. If the business has a relationship with a lender, it should immediately contact that lender to see if that lender is making PPP loans. The business should immediately begin working with an SBA-approved lender to confirm eligibility and to start the application process. Lenders began taking applications on April 3, 2020 for the first round of PPP loan funds. That money was exhausted quickly. Lenders began processing applications again on April 27, 2020 for the second round of PPP loan funds.
Economic Injury Disaster Loans (EIDL) and Emergency Economic Injury Grants (EIDL Grants)
*As of June 15, 2020, the SBA’s website indicates that it is currently accepting EIDL loan applications from all eligible applicants experiencing economic impacts due to COVID-19. Applicants that have already submitted their EIDL applications will continue to be processed on a first-come, first-served basis. However, the SBA has announced that it has exhausted the funding available for EIDL Grants.
Q: What is an Economic Injury Disaster Loan?
A: The SBA’s EIDL program provides small businesses with working capital loans of up to $2 million to help overcome the temporary loss of revenue as the result of a declared disaster. The CARES Act sets out new rules that make it easier for small businesses that were damaged by closures, or had other losses, due to the coronavirus to apply for and receive loans quickly. As part of the initial round of funding, $30 billion was added to the EIDL loan fun, and $10 billion more was added for the EIDL Grants connected to the EIDL loans. As part of the second round of funding, an additional $50 billion was added to the EIDL loan fund, and an additional $10 billion was added for EIDL Grants.
EIDLs are available from January 31, 2020 – September 30, 2020 and the SBA is currently accepting EIDL loan and EIDL Grant applications from all eligible applicants experiencing economic impacts due to COVID-19, and applicants that have already submitted their EIDL applications will continue to be processed on a first-come, first-served basis. The EIDL Grants are backdated to January 31, 2020 to allow those who have already applied for EIDLs to be eligible to also receive an EIDL Grant.
While the original cap was $2 million, recent SBA communications indicate that, due to the large volume of applications, the initial EIDL loan disbursements will be limited to $150,000.
The SBA has notified the public that it has exhausted the funding available for EIDL Grants.
Q: If a business needs funds immediately, can the EIDL loan help?
A: Possibly. A borrower can apply for an EIDL loan and receive up to $10,000 (SBA calculation is $1,000 per employee up to $10,000) as an advance in the form of an EIDL Grant within 3 days, if an advance is requested. But note that the SBA has indicated that the EIDL Grant funds have been exhausted. The borrower will be required to certify to the SBA, under penalty of perjury, that it is eligible to apply. The EIDL Grant funds can be used for maintaining payroll, providing sick leave to employees, rent or mortgages payments, and paying other obligations that cannot be paid due to lost revenue. The EIDL Grant amount will reduce the amount of any loan forgiveness on a PPP loan also obtained by a borrower.
Q: Are there other special provisions that make it easier to get an EIDL loan based on the coronavirus?
A: The CARES Act has simplified the process for EIDL applications for coronavirus loans made before September 30, 2020. For example:
Q: What kinds of businesses can qualify and what proof do they need that they qualify?
A: In addition to sole proprietors (with or without employees) and independent contractors, small businesses, cooperatives and employee owned businesses, and Tribal small businesses with 500 or fewer employees are eligible for EIDLs.
Also, small business concerns and small agricultural cooperatives that meet the applicable size standard for the SBA are also eligible, as well as most private non-profits of any size.
Further, agricultural enterprises with not more than 500 employees are eligible for an EIDL loan and/or EIDL Grant. Agricultural enterprises include those businesses engaged in the production of food and fiber, ranching, and raising of livestock, aquaculture, and all other farming and agricultural related industries (as defined by section 18(b) of the Small Business Act (15 U.S.C. 647(b)).
In advance of disbursing the EIDL Grant, the SBA must verify that the entity is an eligible applicant for an EIDL. To do this, applicants must certify with the SBA, under penalty of perjury, that they are eligible.
Q: Are there any types of entities that are not eligible for an EIDL loan or EIDL Grant?
A: Yes, the following applicants are ineligible for an EIDL loan or EIDL Grant.
Q: Do SBA affiliation rules apply when determining eligibility for an EIDL loan or EIDL Grant?
Q: If a business receives an EIDL and/or an EIDL Grant, can it also get a PPP loan?
A: Yes. Whether the business has already received an EIDL unrelated to Coronavirus or a Coronavirus-related EIDL and/or an EIDL Grant, it may also apply for a PPP loan.
If the business also receives a PPP loan, or refinances an EIDL into a PPP loan, any EIDL Grant amount will be subtracted from the amount forgiven in the PPP loan.
Also, a business cannot use the EIDL for the same purpose as its PPP loan. For example, if the business used the EIDL to cover payroll for certain workers in April, it cannot use a PPP loan for payroll for those same workers in April, although it could use it for payroll in March or for different workers in April.
 Employee-based size standards can be found on the SBA website.
 Employee-based and revenue-based size standards can be found on the SBA website.