Understanding the CARES Act PPP Loan Program: A Comprehensive Guide for Small Businesses

The Coronavirus Aid, Relief, and Economic Security (CARES) Act introduced the Paycheck Protection Program (PPP) to provide critical financial support to small businesses struggling amidst the COVID-19 pandemic. As a content creator for scantoolforcar.store and an expert in automotive repair businesses (many of which are small businesses), I understand the importance of clear, actionable information. This guide aims to break down the complexities of the Cares Act Ppp Loan Program, offering an SEO-optimized and more accessible explanation than the original document, specifically targeting English-speaking business owners.

Navigating the Paycheck Protection Program (PPP)

The COVID-19 pandemic created unprecedented economic challenges, particularly for small businesses across the nation. In response, the U.S. government launched the CARES Act, a sweeping relief package designed to mitigate the financial fallout. A cornerstone of this act was the Paycheck Protection Program (PPP), administered by the Small Business Administration (SBA) in collaboration with the Department of the Treasury.

The initial rollout of the PPP in April 2020 was followed by several updates and amendments, including the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act in December 2020. This later act extended the PPP, revised some of its terms, and introduced new provisions. This guide consolidates information from these acts and related SBA guidelines to provide a comprehensive understanding of the PPP, particularly for those seeking to understand its impact and potential benefits.

Who Was Eligible for a First Draw PPP Loan?

Eligibility for the First Draw PPP loan was broad, aiming to include a wide spectrum of small businesses and organizations affected by the pandemic. To qualify, applicants generally needed to meet the following criteria:

General Eligibility Criteria:

Business Type: Be an independent contractor, self-employed individual, sole proprietor, business concern, tax-exempt nonprofit organization (501(c)(3)), tax-exempt veterans organization (501(c)(19)), or Tribal business concern. Certain housing cooperatives, 501(c)(6) organizations, and destination marketing organizations also became eligible under later amendments, with specific employee number limits. News organizations meeting certain NAICS code and size criteria were also included.
Size Standards: Generally, businesses with no more than 500 employees (or 300 for certain types of organizations, or meeting SBA industry size standards if higher) were eligible, including affiliates. Specific rules applied to news organizations, considering employee count per location.
Operational Status: Be in operation on February 15, 2020, and either have employees with paid salaries and payroll taxes, or have paid independent contractors (reported on Form 1099-MISC), or be an eligible self-employed individual, independent contractor, or sole proprietorship with no employees.
Documentation: Be able to provide documentation to establish eligibility and demonstrate qualifying payroll amounts. This could include payroll records, payroll tax filings, Form 1099-MISC, Schedule C or F, income and expense records for sole proprietorships, or bank records.

Specific Eligibility Considerations:

Affiliates: For most businesses, affiliation rules applied. This meant that the employee count included employees of domestic and foreign affiliates. However, certain exceptions existed, particularly for businesses in the hospitality and franchise sectors. Faith-based organizations were also often exempt from affiliation rules if those rules substantially burdened their religious exercise.
Self-Employed Individuals: Individuals with self-employment income, filing Form 1040 Schedule C, were eligible. Partners in a partnership, however, could not apply separately; their income was to be included in the partnership’s application.
Businesses Owned by Lender Directors/Shareholders: Businesses owned by outside directors or minority equity holders of a PPP lender were allowed to apply to that same lender, provided they followed the same process as other customers and there was no favoritism.
Seasonal Businesses: Seasonal businesses, even if dormant on February 15, 2020, were eligible if they were operational for any 12-week period between February 15, 2019, and February 15, 2020.
Industry-Specific Cases:
- Hospitals owned by governmental entities could be eligible if they received less than 50% of their funding from state or local government sources (excluding Medicaid).
- Businesses receiving legal gaming revenue were not automatically ineligible, although those with illegal gaming revenue remained ineligible.
- Electric and telephone cooperatives exempt from federal income tax were considered “businesses organized for profit” and could be eligible.
- Housing cooperatives were explicitly made eligible, with an employee limit of 300.
- Nonprofit and tax-exempt news organizations meeting specific criteria were eligible.
- Destination marketing organizations and 501(c)(6) organizations were made eligible under the Economic Aid Act, subject to lobbying restrictions and employee limits.

Who Was Ineligible for a PPP Loan?

While the PPP aimed to be inclusive, certain categories of businesses and individuals were deemed ineligible. Understanding these ineligibility criteria is just as crucial as understanding eligibility itself.

Categories of Ineligible Applicants:

Illegal Activities: Businesses engaged in any activity illegal under federal, state, or local law were ineligible.
Household Employers: Individuals employing household staff like nannies or housekeepers were not eligible.
Criminal History: Applicants with owners holding 20% or more equity who were currently incarcerated, subject to indictment for a felony, or had felony convictions related to fraud, bribery, embezzlement, or false statements in loan applications within the last five years, or any other felony within the last year, were ineligible.
Delinquent Federal Loans: Businesses or owners with currently delinquent or defaulted federal loans within the last seven years that caused a government loss were ineligible.
Non-Operational Date: Businesses not in operation on February 15, 2020, were ineligible.
Shuttered Venue Operator Grant Recipients: Businesses that had received or would receive a grant under the Shuttered Venue Operator Grant program were ineligible for PPP loans to avoid double dipping.
Political Influence: Businesses where the President, Vice President, heads of Executive Departments, Members of Congress, or their spouses held a controlling interest were ineligible to prevent potential conflicts of interest.
Publicly Traded Companies: Issuers of securities listed on a national securities exchange were generally ineligible.
Permanently Closed Businesses: Businesses that had permanently closed and were not intending to reopen were ineligible.
Bankruptcy: Applicants or owners in bankruptcy proceedings at the time of application or before loan disbursement were ineligible.
Hedge Funds and Private Equity Firms: Businesses primarily engaged in investment or speculation, such as hedge funds and private equity firms, were ineligible.
Businesses Generally Ineligible for 7(a) Loans: Most types of businesses ineligible for standard 7(a) SBA loans under 13 CFR 120.110 were also ineligible for PPP loans, with specific exceptions noted for hospitals, gaming revenue recipients, and cooperatives as mentioned in eligibility section.

Calculating Your Maximum PPP Loan Amount

Understanding how to calculate the maximum loan amount was crucial for applicants to ensure they requested the correct funding. The calculation methods varied depending on the business type. The maximum First Draw PPP Loan amount was capped at $10 million.

General Calculation Methodology:

For many businesses, the loan amount was calculated using a payroll-based formula:

Aggregate Payroll Costs: Sum up payroll costs from 2019 or 2020 for employees whose primary residence was in the United States. Borrowers could choose to use 2019, 2020, or for non self-employed, the 1-year period before the loan date. 2019 or 2020 were most common and used in examples for simplicity.
Cap on Individual Compensation: Subtract any employee compensation exceeding $100,000 on an annualized basis, prorated for the period.
Average Monthly Payroll: Divide the result from Step 2 by 12 to get average monthly payroll costs.
Loan Amount Multiplier: Multiply the average monthly payroll from Step 3 by 2.5.
EIDL Refinancing (Optional): Add any outstanding amount of an Economic Injury Disaster Loan (EIDL) made between January 31, 2020, and April 3, 2020, that you wished to refinance with the PPP loan. EIDL Advances were not included as they didn’t need repayment.

Examples of Loan Amount Calculation:

Example 1 (No high earners): Annual payroll $120,000. Monthly payroll $10,000. Maximum loan: $10,000 x 2.5 = $25,000.
Example 2 (High earners): Annual payroll $1,500,000. After capping high earners, qualifying payroll becomes $1,200,000. Monthly qualifying payroll $100,000. Maximum loan: $100,000 x 2.5 = $250,000.
Example 3 (EIDL Refinancing): Example 1 scenario + $10,000 EIDL loan to refinance. Maximum loan: $25,000 + $10,000 = $35,000.
Example 4 (High earners and EIDL Refinancing): Example 2 scenario + $10,000 EIDL loan to refinance. Maximum loan: $250,000 + $10,000 = $260,000.

Specific Calculation Methods for Different Business Types:

Self-Employed (Schedule C):
- No Employees: Based on 2019 or 2020 Schedule C net profit (Line 31), capped at $100,000, divided by 12, then multiplied by 2.5, plus any EIDL refinancing.
- With Employees: Calculated by adding 2019 or 2020 Schedule C net profit (capped at $100,000), employee gross wages (capped at $100,000 per employee), employer contributions for health insurance, retirement, and state/local taxes. This total was then averaged monthly and multiplied by 2.5, plus any EIDL refinancing.
Seasonal Employers: Used average total monthly payroll for any 12-week period between February 15, 2019, and February 15, 2020.
Farmers and Ranchers (Schedule F):
- No Employees: Based on 2019 or 2020 Schedule F gross income (Line 9), capped at $100,000, divided by 12, then multiplied by 2.5, plus any EIDL refinancing.
- With Employees: Calculated by adding the difference between 2019 or 2020 Schedule F gross income and specific expense lines (capped at $100,000), employee gross wages (capped at $100,000 per employee), employer contributions for health insurance, retirement, and state/local taxes. This total was then averaged monthly and multiplied by 2.5, plus any EIDL refinancing.
Partnerships: Calculated by adding partner net earnings from self-employment (Form 1065 K-1, capped at $100,000 per partner), employee wages (capped at $100,000 per employee), employer contributions for health insurance, retirement, and state/local taxes. This total was then averaged monthly and multiplied by 2.5, plus any EIDL refinancing.

Corporate Group Loan Limits:

Businesses part of a single corporate group were limited to a maximum aggregate PPP loan amount of $20,000,000 to ensure broader access to the program.

What Qualified as “Payroll Costs”?

Payroll costs were a core component of both loan amount calculation and eligible use of funds. They included:

Salaries, wages, commissions, or similar compensation.
Cash tips or equivalents.
Payment for vacation, parental, family, medical, or sick leave.
Allowance for separation or dismissal.
Payments for employee benefits: group health care, group life, disability, vision, or dental insurance (including premiums), and retirement contributions.
State and local taxes assessed on employee compensation.
For self-employed individuals or independent contractors: wages, commissions, income, or net earnings from self-employment.

Exclusions from Payroll Costs:

Compensation for employees whose principal residence is outside the U.S.
Individual employee compensation exceeding $100,000 annualized.
Federal employment taxes (FICA, Railroad Retirement Act taxes, withheld income taxes).
Qualified sick and family leave wages for which a credit is allowed under the Families First Coronavirus Response Act.

PPP Loan Terms: Interest Rate and Maturity

PPP loans were designed to be highly favorable to borrowers, featuring very lenient terms.

Interest Rate: A fixed rate of 1%, calculated on a non-compounding, non-adjustable basis for all loans.
Maturity: Loans issued had a maturity of five years, offering long-term repayment flexibility.

Applying for and Using PPP Loan Funds

The application process and permissible uses of PPP funds were clearly defined to ensure the program’s intended goals were met.

Application Process:

Single First Draw Loan: Borrowers could generally only apply for one First Draw PPP Loan, encouraging them to request their maximum eligible amount initially.
E-Signatures: E-signatures and e-consents were permitted for applications, even with multiple owners, streamlining the process.
Required Forms: Applicants needed to submit the Paycheck Protection Program Borrower Application Form (SBA Form 2483) or lender’s equivalent, along with payroll documentation. Lenders submitted SBA Form 2484 electronically.

Permissible Uses of PPP Loan Funds:

PPP loan proceeds were restricted to specific categories to ensure they directly supported businesses and their employees.

Payroll Costs: As broadly defined, this remained the primary intended use, with a requirement that at least 60% of loan proceeds be used for payroll costs to achieve full loan forgiveness.
Continuation of Benefits: Costs related to maintaining group health care, life, disability, vision, or dental benefits during periods of leave, including insurance premiums.
Mortgage Interest: Payments for mortgage interest (not principal or prepayments) on business property obligations incurred before February 15, 2020.
Rent Payments: Rent payments for leases dated before February 15, 2020.
Utility Payments: Utility payments for services that began before February 15, 2020.
Interest on Pre-Existing Debt: Interest payments on debt obligations incurred before February 15, 2020.
EIDL Refinancing: Refinancing SBA EIDL loans made between January 31, 2020, and April 3, 2020.
Covered Operations Expenditures: Payments for business software, cloud computing, and similar services facilitating business operations, product delivery, payroll processing, HR, sales, billing, and inventory/record tracking.
Covered Property Damage Costs: Costs for property damage due to public disturbances in 2020, if not covered by insurance.
Covered Supplier Costs: Expenditures for essential goods from suppliers under contracts or orders in effect before the covered period or for perishable goods at any time during the covered period.
Covered Worker Protection Expenditures: Operating or capital expenditures to adapt business activities to comply with COVID-19 related safety guidelines (e.g., drive-through windows, ventilation systems, sneeze guards, PPE).

Use of Funds for Self-Employed Individuals (Schedule C):

For self-employed individuals, permissible uses were further defined, often linked to deductible expenses on Schedule C:

Owner compensation replacement (based on 2019 or 2020 net profit).
Employee payroll costs (if applicable).
Business mortgage interest, rent, and utility payments (deductible on Schedule C and claimed in 2019 or 2020).
Interest payments on other debts incurred before February 15, 2020 (not forgivable).
EIDL refinancing.
Covered operations, property damage, supplier, and worker protection expenditures (to the extent deductible on Schedule C).

Prohibited Uses: PPP funds could not be used for lobbying activities or expenditures designed to influence legislation.

Misuse of Funds: Using PPP funds for unauthorized purposes could lead to required repayment, fraud charges, and recourse against shareholders, members, or partners involved in misuse.

Loan Forgiveness: Turning a Loan into a Grant

A key feature of the PPP was the potential for loan forgiveness. Borrowers could have their loans fully or partially forgiven if they met certain conditions.

Loan Forgiveness Basics:

Forgivable Amount: Up to the full principal amount of the loan and accrued interest could be forgiven.
Eligible Expenses: Forgiveness was based on documented payroll costs, mortgage interest, rent, utilities, covered operations, property damage, supplier, and worker protection expenditures incurred during the “loan forgiveness covered period.” Payroll costs that were also used for Employer Retention Credits were not eligible for forgiveness.
60/40 Rule: At least 60% of the loan forgiveness amount had to be attributable to payroll costs. If payroll costs fell below 60%, the forgiveness amount would be reduced proportionally.
Loan Forgiveness Covered Period: Borrowers could choose a covered period between 8 and 24 weeks, starting from the loan disbursement date.

Maintaining Employee and Compensation Levels:

Full loan forgiveness depended on maintaining employee and compensation levels. Reductions in employee headcount or significant wage cuts could reduce the forgivable amount, although certain safe harbors and exemptions existed to mitigate penalties for unavoidable reductions.

Simplified Forgiveness for Smaller Loans:

Borrowers with loans of $150,000 or less benefited from a simplified forgiveness process, requiring less documentation at the time of application. However, these borrowers were still required to retain records proving compliance with PPP requirements for a period of 3-4 years.

EIDL Advance Impact:

The Economic Aid Act repealed the CARES Act provision that required deducting EIDL Advances from forgiveness amounts. EIDL Advances no longer reduced PPP loan forgiveness.

Lender Responsibilities and Fees

While borrowers bore the primary responsibility for application and fund use, lenders also played a crucial role in the PPP process.

Eligible PPP Lenders:

All SBA 7(a) lenders were automatically approved to make PPP loans.
Eligibility was expanded to include federally insured depository institutions, federally insured credit unions, Farm Credit System institutions, and certain other financing providers meeting specific criteria. Non-bank lenders, particularly CDFIs and minority/women/veteran-owned lenders, were also included.
Lenders needed to register in SAM.gov within 30 days of their first PPP loan disbursement after December 27, 2020.

Lender Underwriting and Responsibilities:

Lender underwriting obligations were streamlined to facilitate rapid loan processing. Lenders were primarily required to:

Confirm receipt of borrower certifications on the application form.
Confirm documentation showing the business was operational on February 15, 2020.
Verify the average monthly payroll cost based on submitted documentation.
Comply with Bank Secrecy Act (BSA) requirements, adapting existing protocols for insured institutions or establishing equivalent AML programs for non-BSA entities.

Lenders were allowed to rely on borrower certifications and documentation in good faith, and were held harmless for borrower non-compliance or fraud if they acted in good faith and met other regulatory requirements.

Lender Fees:

SBA paid lenders processing fees based on loan size, as follows for loans made on or after December 27, 2020:

Loans up to $50,000: Lesser of 50% or $2,500.
Loans $50,001 – $350,000: 5%.
Loans $350,001 – $2,000,000: 3%.
Loans $2,000,000+: 1%.

These fees were intended to compensate lenders for their processing efforts and could not be required to be repaid unless the lender was found guilty of fraud related to the loan.

Secondary Market Sales:

PPP loans could be sold on the secondary market after full disbursement, allowing lenders to manage their portfolios and liquidity.

Loan Pledges and SBA Authorization:

Requirements for loan pledges under 13 CFR 120.434 did not apply to PPP loans pledged for borrowings from Federal Reserve Banks or Federal Home Loan Banks, simplifying pledging processes.
Lenders could use their own promissory notes or SBA forms, and a separate SBA Authorization document was not required beyond the Lender Application Form (SBA Form 2484).

SBA Form 1502 Reporting:

Lenders were required to electronically submit SBA Form 1502 within 20 calendar days of loan approval to report loan details and claim processing fees.

Agent Fees:

Agent fees were capped and could not be paid from PPP loan proceeds. Borrowers were responsible for agent fees if they knowingly used an agent. Lender-paid agent fees were limited to:

1% for loans up to $350,000.
0.50% for loans $350,001 – $2,000,000.
0.25% for loans $2,000,000+.

Key Takeaways and Conclusion

The CARES Act PPP Loan Program was a vital lifeline for countless small businesses during the COVID-19 pandemic. It provided access to forgivable loans designed to cover payroll and other essential operating costs, helping businesses stay afloat and retain employees during unprecedented economic disruption.

While the program was complex, understanding its key components – eligibility, loan calculation, permitted uses, forgiveness rules, and lender responsibilities – was crucial for both borrowers and lenders. This guide has aimed to simplify this information, making it more accessible and understandable for businesses navigating the complexities of pandemic-era financial relief.

It is important to note that while the First Draw PPP loan application period has concluded, understanding the program’s structure and rules remains valuable, especially for those who may have received loans and are now navigating the forgiveness process or considering potential future relief programs. For the most up-to-date information and guidance, always refer to the official SBA website and consult with financial professionals.

This information is for informational purposes only and does not constitute legal or financial advice. Consult with qualified professionals for advice tailored to your specific situation.