PPP loan eligibility: who qualified, who didn't, and what's available now

Who was not eligible for a PPP loan?

The PPP loan was not available to:

• Businesses that weren’t operating by February 15, 2020: The PPP loan was not intended for newer businesses that began after the pandemic hit. 
• Businesses who only employed household employees: Those with household employees like nannies and housekeepers were not eligible for the PPP.
• Businesses primarily engaged in lobbying or political activities: Any business whose main purpose was lobbying or politics didn’t qualify for a PPP loan.
• Businesses involved in illegal activities: The PPP restricted businesses that operated illegally under federal, state, and local laws.
• Certain owners with criminal histories: Owners who had at least a 20% stake in a business who were incarcerated, on probation or parole, currently facing felony charges, or convicted of fraud, bribery, embezzlement, or a false statement on a loan/federal assistance application within the past five years — or any other felony within the past year — were ineligible.
• Applicants with federal debt or bankruptcy: The PPP excluded business owners with certain federal debt or bankruptcy histories. 
• Businesses who aren’t eligible for 7(a) loans: Those in industries that didn’t qualify for SBA 7(a) loans couldn’t receive PPP loans either.
• Businesses who received a Shuttered Venue Operator (SVOG) grant: Businesses couldn’t receive both a PPP loan and SVOG grant.
• Hedge fund or private equity businesses: The PPP excluded hedge funds or private equity firms. 

Who qualified and how did self-employed applications work? 

The PPP was designed for sole proprietors, independent contractors, self-employed individuals, and small businesses with fewer than 500 employees or those with more than 500 employees that met the SBA’s size standards. 

Per the SBA, a business could qualify for a PPP loan if:

• It was in operation on February 15, 2020; 
• It was an individual with self-employment income (such as an independent contractor or a sole proprietor); 
• Its principal place of residence was in the United States; and  
• It filed or planned to file a Form 1040 Schedule C for 2019 or 2020.

On March 3, 2021 the SBA released a new Interim Final Rule that applied to self-employed PPP applicants. Prior to this change, self-employed borrowers who filed Schedule C used line 31 of their Schedule C (net profit) to calculate the owner’s compensation portion of their loan amount. The new calculation provided more flexibility, allowing borrowers to use their net profit or gross income. 

LLC applicants were required to calculate their loan amount based on how their LLC filed its taxes. The SBA stated that “LLCs should follow the instructions that apply to their tax filing status in the reference period used to calculate payroll costs (2019 or 2020)—i.e., whether the LLC filed (or will file) as a sole proprietor, a partnership, or a corporation in the reference period.”

Those who were self-employed with a business that operated as an S Corporation had to qualify based on payroll (including payroll they paid themselves). However, they may have struggled to qualify if they only paid themselves compensation through the owner's draw or distributions. 

In addition to the tax documents used to calculate their loan amount, applicants were required to provide the following information to apply for a PPP loan.

• A copy of their driver’s license or passport. 
• A voided check for the deposit of their PPP loan. Some lenders required them to have a business bank account. 
• For second draw PPP loans, applicants were asked to provide the number from their first PPP loan. SBA loan numbers (PLP) had eight numbers followed by a dash then two more numbers (i.e., XXXXXXXX-XX).

What expenses was the PPP loan for?

The SBA established some very specific guidance regarding the use of PPP loan proceeds for those with income from self-employment who file a Form 1040, Schedule C. Applicants had to use their loan proceeds correctly if they wanted to qualify for full forgiveness. 

“Proprietor expenses” was a term the SBA introduced and defined as follows: “In the context of determining a borrower’s eligible expenses and forgiveness amount, this interim final rule refers to the owner compensation share of a Schedule C filer’s loan amount as ‘proprietor expenses’.”

The PPP was intended to keep workers on payroll, and that included compensation for self-employed individuals. In fact, full forgiveness generally required a business to use at least 60% of PPP funds for payroll-related expenses during specific time periods. The March 3, 2021 guidance from the SBA described it this way: 

• For borrowers that used net profit to calculate loan amount, owner compensation replacement, calculated based on 2019 or 2020 (using the same year that was used to calculate the loan amount) net profit. 
• For borrowers that used gross income to calculate loan amount, proprietor expenses (business expenses plus owner compensation), calculated based on 2019 or 2020 (using the same year that was used to calculate the loan amount) gross income (this amount cannot exceed $20,833).
• For borrowers who used gross income to calculate the loan amount and have no employees, proprietor expenses equal gross income. 
• For borrowers who used gross income to calculate the loan amount and have employees, proprietor expenses equal the difference between gross income and employee payroll costs. 
• For businesses with employees, payroll may also include employee payroll costs for employees whose principal place of residence is in the United States.

In addition, borrowers could qualify for full forgiveness if they used up to 40% of PPP funds for other eligible expenses during the covered period. These included:

• Mortgage interest payments* (but not mortgage prepayments or principal payments) on any business mortgage obligation on real or personal property (e.g., the interest on a mortgage for the warehouse a business purchased to store business equipment or the interest on an auto loan for a vehicle they used to perform their business), 
• Business rent payments (e.g., the warehouse where a business stored business equipment or the vehicle they used to perform their business), and
• Business utility payments (e.g., the cost of electricity in the warehouse a business rented or gas they used to drive a business vehicle). 
• Interest payments on any other debt obligations that were incurred before February 15, 2020 (such amounts are not eligible for PPP loan forgiveness). 

Is PPP coming back? 

The PPP has not been renewed and currently, there is no legislation restoring it. Searches for “new PPP loans” generally refer to the First Draw and Second Draw programs that were available during the COVID-19 pandemic rather than a current PPP loan program.

How PPP loan forgiveness, repayment, and enforcement worked

Most PPP loans that met the program’s requirements were eligible for forgiveness but borrowers were responsible for repaying any portion that wasn’t forgiven. In most cases, unforgiven balances came with a 1% interest rate. Although the program ended in May 2021, the SBA and Pandemic Response Accountability Committee (PRAC) continued to investigate fraudulent loans for years afterward.

What financing options can self-employed owners use instead? 

If you’re a self-employed business owner, you may now take advantage of these financing options instead of PPP loans.

• 7(a) loans: 7(a) loans are the most popular SBA loan program and offer up to $5 million in funding with repayment terms of up to 10 years for equipment and working capital, or up to 25 years for commercial real estate.". You can put the funds toward commercial real estate acquisitions or improvements, working capital, machinery, equipment, furniture, supplies, and more.
• Microloans: Microloans are business loans for $50,000 or less. They’re usually offered by the SBA through non-profit organizations and can help you cover the cost of working capital, inventory, supplies, and smaller purchases. 
• Disaster loans: The SBA’s disaster recovery loans come with low rates and may be useful after a disaster like flood or wildfire strikes your business. You can use the proceeds to pay for certain losses and business operating expenses that could’ve been met if the disaster didn’t occur.
• Working capital loans and lines of credit: Working capital loans and lines of credit could come in handy when you have cash flow gaps. They can help cover short-term expenses like payroll, rent, and utilities. 
• Business credit card: With a business credit card, you may separate your business and personal expenses. Doing so will make it easier to manage cash flow and file taxes.

Frequently asked questions