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

The Coronavirus Aid, Relief, and Economic Security (CARES) Act introduced the Paycheck Protection Program (PPP) to provide vital financial support to small businesses struggling amidst the COVID-19 pandemic. As a crucial component of economic relief, the Cares Act Ppp Program aimed to keep American workers employed by offering forgivable loans to small businesses. This article delves into the intricacies of the PPP, offering an in-depth look at its key features, updates, and how it has evolved to support businesses through challenging times.

Navigating the Latest Updates to the PPP Program

Congress extended the application deadline for the Paycheck Protection Program to August 8, providing businesses with additional time to apply for this critical assistance. Responding to feedback from the small business community, the Paycheck Protection Program Flexibility Act of 2020 brought significant changes to enhance the program’s effectiveness. These revisions, further clarified by the Small Business Administration (SBA) through Interim Final Rules, addressed key areas such as loan forgiveness and eligibility.

Here’s a breakdown of the key updates to the cares act ppp program:

Extended Forgiveness Period: Borrowers now have more flexibility with the loan forgiveness covered period. It is extended to the earlier of 24 weeks after loan origination or December 31, 2020. Businesses that received loans before June 5 could choose to maintain the original eight-week period or extend it.
Payroll Cost Ratio Adjustment: The initial requirement that 75% of loan proceeds must be used for payroll costs was adjusted to 60%. While full loan forgiveness still requires a minimum of 60% payroll spending, businesses spending less than this threshold are now eligible for partial forgiveness, offering a more adaptable framework.
Extended Rehire Safe Harbor: The timeframe for borrowers to restore their workforce and salary levels without impacting loan forgiveness was extended from June 30 to December 31, 2020, giving businesses more time to recover and rehire.
Loan Maturity Flexibility: Loans issued before June 5 have a two-year maturity, but borrowers and lenders could mutually agree to extend this to five years. Loans approved on or after June 5 have a five-year maturity, providing longer repayment terms.
Payroll Tax Deferral: PPP recipients were granted the option to defer payment of payroll taxes, freeing up immediate cash flow.
Deferred Loan Payments: If a borrower applies for loan forgiveness within 10 months of the covered period’s end, loan payments are deferred until the SBA remits the forgiveness amount to the lender, offering temporary relief from repayment obligations.
Expanded Use of Funds: The cares act ppp program outlined specific eligible uses for loan funds, including payroll costs, continuation of healthcare benefits, mortgage interest, rent, utilities, interest on pre-February 15, 2020 debt, and refinancing SBA Economic Injury Disaster Loans (EIDL) made between January 31 and April 3, 2020.
Compensation Caps:
- Employee Cash Compensation Cap: Individual employee compensation eligible for forgiveness was capped at $15,385 for an eight-week period or $46,154 for 24 weeks.
- Owner Compensation Replacement Cap: For self-employed individuals, compensation was limited to 8 weeks of 2019 net profit (up to $15,385) for an eight-week period or 2.5 months of 2019 net profit (up to $20,833) for 24 weeks.
Business Activity Exemption: Loan forgiveness would not be reduced if a business could document its inability to return to pre-February 15, 2020 business levels due to compliance with COVID-19 related safety guidelines issued by HHS, CDC, or OSHA between March 1 and December 31, 2020. This provided a crucial safeguard for businesses impacted by mandated closures or restrictions.
Related Party Rent Payments: Rent payments to related parties were deemed eligible for forgiveness under specific conditions, ensuring fair treatment for businesses leasing from affiliated entities, but mortgage interest payments to related parties were not eligible.
Owner-Employee Rule Exception: Owner-employees with less than a 5% ownership stake in C- or S-Corporations were exempted from owner-employee compensation rules, simplifying calculations for smaller ownership percentages.

To streamline the application process, the SBA also introduced an EZ version of the forgiveness application for eligible borrowers, simplifying documentation and calculations for many small businesses utilizing the cares act ppp program. Furthermore, the SBA established an appeals process for PPP loan and forgiveness decisions, providing a mechanism for businesses to challenge unfavorable determinations.

Understanding the PPP Loan Forgiveness Application Process

The SBA released a revised Loan Forgiveness Application in June, accompanied by clarifying Interim Final Rules and FAQs throughout August. These resources detailed the critical aspects of applying for forgiveness under the cares act ppp program.

Key components of the forgiveness application include:

Payroll Cost Calculations: To achieve full loan forgiveness, at least 60% of the requested forgiveness amount must be attributable to payroll costs. Calculations could include payroll costs “incurred or paid” during either the Covered Period or an elected Alternative Payroll Period, expanding the scope of forgivable payroll expenses. The Alternative Payroll Period offered flexibility for businesses with bi-weekly or more frequent payroll cycles, aligning forgiveness calculations with their pay periods. Compensation for owner-employees and self-employed individuals remained capped as outlined in program updates.
Non-Payroll Cost Calculations: Eligible non-payroll costs, such as mortgage interest, rent, and utilities, needed to be either paid during the Covered Period or incurred during the period and paid on the subsequent regular billing date. This clarified the timing for eligible non-payroll expenses.
$2 Million Loan Review: Borrowers with loans exceeding $2 million were required to check a box on the application, indicating they were subject to potential prioritized audits. This signaled increased scrutiny for larger loan amounts.
FTE Calculation Flexibility: The application adopted a more flexible approach to Full-Time Equivalent (FTE) calculations, allowing applicants to choose between a 40-hour FTE standard or treating employees working fewer than 40 hours as 0.5 FTE. This provided businesses with options that better reflected their workforce structure.
Allowable FTE Reduction Exceptions: The application clarified scenarios where FTE reductions would not negatively impact loan forgiveness. These included:
1. FTE reductions between February 15 and April 26, 2020, that were restored by December 31, 2020.
2. Documented inability to rehire employees employed on February 15, 2020, and inability to hire similarly qualified replacements by December 31, 2020. Businesses were required to notify state unemployment offices within 30 days of an employee rejecting a rehire offer.
3. Inability to return to pre-February 15, 2020 business activity levels due to COVID-19 related health and safety compliance requirements issued by HHS, CDC, or OSHA.
4. Employee terminations for cause, voluntary resignations, or voluntary requests for reduced hours during the Covered Period.
5. FTE reductions that were promptly filled by new employees within the next pay period, preventing gaps in staffing.
  Salary/wage reduction penalties were applied only to the portion of decline not attributed to FTE reductions, preventing double penalties for workforce attrition.
Personal Property Rent and Mortgage Interest Limitations: Forgiveness eligibility for personal property rent and mortgage interest was limited to agreements and obligations established before February 15, 2020.
EIDL Loan Coordination: The application required disclosure of EIDL loan applications, as PPP forgiveness would be reduced by any EIDL advance received. However, refinanced EIDL amounts were included in payroll cost calculations for percentage allocation but not for overall forgiveness calculations.
Documentation Requirements: The application specified required supporting documents to be submitted to lenders and additional documentation to be retained by the borrower for potential audit, emphasizing the importance of record-keeping for six years after forgiveness or repayment.

SBA Guidance and Interpretations of the PPP

The SBA played a crucial role in interpreting and implementing the cares act ppp program, issuing ongoing guidance to lenders and borrowers.

Key aspects of SBA guidance included:

Necessity Certification: Updated SBA guidance on April 23 clarified the “necessity certification,” requiring borrowers to consider their current business activity and access to other liquidity sources when certifying that the loan request was necessary to support ongoing operations. This guidance emphasized that public companies with substantial market value and access to capital markets were unlikely to meet this certification in good faith. A safe harbor was established: borrowers with loans under $2 million were deemed to have made the necessity certification in good faith. For larger loans, the SBA could review necessity certifications and seek repayment if deemed inadequate, but would not pursue further enforcement if the loan was repaid upon notification.
Affiliation Rules and Foreign Affiliates: SBA guidance clarified that borrowers must include employees of both domestic and foreign affiliates when determining PPP eligibility, unless specific affiliation rule exceptions applied. A safe harbor was provided for borrowers who applied before May 5, 2020, and excluded non-US employees if they had 500 or fewer US-resident employees combined with affiliates.
Employee Rehire Flexibility: SBA guidance reiterated that loan forgiveness would not be reduced due to employee layoffs if the borrower offered rehire to the same employee (even if declined) or could document an inability to return to pre-COVID business activity levels due to mandated safety compliance.
Corporate Group Funding Cap: A $20 million cap was placed on the total PPP funds that a “corporate group” could receive, defined as businesses majority-owned by a common parent.
60% Payroll Cost Rule Clarification: The SBA emphasized that while full forgiveness required 60% payroll cost allocation, partial forgiveness remained an option for borrowers falling below this threshold.
Partnership Guidance: Partnerships were eligible for PPP loans to cover partnership and partner compensation, with a limit of one application per partnership. Partner self-employment income (Schedule K-1) could be considered payroll costs up to $100,000. Partners were prohibited from applying separately as self-employed individuals.
Ineligibility of Hedge Funds and Private Equity Firms: Hedge funds and private equity firms were explicitly deemed ineligible for PPP loans.
Private Equity Portfolio Company Scrutiny: The SBA highlighted the need for private equity portfolio companies to carefully assess the “necessity” of PPP loans given the updated necessity certification guidance.
Affiliation Rule and Minority Shareholders: Guidance provided conditions under which minority shareholders could irrevocably waive rights to avoid affiliation status for size eligibility purposes.
$100,000 Payroll Cost Threshold Interpretation: The SBA clarified that the $100,000 payroll cost limit applied to cash compensation but not to non-cash benefits like retirement contributions, healthcare, and insurance.
PEO/Payroll Provider Documentation: Businesses using PEOs or payroll providers could utilize payroll documentation from these third parties for PPP loan applications.
12-Month Payroll Cost Calculation Options: Borrowers could calculate aggregate payroll costs using either the previous 12 months or calendar year 2019 data, offering flexibility in calculation methods.

Background and Overview of the Paycheck Protection Program

The cares act ppp program, established under Title I of the CARES Act – the Keeping Workers Paid and Employed Act, was a cornerstone of the US government’s response to the economic fallout of the COVID-19 pandemic. The program’s core objective was to provide financial incentives for small businesses to retain employees on their payroll during the crisis.

The Keeping Workers Paid and Employed Act, along with subsequent enhancements, allocated $659 billion in federally guaranteed PPP loans through the SBA. This substantial funding aimed to provide immediate relief and encourage businesses to rehire laid-off employees retroactively.

Key features of the Paycheck Protection Program loans included:

Loan Amount and Terms: PPP loans were offered up to $10 million, with a two-year maturity (later extended to five years for new loans) and a 1% interest rate. The loan amount was capped at 2.5 times the borrower’s average monthly payroll costs. The SBA guaranteed 100% of PPP loans issued during the covered period.
Eligible Loan Uses: Loan proceeds could be used for payroll costs (capped at $100,000 per employee for cash compensation), group healthcare benefits, mortgage interest, rent, utilities, interest on pre-covered period debt, and certain other SBA 7(a) loan eligible uses.
Waivers and Deferments: The program waived collateral requirements, borrower and lender fees, prepayment penalties, personal guarantees, and certain traditional SBA loan requirements. Automatic deferment of principal, interest, and fees for six months (potentially extendable to one year) was also provided.
Expanded Lender Pool: The SBA broadened the lender pool and delegated authority to lenders for borrower eligibility and creditworthiness determinations, streamlining the loan process.
Loan Limitations: PPP loan funds could not be used for employee compensation exceeding $100,000 in annual salary or for specific taxes covered by other COVID-19 relief legislation. EIDL and PPP loans could not be used for the same purposes.

Borrower Eligibility for PPP Loans

The cares act ppp program broadened the definition of “small business” to encompass a wider range of entities. Eligible borrowers included small businesses, sole proprietors, independent contractors, self-employed individuals, nonprofits, and other specified businesses operational since February 15, 2020.

“Small business” eligibility criteria under the PPP included:

Businesses meeting existing SBA size standards or alternative size standards.
Businesses with fewer than 500 employees (full-time and part-time, US residents), regardless of revenue.
Hospitality and restaurant businesses with multiple locations and no more than 500 employees per location (affiliation rules waived).
Franchises with SBA-assigned franchise identifiers.
Businesses receiving financial assistance from Small Business Investment Companies.
Sole proprietors, independent contractors, and self-employed individuals.

Borrowers were required to certify in good faith that the loan was necessary due to economic uncertainty, funds would be used to retain workers and cover eligible expenses, and they were not receiving duplicative funds from other SBA programs. The SBA prioritized lending to underserved and rural markets, including veteran-owned, minority-owned, women-owned, and newer businesses.

Loan Forgiveness: A Key Incentive of the PPP

A central feature of the cares act ppp program was the potential for loan forgiveness. Borrowers could be eligible for forgiveness on loan proceeds used during the covered period (earlier of 24 weeks or December 31, 2020) for eligible expenses: payroll costs, mortgage interest, rent, and utilities. Forgiveness applied to both principal and accrued interest, with the forgiven amount not exceeding the loan principal.

Loan forgiveness amounts could be reduced based on reductions in FTE employees or significant salary reductions (exceeding 25%). However, rehiring employees and restoring salaries could mitigate these reductions. Forgiven loan amounts were treated as non-taxable cancelled indebtedness. The loan forgiveness process involved borrowers applying through their lenders, with lenders required to make decisions within 60 days and the SBA purchasing forgiven loans within 90 days. Unforgiven loan amounts remained as ongoing loans with the 100% SBA guarantee.

The cares act ppp program provided a critical lifeline for small businesses during the COVID-19 pandemic. Understanding its nuances, updates, and forgiveness rules was essential for businesses seeking to leverage this vital economic relief.