Treasury Issues New Guidance on Payroll Protection Program

Sarah Longson
Sarah Longson

On April 2, 2020, the Treasury Department released guidelines for the Paycheck Protection Program (“PPP”) small business loans that were made available to businesses with 500 or fewer employees under the CARES Act.  The guidelines, termed “Interim Final Rule,” announced some material departures from the language of the Act itself.  Those departures represent significant changes related to how loan funds may be used, the time to repay the loan, the length of the deferment period, and how loan forgiveness will be determined.  Perhaps most significantly, the Rule  now requires that 75% of the loan  proceeds be used on payroll to be eligible for forgiveness, and the loan   must  be paid back in two years, not the ten years that was originally contemplated.

The Treasury Department has also promised that additional guidance and guidelines will be forthcoming, especially relating to determining the number of employees and the manner in which affiliated companies will be treated.

Many lenders have already announced that they will work only with businesses with whom they have pre-existing lending relationships, and are delaying receipt of applications pending receipt of additional guidance. Because the program is on a “first come, first served” basis, borrowers should apply as soon as possible.  The funds available in the program are expected to be exhausted quickly.

Below is a distillation of the current Interim Rules.


SBA is authorized to guarantee loans under the PPP through June 30, 2020.    The intent of the Act is that SBA provide relief to America’s small businesses expeditiously, by giving all lenders delegated authority and streamlining the requirements of the regular 7(a) loan program.  For example, for loans made under the PPP, SBA will not require the lenders to comply with  CFR 120.150 lending criteria, and SBA will allow lenders to rely on certifications of the borrower in order to determine eligibility of the borrower and documents provided by the borrower to determine qualifying loan amount as well as eligibility for loan forgiveness.

Who is Eligible for a PPP loan?

You are eligible for a PPP loan if you have 500 or fewer employees whose principal place of residence is in the United States, or are a business that operates in a certain industry and meet the applicable SBA employee-based size standards for that industry, and you are:

  • A small business concern as defined in section 3 of the Small Business Act (15 USC 632), and subject to SBA’s affiliation rules under 13 CFR 121.301(f) unless specifically waived in the Act; or
  • A tax-exempt nonprofit organization described in section 501(c)(3) of the Internal Revenue Code (IRC), a tax-exempt veterans organization described in section 501(c)(19) of the IRC, Tribal business concern described in section 31(b)(2)(C) of the Small Business Act, or any other business.

An employer must have been  in operation on February 15, 2020 and either had employees for whom it paid salaries and payroll taxes or paid independent contractors, as reported on a Form 1099-MISC.

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, you were in operation on February 15, 2020.

Employers must also submit documentation to establish eligibility such as payroll records, payroll tax filings, or Form 1099MISC, or income and expenses from a sole proprietorship.  For borrowers that do not have such documentation, the borrower must provide other supporting documentation, such as bank records, sufficient to demonstrate the qualifying payroll amount.

SBA intends to promptly issue additional guidance with regard to the applicability of affiliation rules at 13 CFR §§ 121.103 and 121.301 to PPP loans.

Could I be ineligible even if I meet the eligibility requirements in (a) above?

Businesses that are not eligible for PPP loans are identified in 13 CFR 120.110, except that nonprofit organizations authorized under the Act are eligible.

You are ineligible for a PPP loan if, for example:

  • You are engaged in any activity that is illegal under federal, state, or local law;
  • You are a household employer (individuals who employ household employees such as nannies or housekeepers);
  • An owner of 20 percent or more of the equity of the applicant is incarcerated, on probation, on parole; presently subject to an 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
  • You, or any business owned or controlled by you or any of your owners, 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.

I have determined that I am eligible.  How much can I borrow?

Under the PPP, the maximum loan amount is the lesser of $10 million or an amount that you will calculate using a payroll-based formula,

How do I calculate the maximum amount I can borrow?

Step 1: Aggregate payroll costs (defined below) 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 from Step 2 by 12).

Step 4: Multiply the average monthly payroll costs from Step 3 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 (because it does not have to be repaid).

The examples below illustrate this methodology:

Example 1 – No employees make more than $100,000

Annual payroll: $120,000

Average monthly payroll: $10,000 Multiply by 2.5 = $25,000

Maximum loan amount is $25,000

Example 2 – Some employees make more than $100,000

Annual payroll: $1,500,000

Subtract compensation amounts in excess of an annual salary of

$100,000: $1,200,000

Average monthly qualifying payroll: $100,000

Multiply by 2.5 = $250,000

Maximum loan amount is $250,000

Example 3 – No employees make more than $100,000, outstanding EIDL loan of $10,000.

Annual payroll: $120,000

Average monthly payroll: $10,000

Multiply by 2.5 = $25,000

Add EIDL loan of $10,000 = $35,000

Maximum loan amount is $35,000

Example 4 – Some employees make more than $100,000, outstanding

EIDL loan of $10,000

Annual payroll: $1,500,000

Subtract compensation amounts in excess of an annual salary of

$100,000: $1,200,000

Average monthly qualifying payroll: $100,000

Multiply by 2.5 = $250,000

Add EIDL loan of $10,000 = $260,000

Maximum loan amount is $260,000

What qualifies as “payroll costs?”

Payroll costs consist of compensation to employees (whose principal place of residence is the United States) in the form of salary, wages, commissions, or similar compensation; cash tips or the equivalent (based on employer records of past tips or, in the absence of such records, a reasonable, good-faith employer estimate of such tips); payment for vacation, parental, family, medical, or sick leave; allowance for separation or dismissal; payment for the provision of employee benefits consisting of group health care coverage, including insurance premiums, and retirement; payment of state and local taxes assessed on compensation of employees; and for an independent contractor or sole proprietor, wage, commissions, income, or net earnings from self-employment or similar compensation.

What is excluded from the definition of payroll costs?

The Act expressly excludes the following: (i)Any compensation of an employee whose principal place of residence is outside of the United States; (ii)The compensation of an individual employee in excess of an annual salary of $100,000, prorated as necessary;  (iii) Federal employment taxes imposed or withheld between February 15, 2020 and June 30, 2020, including the employee’s and employer’s share of FICA (Federal Insurance Contributions Act) and Railroad Retirement Act taxes, and income taxes required to be withheld from employees; and (iv.) Qualified sick and family leave wages for which a credit is allowed under sections 7001 and 7003 of the Families First Coronavirus Response Act.

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

No, independent contractors have the ability to apply for a PPP loan on their own so they do not count for purposes of a borrower’s PPP loan calculation.

What is the interest rate on a PPP loan?

The interest rate will be 1%.

What will be the maturity date on a PPP loan?

The maturity is two years.  While the Act provides that a loan will have a maximum maturity of up to ten years from the date the borrower applies for loan forgiveness, the SBA determined that a two year loan term is sufficient in light of the temporary economic dislocations caused by the coronavirus.     

Can I apply for more than one PPP loan?


Can I use e-signatures or e-consents if a borrower has multiple owners?

Yes, e-signature or e-consents can be used regardless of the number of owners.

Is the PPP “first-come, first-served?”


When will I have to begin paying principal and interest on my PPP loan? 

You will not have to make any payments for six months following the date of disbursement of the loan.  However, interest will continue to accrue on PPP loans during this six-month deferment.  The Act authorizes the SBA to defer loan payments for up to one year.  However, the Interim Final Rule provides  that a six-month deferment period is appropriate in light of the modest interest rate (one percent) on PPP loans and the loan forgiveness provisions contained in the Act.

Can my PPP loan be forgiven in whole or in part?

Yes.  The amount of loan forgiveness can be up to the full principal amount of the loan and any accrued interest if the borrower uses all of the loan proceeds for forgiveable purposes,  and employee and compensation levels are maintained.

The actual amount of loan forgiveness will depend, in part, on the total amount of payroll costs, payments of interest on mortgage obligations incurred before February 15, 2020, rent payments on leases dated before February 15, 2020, and utility payments under service agreements dated before February 15, 2020, over the eight-week period following the date of the loanHowever, not more than 25 percent of the loan forgiveness amount may be attributable to nonpayroll costs.  While the Act provides that borrowers are eligible for forgiveness in an amount equal to the sum of payroll costs and any payments of mortgage interest, rent, and utilities, the Interim Final Rule provides  that the non-payroll portion of the forgivable loan amount should be limited to 25%  t0effectuate the core purpose of the statute and ensure finite program resources are devoted primarily to payroll.

What forms do I need and how do I submit an application?

The applicant must submit SBA Form 2483 (Paycheck Protection Program Application Form) and payroll documentation, as described above.  The lender must submit SBA Form 2484 (Paycheck Protection Program Lender’s Application for 7(a) Loan Guaranty) electronically in accordance with program requirements and maintain the forms and supporting documentation in its files.

How can PPP loans be used?

The proceeds of a PPP loan are to be used for: (i)  payroll costs (as defined in the Act.);  (ii) costs related to the continuation of group health care benefits during periods of paid sick, medical, or family leave, and insurance premiums;   (iii) mortgage interest payments (but not mortgage prepayments or principal payments); (iv) rent payments;  (v) utility payments;  (vi) interest payments on any other debt obligations that were incurred before February 15, 2020; and/or (vii)  refinancing an SBA EIDL loan made between January 31, 2020 and April 3, 2020.  If you received an SBA EIDL loan from January 31, 2020

through April 3, 2020, you can apply for a PPP loan.  If your EIDL loan was not used for payroll costs, it does not affect your eligibility for a PPP loan.  If your EIDL loan was used for payroll costs, your PPP loan must be used to refinance your EIDL loan.  Proceeds from any advance up to $10,000 on the EIDL loan will be deducted from the loan forgiveness amount on the PPP loan.

However, at least 75 percent of the PPP loan proceeds must be used for payroll costs.  For purposes of determining the percentage of use of proceeds for payroll costs, the amount of any EIDL 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.   

What happens if PPP loan funds are misused?

If you use PPP funds for unauthorized purposes, 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.

What certifications need to be made?

On the Paycheck Protection Program application, an authorized representative of the applicant must certify in good faith to all of the below:[1]

  • The applicant was in operation on February 15, 2020 and had employees for whom it paid salaries and payroll taxes or paid independent contractors, as reported on a Form 1099-MISC;
  • Current economic uncertainty makes this loan request necessary to support the ongoing operations of the applicant;
  • The funds will be used to retain workers and maintain payroll or make mortgage interest payments, lease payments, and utility payments; not more than 25 percent of loan proceeds may be used for non-payroll costs;
  • Documentation verifying the number of full-time equivalent employees on payroll as well as the dollar amounts of payroll costs, covered mortgage interest payments, covered rent payments, and covered utilities for the eight week period following this loan will be provided to the lender;
  • During the period beginning on February 15, 2020 and ending on December 31, 2020, the applicant has not and will not receive another loan under this program.

[1] A representative of the applicant can certify for the business as a whole if the representative is legally authorized to do so.

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