COVID-19 CARES Act Guidance: Update to Payment Protection Program

Note: This article was originally published on 04/03/2020 and was last updated on 5/29/2020. For more information on the CARES Act, visit Covid-19 CARES Act Guidance.

The SBA Section 7(a) Loan program, also known as the Paycheck Protection Program (PPP), which promises $349 billion to small businesses affected by COVID-19, began today, with a loan application form already live on the U.S. Treasury’s website. The program is being overseen by the Small Business Administration (“SBA”), but banks are the ones who handle the application process.

Over the past week, SBA and the U.S. Department of the Treasury have issued additional guidance. The Paycheck Protection Program provisions of the CARES Act were further interpreted by the SBA in an interim final rule (the “Interim Rule”) issued on April 2, 2020.

How and When to Apply

Funds are limited and subject to availability from the SBA. The Interim Rule makes it clear that the PPP Loans will be made on a first-come, first-served basis. Some of the SBA-approved lenders are indicating that these loans will be available to their existing business clients only, while others state that existing business clients will have priority.

Applicants must submit SBA Form 2483 (Paycheck Protection Program Application Form) and payroll documentation. Applicants must also submit such documentation as is necessary to establish eligibility such as payroll processor records, payroll tax filings, Form 1099-MISC, or income and expenses from a sole proprietorship. For applicants that do not have any such documentation, the applicant must provide other supporting documentation, such as bank records, sufficient to demonstrate the qualifying payroll amount.

Lenders are also asking for a Good Standing Certificate from the Secretary of State (“SOS“). As of April 2, 2020, the SOS is running with a lag time of around three weeks, with no expediting option. We recommend that borrowers submit the application with a copy of the information available on the SOS website, showing that the company “Active”, and a note that the actual Good Standing Certificate will follow.

PPP Application Fees

There are no fees associated with a PPP Loan applications for borrowers. Agents may not collect fees from the borrower or be paid out of the PPP Loan proceeds.

PPP Application Form

Number of Employees: Number of employees on the PPP Loan application, should be the total number of employees on the applicant’s payroll (this is not limited to full-time employees).

Applicant Ownership: The PPP application requires the applicant to list all of the owners who have 20% or more of the equity of the applicant. If the applicant has several owners and all of those owners have less than 20% equity in the business, the applicant must list all of those owners on a separate page and submit it along with the application.

Terms of the Loan

The Interim Rule clarifies that the PPP Loans, to the extent not forgiven, will have:

  • A 2-year term (decreased from the maximum maturity of 10 years under the Act);
  • An interest rate of 1% (increased from prior US Treasury guidance that set the interest rate at 0.5%);
  • Principal and interest deferred for 6 months (decreased from the 6 months to one year under the Act); and
  • No interest charged on forgiven amounts.

Amount of the PPP Loan

The CARES Act and Interim Rule provide that average monthly payroll costs should be calculated over the 12-month period preceding the application, but the application form itself states that monthly payroll costs will be calculated using 2019 payroll costs for most applicants.

The SBA published the following methodology, which will be useful to most applicants, to determine the maximum amount of the PPP Loan:

Step 1: Aggregate payroll costs from the last twelve months for employees whose principal place of residence is the United States.

Step 2: Subtract any compensation paid to an employee in excess of an annual salary of $100,000 and/or any amounts paid to an independent contractor or sole proprietor in excess of $100,000 per year.

Step 3: Calculate average monthly payroll costs (divide the amount in Step 2 by 12).

Step 4: Multiply the average monthly payroll costs by 2.5.

Step 5: Add the outstanding amount of an Economic Injury Disaster Loan (EIDL) made between January 31, 2020 and April 3, 2020, less the amount of any “advance” under an EIDL COVID-19 loan (for those borrowers who have received the $10,000 grant through the EIDL).

Take the average payroll between January 2019 – December 2019 because most banks will ask for documentation to prove that payroll.

Independent Contractors

Independent contractors do not count as “employees” for purposes of a borrower’s PPP Loan calculation. Moreover, independent contractors do not count as “employees” for purposes of a borrower’s PPP Loans forgiveness. This is due to the fact that independent contractors have the ability to apply for a PPP Loans on their own. Note that independent contractors will not be able to apply for the PPP Loans until April 10, 2010.[1]

Affiliation Rules

In most cases, a borrower will be considered together with its affiliates for purposes of determining eligibility for the PPP Loan. Under SBA rules, entities may be considered affiliates based on several factors including stock ownership, overlapping management, and identity of interest. Since the new CARES Act made 501(c)(3) non-profits and 501(c)(19) veterans organizations eligible for the PPP Loan, the affiliation rules apply with respect to these nonprofit organizations and veterans organizations in the same manner as with respect to small business concerns.[2]

The SBA has indicated that the normal affiliation standards for PPP Loans, as set out in 13 C.F.R. § 121.301(f), apply to PPP loans, other than as expressly waived by the CARES Act and/or SBA guidance for the Accommodation and Food Services industry, certain franchise companies, companies receiving financial assistance from Small Business Investment Companies, and faith-based organizations.

Loan Forgiveness

Loan proceeds used for permissible uses during the 8-week period after loan origination (the “covered period”) is forgivable, subject to certain requirements.[3] This means that to be assured of maximum forgiveness, borrowers should plan to spend 100% of the PPP funds before the end of the 8-week period. The Interim Rule states that no more than 25% of the Section 7(a) Loans forgiveness amount may be attributable to nonpayroll costs.

The Headcount Reduction

The amount a borrower manages to spend on permissible uses for the 8-week period determines the borrower’s maximum forgiveness. Forgiveness amount can be reduced due to declines in headcount. Whether the PPP Loan will be forgiven will depend, in part, on the number of employees a borrower employs throughout the covered period.

The amount of the loan forgiven is calculated by multiplying the loan amount by a quotient equal to the average number of full-time equivalent employees (“FTEs”)[4] per month employed by borrower during the covered period divided by either (i) the average number of FTEs per month from February 15, 2019 to June 30, 2019 or (ii) the average number of FTEs per month from January 1, 2020 to February 29, 2020. The employer-borrower can choose either (i) or (ii). The employees employed at the end of the eight week period do not have to be the same employees.

The Salary/Wage Reduction

The PPP Loan forgiveness amount may be further reduced for any employee that has a wage reduction greater than 25% compared to such employee’s most recent full quarter. For purposes of this calculation businesses only need to consider employees who makes $100,000 or less per year. The dollar amount of the wage/salary reduction beyond 25% reduces, dollar-for-dollar, the amount of PPP loan forgiveness.

Remedying the Headcount/salary/Wage Reduction

If by June 30, 2020, the borrower eliminates any reductions in employees or compensation that occurred from February 15, 2020 and ending April 26, 2020 (30 days after enactment of the CARES Act), such reductions will not count against the PPP Loan amount forgiven.[5]

Forgiveness under this program is not treated as taxable gross income for income tax purposes.

The loan forgiveness features of the PPP are complex and will require detailed planning and meticulous documentation. If a business is unable to achieve full forgiveness of the PPP Loan, the amount of the PPP that is not forgiven becomes a 1% loan with a two-year payback period with no collateral and no personal guarantee.

Misuse of PPP Funds

If borrowers use Section 7(a) Loans funds for unauthorized purposes, the amounts used for unauthorized purposes will have to be repaid. Borrowers who knowingly use the funds for unauthorized purposes will be subject to additional liability for fraud.

EIDL and PPP Loans

As of April 5, 2020, borrowers can apply for both EIDL and PPP Loans.

PPP Loans may be used for refinancing an EIDL loan made between January 31, 2020 and April 3, 2020. If a borrower received an EIDL loan from January 31, 2020 through April 3, 2020, the borrower may also apply for a PPP Loan to refinance the EIDL loan.

If a borrower used funds from an EIDL for payroll costs, the PPP Loan must be used to refinance the existing EIDL loan. Proceeds from any advance on the EIDL loan will be deducted from the loan forgiveness amount on the PPP Loan. If a borrower did not use an EIDL loan for payroll costs, the EIDL does not affect the borrower’s eligibility for a PPP Loan.

The Interim Rule requires borrowers to use 75% of PPP Loan proceeds to cover payroll costs. For purposes of determining the percentage of use of PPP Loan proceeds for payroll costs, the amount of any EIDL to be refinanced will be included. For purposes of loan forgiveness, however, the borrower will have to document the proceeds used for payroll costs in order to determine the amount of forgiveness.

EIDL $10,000 Advances

A borrower applying for the EIDL may apply for an advance of up to $10,000. The $10,000 is an advance against an EIDL loan approval. If the borrower does not get an EIDL loan approved, the $10,000 advance turns into a grant. The amount of the advance may depend on the amount of employees the borrower has. If the borrower has 10 employees or more, the borrower will receive $10,000.


[1] For independent contractors, it does not matter whether or not their income comes from a US company.

[2] This rule exempts otherwise qualified faith-based organizations from the SBA’s affiliation rules where the application of the affiliation rules would substantially burden those organizations’ religious exercise.

[3] Permissible uses are; (i) payroll costs, (ii) interest payments on mortgages incurred before February 15, 2020, (iii) rent payments on leases in effect before February 15, 2020, and (iv) utility payments for which service began before February 15, 2020.

[4] According the SBA’s PPP Forgiveness Application, FTE is equivalent to 40 hours per week.

[5] The CARES Act wording is that the employer by June 30 “has eliminated” the reduction in the number of FTEs. There has been no guidance from the SBA on precisely what this means.