Last updated August 2, 2021

This document is for informational purposes only, is not intended as legal advice, and does not substitute for consulting with a lawyer about specific facts and circumstances.  This document does not constitute a solicitation, and your use of this document does not create an attorney-client relationship between you and Lowenstein Sandler. In addition, the information in this article may change based on guidance by the SBA or Treasury as well as a change in law.

The Paycheck Protection Program closed on May 28, 2021.  The SBA is no longer accepting new applications from participating lenders.  The following FAQs are for informational purposes only and to assist borrowers who obtained PPP loans with their loan forgiveness applications.

Overview

The Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”) was originally established under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) to provide economic relief to small businesses and nonprofits that were financially impacted by the COVID-19 pandemic. 

On May 28, 2021, the SBA announced that no new PPP applications would be accepted after that date because all PPP funding had been exhausted.

You have until the maturity date of your PPP loan to apply for loan forgiveness.  To avoid having to begin making payments on your PPP loan, you should submit your loan forgiveness application within 10 months of the end of your covered loan period.  Effective August 4, 2021, borrowers whose loans are $150,000 or less and whose lenders have opted in to the SBA’s direct forgiveness program can apply for loan forgiveness directly on the SBA’s PPP loan forgiveness portal.

Below are some frequently asked questions and answers with respect to the PPP that we hope will help you understand the program.  If you need more help, you can try calling the SBA’s PPP customer service line which is available at (877) 552-2692 Monday through Friday from 8 am to 8 pm EST.

Questions & Answers

What is the Paycheck Protection Program?

The PPP is a loan program that allows eligible borrowers to obtain loans on favorable terms to cover payroll and other eligible expenses.  Under the original program, loan proceeds could only be used for payroll costs, rent payments, mortgage interest payments, and utility payments.  Effective December 27, 2020, PPP loans (including existing loans) may be used for additional categories of non-payroll expenses including operating expenses, costs to repair property damage, costs for supplies, and expenses for protecting workers.

This loan program is for the specific purpose of helping eligible borrowers affected by the COVID-19 pandemic to continue paying employees and to keep their doors open for business.  To the extent the PPP loan is promptly used to pay eligible expenses, the loan never has to be repaid (“terms and conditions apply,” naturally).

Who is eligible for a first- or second-draw PPP loan?

In general, you are eligible for a first-draw PPP loan if you employ fewer than 500 employees (full-time and part-time) who live in the United States, AND you were in operation on February 15, 2020. Businesses, nonprofit organizations, self-employed individuals, sole proprietors, and independent contractors may apply.  You must certify on the PPP loan application that “[c]urrent economic uncertainty makes th[e] loan request necessary to support [your] ongoing operations.”

You are eligible for a second-draw PPP loan if you have or will have used your first-draw PPP loan by the time you receive the second-draw PPP loan; you have no more than 300 employees; and you experienced a decline in “gross receipts” of at least 25% in any quarter of 2020 compared to the same quarter of 2019.  (Special rules apply for businesses that did not operate in 2019.)  “Gross receipts” include all revenue in whatever form received or accrued from any source.  The amount of a forgiven PPP loan is excluded.  Specific instructions for calculating gross receipts can be found on page 22 of this SBA Interim Final Rule, and additional SBA guidance on how to calculate revenue reduction is available here.  Ask your financial advisor for help if you are not sure how to calculate your gross receipts reduction.  As with first-draw borrowers, second-draw borrowers must certify that the loan is necessary to support ongoing operations.

Is loan forgiveness automatic?

No.  You will need to submit an application for loan forgiveness either to the SBA or directly to the lender that provided your PPP loan.  Effective August 4, 2021, you are eligible to submit your forgiveness application to the SBA using its PPP loan forgiveness portal if:

  • your loan was for $150,000 or less; and
  • your lender opts in to the direct forgiveness program. A full list of participating lenders is here.

Borrowers of loans up to $150,000 will submit a streamlined 1-page PPP loan forgiveness application, known as the PPP Loan Forgiveness Form 3508S (either on the SBA forgiveness portal or with their lender).  As required by the Economic Aid Act, the form only requires you to describe the number of employees you were able to keep on payroll as a result of the loan, estimated total payroll costs, the total amount of your PPP loan, and the requested forgiveness amount.  You must also attest that you accurately completed the forgiveness application and complied with the PPP loan requirements. 

Borrowers of loans exceeding $150,000 will submit either the PPP Loan Forgiveness Form 3508 (long form) or the Form 3508EZ.  The “EZ” loan forgiveness application may be submitted by borrowers who can satisfy any of the following requirements:

  • the borrower did not reduce salary or wages for any employee by more than 25% during the covered loan period as compared to the most recent quarter before the covered loan period, and did not reduce the number or hours of employees between January 1, 2020, and the end of the covered loan period (ignoring reductions related to employees who refused offers of rehire and whose positions could not be filled with similarly qualified workers).
  • the borrower did not reduce salary or wages for any employee by more than 25% during the covered loan period as compared to the most recent full quarter before the covered loan period, and was unable to return to the same level of business activity it was operating at before February 15, 2020, due to compliance with official requirements related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID-19.

Do independent contractors count as employees for purposes of PPP calculations?

No.  Independent contractors can apply for a PPP loan on their own; the entities that engage them cannot count them for purposes of a PPP loan application.

I don’t have employees.  Can I still qualify?

Yes.  The rules issued under the CARES Act state: “You are also eligible for a PPP loan if you are an individual who operates under a sole proprietorship or as an independent contractor or eligible self-employed individual . . . .”  In that case, you must submit documents such as payroll processor records, payroll tax filings, Forms 1099-MISC, income and expenses from a sole proprietorship, or other documents sufficient to demonstrate the qualifying loan amount.

Can I apply for a PPP loan if I am receiving unemployment assistance?

Yes, but proceed with caution. There is no restriction on receiving both benefits, but as a general rule you should not use your PPP loan to cover your own compensation while at the same time receiving unemployment benefits.  If you are receiving unemployment benefits, you can use your PPP loan for other business expenses, such as other employees’ compensation, rent, mortgage interest, utilities, operating costs, property damage costs, and supplier costs.  But remember, at least 60% of the forgiven loan amount must be used for payroll costs; if you use all or most of your loan for non-payroll expenses, the forgivable amount may be low.

How do I apply for a PPP loan?

Prior to the close of the program, sole proprietors, independent contractors, and other self-employed individuals who file an IRS Form 1040, Schedule C applied using these first-draw and second-draw PPP loan application forms. All other borrowers used these first-draw and second-draw PPP loan application forms.   Lenders were permitted to modify the forms.

When can I apply?

 The PPP application period is now closed.  The SBA is no longer accepting new PPP applications.

Where can I apply?

Prior to May 6, 2021, borrowers could apply for a PPP loan through any participating lender.  From May 6 to May 28, borrowers could only apply for a PPP loan through participating community financial institutions. As of May 28, 2021, no lenders are accepting PPP loan applications.

What is the maximum amount I can borrow?

It’s a formula amount: for businesses other than NAICS sector 72 entities (e.g., restaurants and hotels) it is 2.5 times your average monthly payroll expenses for any of the following time periods: (1) the 12 months before you apply for the loan, (2) calendar year 2019, or (3) calendar year 2020.  Choose the time period that reflects the largest payroll costs if you want to maximize your loan amount.  Under PPP Round 2, restaurants and hotels are allowed to borrow 3.5 times their average monthly payroll expenses.

If you are a seasonal business, under PPP Round 2 you can borrow 2.5 times your average total payments for payroll costs incurred or paid in any 12-week period between February 15, 2019 and February 15, 2020.

If you are a startup business that did not exist during the one-year period before February 15, 2020, your second-draw PPP loan is 2.5 times your average total monthly payroll costs paid or incurred as of the date you apply for the PPP loan.

Salary and wages above $100,000 per employee are excluded from the calculation of average monthly payroll, but all benefits the business pays on behalf of such employees (e.g., health insurance, retirement benefits, group life insurance, and disability, vision, and dental insurance benefits) are counted in the payroll calculation. 

If you are a sole proprietor, independent contractor, or self-employed individual who files an IRS Form 1040, Schedule C, you can borrow 2.5 times your average monthly gross income (line 7) or net profits (line 31), as reported on your 2019 or 2020 tax return.  Using your gross income will likely increase your maximum loan amount.

There’s an absolute cap of $10 million on every first-draw PPP loan.  Second-draw PPP loans are capped at $2 million.

The Treasury Department has released detailed guidance to help different categories of borrowers calculate their maximum loan amount.  See Paycheck Protection Program: How to Calculate Maximum Loan Amounts for First Draw PPP Loans and What Documentation to Provide – By Business Type and Second Draw Paycheck Protection Program Loans:   How to Calculate Maximum Loan Amounts Including What Documentation to Provide, for complete instructions.

What information should I gather in order to apply for a PPP loan?

You should have evidence of paying payroll or self-employment taxes.  Your lender may require any or all of the following information for the relevant period; check before applying:

  • organizational documents for your business;
  • 2019 and 2020 profit and loss statements to show revenue loss during 2020;
  • 2019 and 2020 business tax returns:
  • 2019 and 2020 IRS quarterly 940, 941, or 944 payroll tax reports;
  • documentation for the following:
    • gross wages for each employee
    • paid time off for each employee
    • vacation pay for each employee
    • family medical leave pay for each employee
    • state and local taxes assessed on the employee’s compensation for each employee
    • documentation to support the total health, dental, vision, life and disability insurance expenses and retirement expenses incurred as a part of payroll expenses

What can I use the loan proceeds for?

Permissible uses for existing and new PPP loans include:

  • payroll costs (including employer expenses related to providing health, dental, vision, disability and life insurance benefits and retirement benefits);
  • costs related to the continuation of group health care benefits during periods of paid sick, medical, or family leave, and insurance premiums;
  • payments of interest on any mortgage obligation (but not to pay principal or prepay a mortgage);
  • rent (including rent under a lease agreement);
  • utilities (including electricity, water, gas, sewage, telephone, cell phone, Internet, and transportation costs);
  • interest on any other debt obligations that were incurred before the covered period (though such expense is not eligible for PPP loan forgiveness);
  • operating expenses, including payments for any business software or cloud computing service that facilitates business operations; product or service delivery; the processing, payment, or tracking of payroll expenses; human resources; sales and billing functions; or accounting or tracking of supplies, inventory, records and expenses;
  • costs related to property damage and vandalism or looting resulting from public disturbances that occurred in 2020 and that were not covered by insurance or other compensation;
  • worker protection expenses including any operating or capital expenditures to adapt business activities to comply with government-issued COVID-19 safety guidelines (g., air pressure ventilation or filtration systems, physical barriers to ensure social distancing, a drive-through window, an expansion of indoor or outdoor business space, onsite or offsite health-screening, or the purchase of personal protective equipment); and
  • the costs of supplies that are essential to your operations at the time of purchase, made pursuant to a contract in effect prior to your covered loan period, or with respect to perishable goods, in effect before or at any time during your covered loan period.

When will I have to repay the loan?

You will not have to start making payments on the loan until after you submit your forgiveness application and the SBA pays the forgiveness amount to the lender.  You have until the maturity date of your PPP loan to apply for loan forgiveness.  However, if you do not apply for loan forgiveness within 10 months after the last day of your loan’s covered period, then loan payments are no longer deferred and you must begin making payments on the loan.   

For PPP loans made before June 5, 2020, the full amount will be due within 2 years of when you received the money.  If you received your PPP loan on or after June 5, you will have 5 years to repay the loan.  Pre-June 5th loans can be extended up to 5 years if the lender and borrower mutually agree.  If you want to pay earlier, there are no penalties for pre-payment.

Are there any other PPP loan terms I should know about?

  • Interest rate will be 1%.
  • No collateral will be required.
  • No personal guarantees will be required.

Will all or a portion of my PPP loan be forgiven?

The loan amounts will be forgiven so long as:

  • the loan is used to cover payroll costs and other eligible expenses over the 8- to 24-week period after the loan is made; and
  • for loans greater than $50,000, employee and compensation levels are maintained.
  • Note: An October 2020 SBA Interim Final Rule exempts PPP loans of $50,000 or less from loan forgiveness reductions based on workforce and wage reductions.

PPP borrowers are eligible for full loan forgiveness so long as they use at least 60% of loan proceeds for payroll expenses, with no more than 40% of loan proceeds going to eligible non-payroll expenses.

Reductions to Forgiveness:  For loans greater than $50,000, forgiveness is reduced based on workforce reductions and wage reductions.  Both are hard to work through and may require the assistance of legal counsel.

For borrowers of loans over $50,000, some reductions in workforce will not count against you for the purpose of loan forgiveness.  Loan forgiveness will not be impacted if:

  • you laid off workers between February 15, 2020 and April 26, 2020 and then rehired them by December 31, 2020 (for loans made before the enactment of the Economic Aid Act on December 27, 2020) or by the last day of your covered loan period (for loans made on or after December 27, 2020).
  • you fire an employee for cause; an employee voluntarily resigns; or an employee voluntarily requests and receives a reduction in hours.
  • you have laid off employees, and then:
    • made a good faith, written offer to rehire,
    • documented the employee’s rejection of that offer,
    • informed the state unemployment insurance office within 30 days of the employee’s rejection of the offer (employees who reject offers of reemployment may forfeit eligibility for continued unemployment compensation), and
    • documented your inability to hire similarly qualified employees for unfilled positions on or before December 31, 2020 (for loans made before the enactment of the Economic Aid Act on December 27, 2020) or by the last day of your covered loan period (for loans made on or after December 27, 2020).
  • you can document in good faith that your business is unable to return to the same level of activity it was operating at before February 15, 2020, due to compliance with operating restrictions related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID-19.

Is my PPP loan forgiveness amount reduced by the EIDL advance I received?

No.  The Economic Aid Act amended the CARES Act to remove the requirement that borrowers subtract the amount of any EIDL advance (i.e., the $1,000 to $10,000 EIDL grant received from the SBA) from the PPP loan forgiveness to which the borrower is otherwise entitled.  You are eligible for full forgiveness of your PPP loan even if you also received an EIDL advance.  This rule applies to both prior and new PPP loans.  The SBA will issue rules to extend this benefit to borrowers whose loans have already been forgiven and whose EIDL advance was deducted from the forgiven amount.

Is the amount forgiven taxable?

Maybe.  The amount of any loan forgiveness will not be considered gross income under the federal Internal Revenue Code, although state and local tax authorities may or may not tax the forgiven amount.

May I claim tax deductions for expenses paid with my PPP loan?

Yes.  The Economic Aid Act clarifies that otherwise deductible business expenses paid for with PPP loan proceeds are eligible for federal tax deduction.  This rule applies even if business expenses are paid for with the proceeds of a PPP loan that is fully forgiven.  State and local authorities may take a different approach, so double check state and local requirements when you are preparing your business tax filings.

What happens if PPP loan funds are misused?

If you use PPP funds for unauthorized purposes, the SBA will direct you to repay those amounts.  If you knowingly use the funds for unauthorized purposes, you will be subject to additional liability such as charges for fraud.  If one of your shareholders, members, or partners uses PPP funds for unauthorized purposes, SBA will have recourse against the shareholder, member, or partner for the unauthorized use.

Can I apply for more than one PPP loan?

Yes.  Businesses with up to 300 employees that have used their first-draw PPP loan and have experienced a drop in gross receipts of at least 25% during any quarter of 2020, as compared to the same quarter of 2019, may apply for a second-draw PPP loan. 

Will the details of my PPP loan be made public?

Yes.  Loan data is available on the SBA website. 

What other relief may I be eligible for?

In addition to a first- or second-draw PPP loan, you may be eligible for other types of relief.  Below is a non-exhaustive list of options to explore:

  • Restaurant Revitalization Fund: The American Rescue Plan Act made an additional $28.6 billion in grants available to restaurants, bars, food trucks, and similar places of business. The amount of the grant received through this fund is based on the eligible entity’s “pandemic-related revenue loss,” which is defined generally as the entity’s gross receipts during 2020 subtracted from the gross receipts in 2019, if such sum is greater than zero. Note that the grant amount will be reduced by the amount of any PPP funds an entity has received. To learn more, see the National Restaurant Association’s Policy Brief.
  • Targeted EIDL Advance: The Economic Aid Act approved an additional $20 billion for emergency EIDL advances (e., grants) of up to $10,000 through December 31, 2021.  You may be eligible to receive funds up to $10,000 if you are located in a low-income community, previously received an EIDL Advance for less than $10,000, or previously applied but received no funds due to lack of available program funding. To be eligible for the Targeted EIDL Advance you must have suffered greater than a 30% economic loss in 2020 as compared to 2019, and have no more than 300 employees.   To learn more, visit the SBA Targeted EIDL Advance portal.
  • Shuttered Venue Operators Grant Program: The Economic Aid Act also approved grant funding to qualifying live venue operators and promoters, theatrical producers, live performing arts organizational operators, museum operators, motion picture theater operators, and talent representatives.  Eligible venue operators must document a drop in gross receipts of at least 25% in any quarter of 2020, as compared to 2019.  Grants are calculated as 45% of the venue operator’s gross earned revenue in 2019, capped at $10 million. Grants can be used for any PPP-eligible expenses.  A nonprofit that received a PPP loan may apply for and receive a Shuttered Venue Operators Grant. However, the grant amount will be reduced by the amount of any PPP loan that the nonprofit received on or after December 27, 2020. A nonprofit may not apply for or receive a PPP loan after it receives a Shuttered Venue Operators Grant. For more information about the Shuttered Venue Operators Grant Program, see the SBA’s FAQs here and video tutorials about the program here. The SBA began accepting applications for the Shuttered Venue Operators Grant Program on April 8, 2021. Eligible entities can apply via the SBA’s SVOG application portal. 
  • State and Local Relief: Certain states and cities have enacted relief programs for small businesses and nonprofits.  The NJ COVID-19 Business Emergency Assistance Eligibility Wizard is a helpful resource for companies and nonprofits in New Jersey.  The New York City Department of Small Business Services offers weekly webinars on financial assistance for organizations financially impacted by COVID-19 that may be helpful for companies and nonprofits in the New York City area.
  • Private Sector Grants and Loans: A number of websites aggregate private sector grant and loan opportunities.  This searchable list of private-sector grant and loan opportunities developed by Start Small Think Big covers various geographical locations and industries.
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