The Paycheck Protection Program Under the CARES Act

Scott A. Johnson


6/11/2020 UPDATE:  For how the Paycheck Protection Program Flexibility Act has changed PPP, please see Paycheck Protection Program Flexibility Act of 2020:  Needed Changes for the CARES Act PPP Loans.


5/4/2020 UPDATE: The SBA continues to parcel out guidance on the Paycheck Protection Program, releasing clarification on the CARES Act exemption for re-hires yesterday.  As discussed in the article below, the CARES Act provides an exemption to reduction in the maximum forgivable loan amount for employers that eliminate, by June 30, 2020, reductions in their employee headcounts that occurred between February 15 and April 27, 2020.  The new guidance indicates employers who make a good faith attempt to rehire their employees in writing by June 30 will qualify for the exemption, even if an employee rejects the offer of rehire.  The employee’s rejection of re-employment will need to be documented by the employer.  

   The SBA issued guidance in a FAQ it updated on April 29, 2020, that it will review all loans in excess of $2 million (and “other loans as appropriate”) when the application for forgiveness is submitted.  The review will include a consideration of whether the borrower was eligible for the loan (including review of affiliation and economic need). Additionally, another interim final rule issued April 30, 2020,  places limits in the total amount of loans that related entities can obtain.  The rule provides that no “single corporate group” can obtain more than $20 million in loans.  Businesses will be considered “part of a single corporate group if they are majority owned, directly or indirectly, by a common parent.”  The rule is effective for any loans that have not been disbursed as of April 30.  It also puts the onus on borrowers to notify lenders if they exceed PPP fund limits.   Use of funds received after April 30 in excess of this $20 million limit among a single corporate group, as well as the failure to notify lenders, will be construed as use of funds for unauthorized purposes and will not be forgivable.   

   Additionally the US Justice Department (DOJ) has begun inquiries regarding how the money was lent.  Reportedly it found instances where number of employees or amount of payroll was overstated.  The April 29 SBA guidance includes information pertaining to calculating amount of employees and size of payroll.


4/23/2020 UPDATE: On April 23, 2020, the SBA issued additional guidance on the Paycheck Protection Program, noting that borrowers must make a good faith certification that the loan is necessary to support ongoing operations of the business.  The guidance notes that even though the “other credit elsewhere” test is waived for these loans, it is unlikely that a company with substantial value and access to capital elsewhere can make the required certification in good faith.  Misrepresentations in a Paycheck Protection Program loan applications are a criminal offense.  As a result, this guidance from the SBA provides a safe harbor to borrowers that may have unnecessarily applied for a PPP loan as follows: “Any borrower that applied for a PPP loan prior to the issuance of this guidance and repays the loan in full by May 7, 2020 will be deemed by SBA to have made the required certification in good faith.”


4/3/2020 UPDATE:  On April 2, 2020, the Small Business Administration issued an interim final rule for the Paycheck Protection Program. In contrast to prior guidance concerning interest rates for this loan program, the interim final rule sets the interest rate on these loans at 1%.  The interim final rule also provides certainty that a business cannot include payments it makes to an independent contractor as part of its payroll costs.  Additionally, although the CARES Act provides a laundry list of items the Paycheck Protection loans can be used for, the interim final rule specifies that 75% of the loan must be used for allowable payroll costs and that 75% of the forgivable loan amount must have been used for payroll costs.  Criminal penalties may be imposed if there are false representations made by the borrower, or if loan proceeds are used for unauthorized purposed.   


4/1/2020 UPDATE:  Based on guidance issued by the Department of Treasury on Tuesday, March 31, 2020, repayment of PPP loans will be deferred for six months, interest charged on outstanding principal balance of the loans will be 0.50% and any portion of the loan not forgiven (more on this below) must be repaid within two years. 

   Lenders may begin accepting applications for PPP loans on April 3, from qualifying businesses and sole proprietorships.  Applications from self-employed individuals and independent contractors will begin being accepted on April 10. 


store fronts  On Friday, March 27, 2020, Congress passed the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) providing an historic injection economic stimulus to boost the U.S. economy in response to COVID-19 (a.k.a. coronavirus).  Among other programs providing economic relief to businesses by the CARES Act, is the creation of a forgivable loan program called the Paycheck Protection Program (PPP).  This program was created as an addition to the existing framework for SBA Section 7(a) loans.  

   PPP loans are available to businesses with 500 or fewer full and part-time employees (and possibly more depending on the business sector), similarly sized non-profits, sole proprietors, self-employed individuals and independent contractors, who certify that the loan is necessary to support ongoing business operations in light of the COVID-19 crisis.  Generally, the maximum loan amount available will be equal to two and a half times the amount of average monthly payroll for the borrower over the prior year up to a maximum amount of $10,000,000.  Proceeds from PPP loans can be used to make payment of payroll costs, mortgage interest payments, rent, utilities and interest on other debt obligations. 

   In contrast to the existing SBA 7(a) loan program, PPP loans do not need to be personally guaranteed or secured by collateral and the borrower is not required to demonstrate that it does not have the ability to obtain credit elsewhere.  The entire amount of the PPP loan will be guaranteed by the SBA, whereas other SBA 7(a) loans are only partially guaranteed by the SBA.  Additionally, all, even lenders that were not previously approved SBA-lenders, can become approved to provide PPP loans. 

   Repayment of PPP loans will be deferred for at least six months, but no more than twelve months, and interest charged on outstanding principal balance will be no more than four percent.  

   The most intriguing aspect of the PPP loans is the principal balance of the loan can be forgiven.  For avoidance of doubt, this means the borrower will not be required to repay some or all of the principal loan balance, and the cancellation of this debt will not be construed as taxable income to the borrower.  The amount of the loan that can be forgiven will be equal to costs incurred by the borrower during the eight week period following the date the loan for:

  1. payroll;
  2. mortgage interest;
  3. rent; and
  4. utilities.

This figure will be reduced based on a formula for reductions in employees and reductions in payroll during the eight-week period immediately following the date of the loan.  However, the reductions in the forgiveness will not be applied if reductions in employees and/or payroll from February 15, 2020, through April 26, 2020, are eliminated by June 30, 2020. In order to receive the forgiveness, the borrower is required to submit an application to its lender with evidence to support the amount of forgiveness being requested.

   Of course, there are other programs created by the CARES Act that may provide a benefit to businesses that are in addition to or in lieu of PPP loans.  Please reach out to our business attorneys if you need assistance determining whether your business qualifies for a PPP loan or whether it is a good option for your business.  



At the date of publication the above information was correct.  It is quite possible the information above has changed as COVID-19 is a rapidly evolving situation. 

The article in this publication has been prepared by Eastman & Smith Ltd. for informational purposes only and should not be considered legal advice. This information is not intended to create, and receipt of it does not constitute, an attorney/client relationship.