CARES Act Paycheck Protection Program: Update and Frequently-Asked Questions

April 3, 2020

On April 2nd, the Small Business Administration (“SBA”) released its Interim Final Rule implementing certain aspects of the Paycheck Protection Program (the “Program” or “PPP”), part of the $2 trillion CARES Act passed in response to the Covid-19 crisis. We provided an overview of the CARES Act in a previous Client Alert. The Interim Final Rule follows the US Department of Treasury’s informal guidance about the Program on March 31st.

Below, we provide answers to Frequently Asked Questions about the Paycheck Protection Program. Clients who are interested in applying for the Program should review and stay up to date with information about it on the Treasury’s website.

Q:  What is the Paycheck Protection Program?
A:  The Paycheck Protection Program is a lending program created by the CARES Act and administered by the Small Business Administration (“SBA”). It is intended to enable small businesses to retain their workforce and to obtain fast relief from payroll costs and other business costs. The Act has authorized $349 billion for this program, together with continuing commitments for Section 7(a) SBA business loans currently in place.

Q:  When can we apply?
A:  Starting April 3, 2020, small businesses and sole proprietorship individuals can apply. Independent contractors and self-employed individuals may apply starting April 10, 2020. Eligible borrowers should apply as quickly as possible. Demand will be intense, and the Interim Final Rule states that the Program is “first-come-first served.”

Q:  How long will the Program last?
A:  Eligible borrowers may obtain loans under the Program from the starting date through June 30th, 2020 (again, on a first-come first served basis).

Q:  Can we apply for more than one PPP loan?
A:  No.

Uses of Loans
Q:  What can we use the loan for?
A:  You can use a PPP loan for:

  • Payroll costs;
  • Costs related to continuation of group health care benefits during periods of paid sick, medical, or family leave, and insurance premiums;
  • Employee salaries, commissions, or similar compensation;
  • Mortgage interest payments;
  • Rent;
  • Utilities;
  • Interest on any other debt obligations that were incurred before February 15th, 2020; and/or
  • Refinancing an Economic Injury Disaster Loan (“EIDL”) made between January 31, 2020 and April 3, 2020.

However, at least 75% of the PPP loan proceeds must be used for payroll costs. The amount of any EIDL that is refinanced will be included in this percentage calculation.

Q:  If we already applied for an EIDL through the SBA previously, do we need to file another application for the PPP loan?
A:  Yes, the two loan programs are separate, and you cannot use your PPP loan for the same purpose as your EIDL loan, or any other SBA loan. This means that 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 and from the amount refinanced (because repayment is not required).

Q:  Who is eligible to participate in the Program?
A:  Businesses, nonprofit organizations, veterans’ organizations, and Tribal businesses with 500 employees or less. Certain self-employed individuals are also eligible.

Q:  Are there any exceptions to the 500 employee or less requirement?
A:  Yes, if your business is in the accommodation or food services industry (with a NAICS code beginning with 72), the 500-employee limit is applied on a per location basis.

Businesses in industries that typically have more than 500 employees may meet the applicable SBA employee-based size standard for their industry, as provided here, allowing them to qualify for a PPP loan, even if they have more than 500 employees.

Interested applicants who exceed the 500-employee limit are encouraged to review the NAICS code applicable to their business and their applicable SBA size standard to see if they may still qualify.

Q:  We have fewer than 500 employees, but we own or control another business, so that the two businesses combined have more than 500 employees. Can I still be eligible for a loan?
A:  Generally, no, because of the SBA affiliation rules. Companies that own or are owned by another company, or are under common control by a third party may have all of their employees counted for purposes of the 500 employee limit. However, the affiliation rules are waived for the following applicants:

  • Businesses operating in the accommodation and food services sector;
  • Businesses operating as a franchise that is assigned a franchise identifier code by the SBA as found ; and
  • Businesses that receive financial assistance from a Small Business Investment Company.

Q:  We are a venture-backed startup with fewer than 500 employees. Are we eligible for a loan under the Program?
A:  Startups are not excluded from the Program. However, startups that are owned or controlled by venture capital investors may not be eligible to participate because the total number of employees of the venture capital fund and its other portfolio companies could count towards the 500 employee threshold under the SBA affiliation rules. The Interim Final Rule states that the SBA will provide further guidance on the affiliation rules, and recent news reports suggest that the affiliation rules for start-ups may be waived, but until then, each venture-backed startup should carefully analyze its structure and the SBA affiliation rules before applying. The National Venture Capital Association (NVCA) has also released its own guidance on this issue.
Q:  We have more than 500 employees, but fewer than 500 full-time employees. Are we still eligible for a loan?

A:  No. The 500-employee threshold includes all employees, no matter if they are employed on a full-time, part-time, or other status.

Q:  Does the Program apply to individuals who are self-employed, operating a sole proprietorship or as independent contractors?
A:  Yes, individuals who operate under a sole proprietorship or as an independent contractor and eligible self-employed individuals are eligible to receive a loan under this Program.

Maximum Loan Amount
Q:  What is the maximum loan amount we can get under this Program?
A:  The maximum loan amount during the covered period is 250% of the average total monthly payments for “payroll costs” incurred in the 1-year period before the date of the loan, plus the outstanding amount (if any) of an EIDL loan to be refinanced as a PPP loan made on or after January 31, 2020, less the amount of any loan advance (because repayment is not required). The maximum loan amount is capped at $10 million.

Q:  What is included in “payroll costs”?
A:  Please see the full definition of “payroll costs” in our previous Alert. Please bear in mind that “payroll costs” excludes federal employment taxes imposed or withheld, including the employee’s and employer’s share of FICA and Railroad Retirement Act taxes, and income taxes required to be withheld from employees. You should also exclude any prorated portion of an employee’s annual salary that is over $100,000 when computing the maximum loan amount. The Interim Final Rule includes examples on how to calculate the maximum loan amount (see pages 8-9).

Q:  We use several independent contractors. Does “payroll costs” include payments to independent contractors?
A:  No, the Interim Final Rule clarifies that independent contractors do not count as employees for purposes of the PPP loan calculations because they may apply for PPP loans of their own.

Q:  We have a foreign subsidiary with employees working overseas. Can we include their salaries and wages as part of “payroll costs”?
A:  No, “payroll costs” exclude any compensation of employees whose principal place of residence is outside of the United States. Note the same rule would apply to businesses with employees that permanently work remotely overseas.

How to Apply
Q:  How can we obtain a loan under the Program and where can we apply?
A:  Eligible borrowers can apply through any existing SBA 7(a) lender or other SBA approved lender by submitting the loan application form and supporting documentation (see below). The loan application form needs to be completed, signed and dated by an authorized representative of the business and includes certain certifications that the authorized representative must make about the business and any owners of more than 20%. Borrowers are encouraged to visit here for a list of SBA lenders (or here for Massachusetts-based lenders), check with their bank to see if it is participating in the Program, and search for other banks who are publicizing their participation in the Program.

Q: What documentation do we need to submit when we apply?
A:  You need to submit any document that will demonstrate your eligibility, which may include the following:

  • Any federal payroll tax filings for the prior 1 year period, such as IRS Forms 940, 941 or 944 and your W3 and W2 forms for 2019;
  • All payroll reports for the prior 1 year period, including those for 2020;
  • For any business that uses independent contractors, IRS Forms 1099 for 2019;
  • For any business taxed as a partnership with owners not on the payroll, IRS Schedule K-1s for 2019;
  • For sole proprietorships, IRS Schedule C for 2019;
  • Records of amounts paid for employee health insurance for the prior 1 year period;
  • Records of amounts paid for retirement plan funding for the prior 1 year period; and
  • Any other documentation supporting the number of full-time equivalent employees (“FTEEs”) on payroll, dollar amounts of payroll costs and other proper uses of the loan proceeds to your lender.

Loan Forgiveness
Q:  How does loan forgiveness work under the Program?
A:  You may be eligible for loan forgiveness in the amount of costs you incurred and payments you have made during the 8-week period from the date of your loan on the following costs:

  • Payroll costs
  • Mortgage interest
  • Rent payments; and
  • Utility payments.

Q:  Is there a limit to the amount of loan forgiveness?
A:  The amount of loan forgiveness cannot exceed the principal amount of the PPP loan. Also, at least 75% of the loan forgiveness must be attributable to payroll costs. Any loan advance received under an EIDL loan must also be reduced from the amount of loan forgiveness.

Q:  Can the amount of loan forgiveness that we are eligible for be reduced?
A:  Yes. As more fully described in our prior Client Alert, if the number of FTEEs has been reduced during the 8-week period from the date of your loan, or if you have decreased the total salary or wages of any employee by more than 25% during that period (excluding employees with annual salaries of $100,000 or more), the amount of loan forgiveness may be reduced. For this reason, before deciding whether to lay off or furlough any employees, you should consider the potential impact on the loan forgiveness. However, if you have terminated an employee or reduced his or her salary by more than 25% at any time between February 15, 2020 and April 26, 2020, there will be no reduction in the amount of loan forgiveness, provided that you rehire or reinstate the salaries of all the affected employees to their previous levels by June 30, 2020.

Q:  We have already laid off or furloughed employees. Do we need to rehire all the laid off and furloughed employees before applying for the loan in order to avoid the loan forgiveness reduction?
A:  Not necessarily. If you laid off or furloughed employees between February 15, 2020 and April 26, 2020, you have until June 30th to rehire all the laid off and furloughed employees to avoid the loan forgiveness reduction.

Q:  If we rehire all of the employees and use the PPP loan to pay them for 8 weeks, but then run out of cash to pay them after, can we lay off or furlough them again or does that disqualify us from loan forgiveness?
A:  No, whether there is a loan forgiveness reduction is determined by the number of FTEEs and the pay rates of employees during the 8-week period from the date of your loan. Assuming that you maintained your workforce and pay rates during this 8-week period, any layoffs or furloughs that occur after this period will have no impact on your loan forgiveness.

Q:  How do we apply for loan forgiveness?
A:  You will need to apply for loan forgiveness directly with the lender from whom you obtained the loan under the Program, by submitting an application form (which we anticipate the SBA will be posting online soon) and the following documentation:

  • Documentation verifying the number of FTEEs on payroll and pay rates, including IRS payroll tax filings and state income tax, payroll and unemployment insurance filings
  • Documentation verifying payments on covered mortgage obligations, lease obligations and utilities, including cancelled checks, payment receipts, and transcripts of accounts; and
  • Certification from a representative of your business or organization that is authorized to certify that the documentation provided is true and accurate and that the amount that is being forgiven was used in accordance with the Program.

PPP Loan Terms
Q:  What are the terms of the loans under this Program?
A:  To the extent not forgiven, all loan payments start six months after the date of disbursement of the loan.  The CARES Act authorizes the SBA to defer loan payments for up to one year, but the Interim Final Rule makes clear that the maximum deferral will be limited to six months. The loans will accrue interest starting on the date of disbursement at a fixed rate of 1.0% (this was initially published at a 0.5% rate).  Full repayment is due in 2 years. All loans will have the same terms regardless of the lender or borrower.

While many details of the Paycheck Protection Program are still in flux, clients interested in the Program should talk to their local bank to see if it is participating in the Program, or search online to see if there are SBA 7(a) lenders with nearby branch locations. Clients should review their prior year’s payroll cost records to determine the maximum eligible amount of any loan, and prepare an 8-week budget for payroll costs, mortgage interest, rent and utilities in order to determine the maximum loan forgiveness. Our team of lawyers are here to help with determining the maximum loan amount or maximum loan forgiveness for purposes of your application.

The information provided here does not constitute legal advice and the answers to these questions are not a substitute for reading the specific provisions of the law.

For more information please contact the authors of this Alert:  John Chu (; 617-456-8007); John Bradley (; 617-456-8076); Steve Gans (; 617-456-8014); or Bob Maloney (; 617-456-8008).

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