Frequently asked questions about CARES Act Paycheck Protection Program (PPP) loans for small business

Updated December 28, 2020 with information about new PPP loans included in the stimulus and spending legislation.

The Coronavirus Aid Relief and Economic Security Act (CARES Act) includes a number of programs to help small business owners, including Paycheck Protection Program (PPP) loans. By way of background:

• The CARES Act which created PPP loans became law March 27, 2020
• On April 23, 2020 Congress authorized an additional $310 billion in funding for PPP loans.  It was later extended through August 8, 2020.
• On June 5, 2020 The President signed the PPP Flexibility Act, which changed some of the original provisions. 
• On December 27, 2020 the President signed HR 133, the stimulus and spending package that includes new funding for PPP loans through March 31, 2021.

Please keep in mind this information is changing rapidly and is based on our current understanding of the programs. It can and likely will change. Although we will be monitoring and updating this as new information becomes available, please do not rely solely on this for your financial decisions. We encourage you to consult with your lawyers, CPAs and Financial Advisors. 

Do I qualify for a PPP loan?

To qualify for a Paycheck Protection Program loan for the first time, you must be a small business as defined by the SBA. This includes:

• Small businesses or non-profit 501(c)(3) organizations with 500 or fewer employees
• Small businesses, 501(c)(19) veteran’s organizations  or tribal concerns that meet the SBA size standards (See SBA size standards here.) 
• Sole proprietors or independent contractors

Businesses in the food or hospitality industry (NAICS codes beginning in (72) may be eligible on a per location basis. 

In addition the normal affiliation rules are waived for franchises or businesses receiving financial assistance from a Small Business Investment Company.

The business must be in operation by February 15, 2020 and impacted by the coronavirus crisis.

Do I qualify for a second PPP loan? 

To qualify for a second PPP loan, you must generally meet the qualifications above, plus:

1. The business may not have more than 300 employees and
2. The business must have at least a 25% reduction in revenues in at least one quarter in 2020 when compared to previous quarters (more details below)

Businesses with multiple locations that qualified under the CARES Act may qualify for a second draw provided they employ fewer than 300 people in each location. Affiliation rule waivers from the CARES Act still apply.

Learn more about the revenue reductions and qualifying for a second PPP loan here.

I don’t have employees. Can I still qualify?

Yes you may. Self employed individuals and independent contractors may apply.   

How much money can I borrow? 

The basic answer is that the maximum loan amount is 2.5 times the average monthly payroll for the 12 months preceding the date the loan is made, up to a maximum of $10 million for first time PPP loans, and up to $2 million for second PPP loans.. Alternatively, businesses may use 2.5 times average monthly payroll for 2019. 

Use our free CARES Act SBA Calculator to see how much you may be able to borrow.

However, if you are a seasonal business, you can apply to borrow 2.5 times your payroll for either the 12-week period beginning February 15, 2019 and ending May 10, 2019, or the period of March 1, 2019 through June 30, 2019. Alternatively, the seasonal employer may use  any consecutive 12-week period between May 1, 2019 and September 15, 2019.

What if you are a newer business? If you were not in business for the time period beginning on February 15, 2019 and ending on June 30, 2019, then you can use your average total monthly payroll costs incurred from January 1, 2020 to February 29, 2020 and multiply that by 2.5. 

Payroll does not include waged or salaries above $100,000 or qualified sick leave pay under the Families First Coronavirus Response Act. That does not mean higher wages are completely excluded; it means that only the first $100,000 will qualify. (See What Does Payroll Include? below.)

Read: How to calculate your maximum PPP loan amount based on business type: self-employed, S or C Corp, Partnership, LLC or nonprofit.

I don’t pay myself payroll. How do I qualify? 

If you are self-employed you likely report your business income or self-employment income on Schedule C, which you file with your tax return Form 1040. If that’s the case, you can apply based on your net profit for 2019 (Schedule C Line 31). 

Read: Self-employed: How to Apply for PPP

Is this the free $10,000 SBA grant I heard about?

No. The advance (or grant) of up to $10,000 is part of the Economic Injury Disaster Loan program, not Paycheck Protection Program Loans. Read about the EIDL grants here. 

Where can I get one of these loans?

Individual lenders, including many banks, credit unions and some online lenders make these loans. You are not automatically out of luck if your bank can’t help you. You can apply elsewhere.

Nav matches borrowers to SBA approved lending partners.  Sign up for a free Nav account to be matched with lending partners making these loans.

Keep in mind that the cost is the same no matter where you get your PPP loan: 1% interest and no fees for any balance not forgiven.

What can I use the funds for? 

You can use the loan proceeds for: 

• payroll costs; 
• costs related to the continuation of group health care benefits during periods of paid sick, medical, or family leave, and insurance premiums;
• employee salaries, commissions, or similar compensations;
• payments of interest on any mortgage obligation (but not to pay principal or to prepay a mortgage)
• rent (including rent under a lease agreement); 
• utilities; 
• interest on any other debt obligations that were incurred before the covered period;
• covered operations expenditure;
• covered property damage cost;
• covered supplier cost; or
• covered worker protection expenditures.

What’s included in covered expenses? 

These new categories of covered expenses were created by the stimulus bill but they are retroactive to any PPP loan not yet forgiven. 

Covered operations expenditures means “payment for any business software or cloud computing service that facilitates business operations, product or service delivery, the processing, payment, or tracking of payroll expenses, human resources, sales and billing functions, or accounting or tracking of supplies, inventory, records and expenses”

Covered property damage cost means “a cost related to property damage and vandalism or looting due to public disturbances that occurred during 2020 that was not covered by insurance or other compensation;”

Covered supplier cost means “an expenditure made by an entity to a supplier of goods  for the supply of goods that:

• Are essential to the operations of the entity at the time at which the expenditure is made; and 
• is made pursuant to a contract, order, or purchase order— ‘‘(i) in effect at any time before the covered period with respect to the applicable covered loan; or ‘(ii) with respect to perishable goods, in effect before or at any time during the covered period”

Covered worker protection expenditure means “an operating or a capital expenditure to facilitate the adaptation of the business activities of an entity to comply with requirements established or guidance issued by the Department of Health and Human Services, the Centers for Disease Control, or the Occupational Safety and Health Administration, or any equivalent requirements established or guidance issued by a State or local government, during the period beginning on March 1, 2020 and ending the date on which the national emergency declared by the President under the National Emergencies Act (50 U.S.C. 1601 et 8 seq.) with respect to the Coronavirus Disease 2019 (COVID–19) expires related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID–19; may include the purchase, maintenance, or renovation of assets that create or expand

• a drive-through window facility;  
• an indoor, outdoor, or combined air or air pressure ventilation or filtration system;
• a physical barrier such as a sneeze guard;
• an expansion of additional indoor, outdoor, or combined business space; 
• an onsite or offsite health screening capability; or 
• other assets relating to the compliance with the requirements or guidance described in subparagraph (A) as determined by the (SBA) Administrator in consultation with the Secretary of Health and Human Services and the Secretary of Labor; the purchase of— 
• • covered materials described in section 328.103(a) of title 44, Code 16 of Federal Regulations, or any successor regulation;
  • particulate filtering face piece respirators approved by the National Institute for Occupational Safety and Health, including those approved only for emergency use authorization; or 
  • other kinds of personal protective equipment, as determined by the Administrator in consultation with the Secretary of Health and Human Services and the Secretary of 4 Labor; and does not include residential real property or intangible property;’

How fast will I have to repay it?

If there is a balance left after forgiveness, the loan will have a maximum term of two years for loans made before June 5, 2020. Loans made on or after that date carry a five year repayment period. You can prepay at any time without penalty. 

What is the interest rate and fees? 

The interest rate for these loans will be 1% for all lenders that make them. Normal 7(a) loan fees are waived. 

Is there a personal or business credit check?

None is required. 

Is there a personal guarantee?

No. There is no personal guarantee required. In addition, these will be non-recourse loans as long as proceeds are used for covered purposes. (Non-resource means the government won’t be able to collect if you default.) 

Is collateral required?

No. Normally SBA loans for more than $25,000 require collateral. That requirement is waived for these loans. 

How soon do I have to start making payments?

As a result of the PPP Flexibility Act, payments are deferred until the lender receives payment for the forgiven amount from the SBA. If a borrower does not apply for forgiveness within 10 months after the covered period, the deferral period for the loan ends on the date that is 10 months after the last day of the covered period.

Do I have to prove I can’t get credit elsewhere?

No. Normally SBA loans require a “credit elsewhere” test to determine whether the borrower can get similar credit at another financial institution. This is waived here. 

How do I get loan forgiveness?

If you get one of these loans, you can request forgiveness of the principal portion of the loan for the 8-24 week period after you get the loan that covers:

• Payroll costs
• Interest on a mortgage
• Rent 
• Utilities 

However, no more than 40% of the forgiven amount can be attributed to non-payroll costs.

Your loan forgiveness may be reduced if you decrease your full-time employee headcount or decrease salaries and wages by more than 25% for any employee that made less than $100,000 annually in 2019. (Exceptions apply.) You may also receive forgiveness for additional wages paid to tipped workers.

In addition: 

• Payroll includes the costs listed under the section “What Does Payroll Include?” below. 
• Forgiven debt will not be taxable. 
• The mortgage, rent and utilities covered in this section must be in place before February 15, 2020. 

Read: How to apply for forgiveness for your Paycheck Protection Program loan

Please note: there are specific and technical calculations included in this section of the law, and you should not rely on this description to determine whether to keep employees, reduce employee wages or to determine your eligibility for loan forgiveness. 

Do independent contractors count as employees?

No. Independent contractors can apply for a PPP loan on their own so they do not qualify for purposes of a borrower’s PPP loan forgiveness.  (Unless you are an independent contractor applying for yourself.)

Can I get more than one PPP loan?

No.  If you are an owner in multiple businesses, please read: Can I Apply for EIDL or PPP for multiple businesses?

What happens if PPP loan funds are misused?

If you use PPP funds for unauthorized purposes, SBA will direct you to repay those amounts. If you knowingly use the funds for unauthorized purposes, you will be subject to additional liability such as charges for fraud. If one of your shareholders, members, or partners uses PPP funds for unauthorized purposes, SBA will have recourse against the shareholder, member, or partner for the unauthorized use.

Keep good records of how you use these funds. Sloppy record keeping may prove costly!

What does payroll include?

The CARES Act states that payroll includes:

• Salary, wages, commissions or similar compensation,
• Payment of cash tips or equivalent  (based on employer records of past tips or, in the absence of such records, a reasonable, good-faith employer estimate of such tips),
• Payment for vacation, parental, family, medical, or sick leave;
• Allowance for dismissal or separation;
• Payment required for the provisions of employee benefits including insurance premiums for group life, disability, vision, or dental insurance;
• Payment of any retirement benefit;
• Payment of State or local tax assessed on the compensation of employees; plus
• For sole proprietors or independent contractors, wages, commission, income, or income from net earnings from self-employment, or similar compensation. 

It does not include:

• The compensation of an individual in an amount that is more than $100,000 on an annualized basis, as prorated for the period during which the compensation is paid or the obligation to pay the compensation is incurred;
• Federal employment taxes imposed or withheld between February 15, 2020 and June 30, 2020, including the employee’s and employer’s share of FICA (Federal Insurance Contributions Act) and Railroad Retirement Act taxes, and income taxes required to be withheld from employees;
• Any compensation of an employee whose principal place of residence is outside the United States;
• Qualified sick and family leave wages for which a credit is allowed under sections 7001 and 7003 of the Families First Coronavirus Response Act.

Are employee benefits in the $100,000 salary aap? 

No. The CARES Act excludes from the definition of payroll costs any employee compensation in excess of $100,00 on an annualized basis. According to the SBA, the exclusion of compensation in excess of $100,000 annually applies only to cash compensation, not to non-cash benefits, including:

• employer contributions to defined-benefit or defined-contribution retirement
  plans;
• payment for the provision of employee benefits consisting of group health care
  coverage, including insurance premiums; and
• payment of state and local taxes assessed on compensation of employees.

What do utilities include?

Utilities include electricity, gas, water, transportation, telephone, or internet access for which service began before February 15, 2020. 

How do I document payroll? 

You must submit such documentation such as payroll processor records, payroll tax filings, or Form 1099- MISC, or income and expenses from a sole proprietorship. For borrowers that do not have any such documentation, the borrower must provide other supporting documentation, such as bank records, sufficient to demonstrate the qualifying payroll amount. You’ll find full documentation requirements on the Paycheck Protection Program forgiveness application (Form 3508) instructions.

Are there disqualifiers? 

Yes. You are ineligible for a PPP loan if, for example: 

• You are engaged in any activity that is illegal under federal, state, or local law; 
• You are a household employer (individuals who employ household employees such as nannies or housekeepers); 
• An owner of 20 percent or more of the equity of the applicant is incarcerated, on probation, on parole; presently subject to an indictment, criminal information, arraignment, or other means by which formal criminal charges are brought in any jurisdiction; or has been convicted of a felony involving fraud, bribery, embezzlement, or a false statement in a loan application or an application for federal financial assistance within the last five years or any other felony within the last year; or 
• You, or any business owned or controlled by you or any of your owners, has ever obtained a direct or guaranteed loan from SBA or any other Federal agency that is currently delinquent or has defaulted within the last seven years and caused a loss to the government.
• The stimulus legislation also specifies that these loans are not available to businesses with greater than 20% ownership by “Chinese entities.” It also prohibits publicly traded companies from getting PPP loans.

What’s the difference between PPP and EIDL? 

The CARES Act includes a number of relief programs for small businesses. The one we are focus on in this article is Paycheck Protection Program Loans. The Economic Injury Disaster Loan is a separate loan altogether and you apply directly to the SBA, not to individual lenders. 

Can I apply for PPP and EIDL?

Yes but you cannot “double dip” and use funds from both loan programs for the same purpose.

Can I apply for this loan and the payroll tax credit?

There is a payroll tax credit of up to 50% of qualified wages for certain businesses whose operations have been fully or partially suspended by a government order or whose gross receipts in a quarter have fallen by at least half compared to a similar quarter the year before. 

Your business cannot receive both the Employee Retention Payroll Tax Credit and a Paycheck Protection Program Loan, so if you are considering both make sure you consult with your legal or financial advisor. 

However, thanks to the PPP Flexibility Act, businesses and self employed individuals may qualify for payroll tax deferral and PPP.