Paycheck Protection Program Offers Forgivable Loans for Eligible Small Businesses

April 5, 2020 | Kristine A. Tidgren

Update: On April 24, Congress replenished the PPP fund. Additional guidance was also provided: Congress Authorizes More Funds for PPP and EIDL and Says Farms Can Apply

Update: As of April 16, 2020, funds allocated to the PPP have been exhausted. We are watching to see if additional funds will be authorized.

Update: On April 14, SBA released interim guidance detailing calculation of loans and forgiveness for those who file Schedule Cs and partnerships. No reference to Schedule F, but same principles should apply. More to come! Total reliance on 2019 return (doesn't have to be filed, but must be prepared).

Update: On April 8, SBA released a few more questions and answers. In particular, the new information states that the "covered period" for the 8-week forgiveness period begins when the disbursement is made.

Note: This is an update to our March 30 article, incorporating guidance from the Small Business Administration's interim final rule (issued late in the day on April 2). The Treasury Department and the Small Business Administration continue to post new guidance on their websites. We will update this post as new developments unfold.

On Friday, March 27, 2020, the President signed into law H.R. 748, the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act. The CARES Act contains a number of relief provisions designed to sustain Americans during the COVID-19 health and economic crisis. This post provides a general overview of a new small business loan program, the Paycheck Protection Program. Other posts detail individual tax provisions and business tax provisions

The Paycheck Protection Program, implemented by section 1102 of the CARES Act, expands the Small Business Administration 7(a) loan program to provide up to $349 billion in 100% federally-guaranteed loans to small employers and eligible self-employed individuals impacted by COVID-19. These loans are designed to be forgivable under section 1106 if requirements are met. While a number of details must still be filled in, this post provides an overview of the law as set forth in the statute. It also incorporates provisions from the interim final rule issued by the Small Business Administration on April 2.

Who is Eligible?

The CARES Act amends the Small Business Act to expand the small business loan program by creating section 7(a)(36), the Paycheck Protection Program. The program, administered through the Small Business Administration, expands the definition of eligible small businesses and organizations to include many not ordinarily eligible for an SBA loan. The SBA is authorized to guarantee loans under the Paycheck Protection Program, through June 30, 2020, although the loans are issued on a first-come, first-served basis. (page 13)

Definition: This program provides “covered loans” during the “covered period.” For purposes of section 1102, the term “covered loan” means a loan made under the program during the covered period. The term “covered period” under section 1102 means the period beginning on February 15, 2020, and ending June 30, 2020. For purposes of section 1106 (loan forgiveness), the covered period is the 8-week period beginning on the date of the origination of a covered loan. “Covered loan” has the same definition in each section.

Eligible Businesses

Specifically, during the covered period, in addition to "small business concerns" meeting standards under current SBA regulations, any:

  • business concern,
  • 501(c)(3) nonprofit,
  • veterans’ organization, or
  • Tribal business concern

shall be eligible to receive a covered loan if the business concern, nonprofit organization, veterans’ organization or Tribal business concern employs 500 or fewer employees. Additionally, a business that operates in a certain industry and meets the applicable SBA employee-based size standards for that industry is also eligible, even if it employs more than 500 employees. The term “employee” for purposes of determining how many employees a business employs includes individuals employed on a full-time, part-time, or other basis. Additionally, businesses with a North American Industry Classification System (NAICS) code beginning with 72 are eligible to receive a loan if a multi-location business does not employ more than 500 employees per physical location. NAICS code 72 comprises lodging and restaurant businesses.

Note: The interim final rule states, “You are eligible for a PPP loan if you have 500 or fewer employees whose principal place of residence is in the United States.” (page 5) FAQ Number two clarifies that a business can have more than 500 employees if it also meets the definition of a "small business concern."

Observation: There is no additional restriction on agricultural businesses applying for PPP loans. Although agricultural enterprises have been ineligible for SBA 7(b) loans, section 7(a) has no such restriction. Nor does the statute place a revenue limit on these businesses. Businesses do not count workers with a principal place of residence outside of the U.S. Nor do they get to include those employees’ wages in payroll costs (see below). It is currently unclear whether agricultural enterprises are eligible for the expanded EIDL 7(b) loans within the CARES Act. We are awaiting further guidance. It seems to have been the intent of Congress to include them, but 7(b) states that the SBA is authorized to provide disaster loans, except as to "agricultural enterprises." That language was not changed by the CARES Act.

Note: The interim final rule states that if you meet the above criteria you must also have been in operation on February 15, 2020, and either (1) had employees for whom you paid salaries and payroll taxes or (2) paid independent contractors as reported on Form 1099-MISC. These requirements are found in section 7(a)(36)(F)(ii)(II)(BB) in the statute informing lenders of a borrower’s eligibility requirements. (page 6) This certification is also required on applications. (page 17)

Observation: The purpose of the requirement to have paid independent contractors is not clear since the interim rule specifies that borrowers are not allowed to count 1099-MISC payments in their payroll costs because independent contractors are eligible in their own right to apply for the loan. (pages 11, 15)  If businesses are not allowed to consider payments made to independent contractors, why is this an eligibility consideration? Or, conversely, if businesses are eligible if they make payments to independent contractors, why do those payments not count as “payroll costs?” See also the discussion in the next section (“Eligible Self-Employed Individuals”) regarding this section’s application to self-employed individuals and independent contractors in their own right.

Eligible Self-Employed Individuals

During the covered period, individuals who operate under a sole proprietorship or as an independent contractor, and “eligible self-employed individuals” shall also be eligible to receive a covered loan. The term “eligible self-employed individuals” is defined as it is in the Families First Coronavirus Response Act. It includes any individual who:

  • Regularly carries on any trade or business within the meaning of IRC § 1402 and
  • Would be entitled to receive paid leave during the taxable year pursuant to the Emergency Paid Sick Leave Act (created by the Families First Coronavirus Response Act) if the individual were an employee of an employer other than himself or herself.

An eligible self-employed individual, independent contractor, or sole proprietorship seeking a covered loan must submit documents to establish the individual as eligible, including payroll tax filings, Forms 1099-MISC, and income expenses from the sole proprietorship, as determined by the SBA.

Note: In discussing the eligibility for individuals operating as a sole proprietor, independent contractor, or eligible self-employed individual, the interim final rule does not reference the requirement that you must have (1) had employees for whom you paid salaries or (2) paid independent contractors. In this section, the rule states only that you must have been in operation on February 15, 2020, and that you must submit documentation necessary to establish eligibility such as payroll processor records, payroll tax filings, or Form 1099-MISC, or income and expenses from a sole proprietorship. If these borrowers do not have the required documentation, the rule states that the borrower must provide other supporting documentation, such as bank records, sufficient to demonstrate the qualifying payroll amount (page 6).

Observation: The statute and the rules lack clarity with respect to the eligibility requirements for partners, owners of LLCs taxed as partnerships, sole proprietors, and self-employed individuals who do not have true “employees” or do not engage independent contractors. It seems clear that such businesses qualify and can include their own self-employment earnings as “payroll costs” if they either (1) had employees for whom they paid salaries and payroll taxes or (2) paid independent contractors, as reported on a Form 1099-MISC (the current application requires such an affirmation, as directed on page 17 of the interim rule). It is unclear, however, how the law applies to those who cannot make this affirmation. It appears that the interim rule may not be imposing this eligibility requirement on the self-employed. (See page 6)

Many lawmakers have also spoken of the PPP program helping gig economy workers and self-employed workers like hair salon owners with no employees. It remains unclear, however, how this interpretation aligns with the statutory language and the current loan application. It would not seem to be Congress’ intent that an owner of an S Corporation could qualify, but a partner would not, in an otherwise identical business environment. Nor would it seem logical that a self-employed person who sent a 1099-MISC to an attorney would qualify, but another self-employed person who sent no 1099-MISC would not. It is also unclear the distinction among these categories and “sole proprietors” who were eligible to apply April 3. We must await further guidance; no doubt being created in anticipation of the April 10 application start date for the self-employed and independent contractors. Perhaps the guidance will consider these individuals “employees” for purposes of meeting the section 7(a)(36)(F)(ii)(II)(BB) eligibility requirement.


SBA rules applicable to affiliations generally continue to apply, except that these rules are waived with respect to eligibility for a covered loan for:

  • Accommodation and food service industry business concerns with not more than 500 employees on the date the covered loan is disbursed
  • Any business concern operated as a franchise that is assigned a franchise identifier code by the SBA
  • Any business concern receiving financial assistance from a company licensed under section 301 of the Small Business Investment Act

Note: The interim final rule states that the SBA intends to promptly issue additional guidelines with regard to the applicability of existing affiliation rules. (page 7) These rules were published on April 3.

Who is Ineligible?

The interim final rule states that potential borrowers are ineligible for PPP loans if, for example:

  • They are engaged in any activity that is illegal under federal, state, or local law;
  • They are a household employer (individuals who employ household employees such as nannies or housekeepers) (this restriction is in place because this is not a “business”);
  • They are an owner of 20 percent or more of the equity of the applicant is incarcerated, on probation, on parole; presently subject to indictment, criminal information, arraignment, or other means by which formal criminal charges are brought in any jurisdiction; or has been convicted of a felony within the last five years; or
  • They, or any business owned or controlled by them 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. (page 7)