Paycheck Protection Program: Back to Basics

July 22, 2020

Earlier this month, the President signed legislation that extends the Paycheck Protection Program (“PPP”) loan application deadline to August 8th. As of July 17th, approximately $131 billion in PPP funds remains available, out of the $660 billion allocated. The Small Business Administration has resumed accepting PPP applications.

This Client Alert is intended to provide a summary of this important program as it now stands, after the numerous changes, regulatory clarifications, and other developments we have outlined in our previous Alerts.

The PPP is a loan program created on March 27, 2020 as part of the CARES Act that is intended to provide small businesses with cash-flow assistance to maintain their workforce during COVID-19. Subject to certain exceptions, the program is available to businesses that are financially impacted by COVID-19 and have up to 500 employees. One of the most attractive aspects of a PPP loan is that up to the full amount of the loan can be forgiven and effectively become a non-taxable grant. The CARES Act, as amended by the Paycheck Protection Program and Health Care Enhancement Act in April, allocated $660 billion in funding for the PPP.

PPP Loan Terms
PPP loans made after June 5th have a maturity of 5 years, while loans issued prior to June 5th have a maturity of 2 years (though borrowers and lenders can mutually agree to extend the term to 5 years). PPP loans have an interest rate of 1% and loan payments are deferred until either the processing of the borrower’s loan forgiveness application, or 10 months after the end of the covered period (to be discussed below). There are no collateral or personal guarantees required for a PPP loan.

Loan Forgiveness Requirements
Borrowers spending the PPP loan on eligible expenses (discussed below) during the covered period may be eligible for up to 100% of forgiveness on their loan. The “covered period” was originally limited to 8 weeks from the date of the disbursement of the loan proceeds. Under the Paycheck Protection Program Flexibility Act (the “Flexibility Act”), signed at the beginning of June, the covered period was extended from 8 weeks to 24 weeks beginning on the date of the disbursement of the loan proceeds for loans issued on or after June 5th; borrowers with loans issued before June 5th were given the option to use either the 8-week or 24-week period as their covered period, so long as the covered period does not extend beyond December 31, 2020.

To receive loan forgiveness, borrowers may spend the PPP loan proceeds on payroll costs, mortgage interest payments, rent and lease payments, and utilities during the covered period, provided that at least 60% of the PPP loan must be spent on payroll costs. If a borrower spent less than 60% on payroll costs, the borrower can still receive partial forgiveness, such that the total loan forgiveness amount will be reduced until payroll costs make up at least 60% of the total amount. To simplify the calculations of what comprises the payroll costs that were paid or incurred during the “covered period,” borrowers can elect to start the covered period on the first payday after the disbursement of the loan proceeds rather than the date of the disbursement of the loan.

Loan Forgiveness Reductions
The purpose of the PPP is to protect the workforce, so the amount of a loan that will be forgiven will be subject to reductions if the borrower furloughs or lays off its employees or reduces their salary or wages by more than 25%. However, if the borrower furloughed or laid off any employees, or decreased its total wage and salaries payable to its workforce between February 15th to April 26th, and reverses those actions before December 31, 2020, the borrower will not have its loan forgiveness reduced.

The Flexibility Act also recognized that that the strict requirement of rehiring or restoring wages may not always be available to borrowers. Accordingly, it offers some methods of keeping the right to full loan forgiveness, even though the borrower may have furloughed, laid off, or reduced hours of its employees:

  1. If the borrower made a good-faith, written offer to rehire an individual who was an employee on February 15th and the borrower was unable to rehire the same individual or similarly qualified employees on or before December 31st;
  2. If the borrower made a good-faith, written offer to restore any reduction in hours of an employee, at the same salary or wages, during the covered period, and the employee rejected the offer;
  3. If the borrower had employees who were fired for cause, voluntarily resigned, or voluntarily requested and received a reduction of their hours; or
  4. If the borrower, in good faith, is able to document that it was unable to return to the same level of business activity as before February 15th, because of compliance with local or state restrictions (including shutdown orders) or the guidance or requirements from HHS, CDC or OSHA.

How to Apply for Forgiveness
Borrowers must apply to the lender for loan forgiveness.  The lender should provide borrowers with the then-current applications for forgiveness. (The Treasury has revised these from time to time as well).   If the borrower satisfies one of the following criteria, it may use the simpler EZ application, which requires less documentation and fewer calculations:

  1. The borrower has or has had employees, did not reduce their salaries or wages during the covered period by more than 25%, AND did not furlough, lay off or reduce hours of its employees during the covered period (ignoring the reductions caused by #1 or #2 discussed above in the previous section); or
  2. The borrower has or has had employees, did not reduce their salaries or wages during the covered period by more than 25%, AND the borrower was unable to return to the same level of business activity during the covered period as before February 15th for reasons described in #4 above; or
  3. The borrower is self-employed and has no employees.

In addition to filling out the loan forgiveness application, borrowers must either submit or maintain a number of other documents. These documentation requirements are listed on the instructions for the full application and the EZ application. Borrowers should review these instructions carefully and ensure compliance with them.

The information provided here does not constitute legal advice and does not substitute for reading the specific provisions of the law. The CARES Act and the requirements pertaining to the PPP program will continue to be updated by the SBA and our team of attorneys will do our best to keep you updated.

Eligible applicants interested in applying for the program should reach out the authors of this Alert: Bob Maloney (; 617-456-8008); John Bradley (; 617-456-8076); and John Chu (; 617-456-8007) or any other attorney in Prince Lobel’s Corporate Practice Group.

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