Paycheck Protection Program (SBA § 7(a) Loans)
The Paycheck Protection Program (PPP) offers loans, which may be fully forgivable, to qualifying small businesses and nonprofit organizations to pay up to 24 weeks of certain qualifying costs. On March 30, 2021, under the PPP Extension Act of 2021, the PPP was extended through June 30, 2021. For the final 30 days of the program (i.e., from June 1 until June 30), the Small Business Administration (SBA) may only process applications submitted prior to June 1, and it may not accept any new loan applications.
Eligibility for PPP loans depends on whether the applicant is applying for a “First Draw” or “Second Draw” PPP loan. First Draw PPP loans, which were established under the CARES Act, are available to tax-exempt, 501(c)(3) nonprofit community action agencies (CAAs) and state associations with fewer than 500 employees that were in operation as of February 15, 2020. Second Draw PPP loans, which were established under the Consolidated Appropriations Act, 2021, are available to CAAs and state associations with no more than 300 employees that can demonstrate a 25% reduction in gross revenue between comparable quarters in 2019 and 2020.
Applicants can apply through participating SBA 7(a) lenders, federally insured depository institutions, credit unions, or Farm Credit System institutions (to find SBA-approved lenders, visit SBA’s online Lender Match tool). The loans are issued on a first-come, first-served basis.
To apply for a First Draw PPP loan, organizations must submit a completed SBA Form 2483 application, along with appropriate payroll documentation (such as payroll processor records, payroll tax filings, or Form 1099-MISC) to a participating SBA lender. The application requires that a representative authorized to act on behalf of the organization (e.g., Executive Director/CEO, board chair, etc.) certify in good faith that, among other things:
- Current economic uncertainty makes the loan request necessary to support the ongoing operations of the organization; and
- The loan funds will be used to retain employees and maintain payroll; or make payments for mortgage interest, rent, utilities, covered operations expenditures, covered property damage costs, covered supplier costs, and covered worker protection expenditures.
To apply for a Second Draw PPP loan, organizations must submit a completed SBA Form 2483-SD application, along with supporting documentation, to a participating SBA lender. The application also requires that a representative authorized to act on behalf of the organization make similar certifications to those required for First Draw PPP loans.
There is no requirement that applicants seek to obtain credit elsewhere before turning to the federal government. There were no fees for applying and no collateral required.
Borrowers that receive First Draw PPP loans with an original principal amount of $2 million or greater must complete Loan Necessity Questionnaires. The questionnaire applicable to nonprofit borrowers, SBA Form 3510, will be distributed to applicable borrowers, and borrowers must complete the forms and provide supporting documentation to lenders within ten business days. Lenders then have five days to upload borrower responses and documents to the SBA’s loan forgiveness platform.
The forms are designed to help SBA loan reviewers evaluate the good-faith certification borrowers made at the time they applied for First Draw PPP loans. A borrower should not assume that the SBA is questioning their certification by sending them a form. SBA has stated that its determination "will be based on the totality of [the borrower’s] circumstances." However, a borrower’s failure to complete the form and provide supporting documentation may result in the SBA’s determination that the borrower was "ineligible for either the PPP loan, the PPP loan amount, or any forgiveness amount claimed." Furthermore, failure to complete the form may result in the SBA seeking repayment of the loan or pursuing "other available remedies."
SBA has clarified that First Draw PPP loans under $2 million automatically qualify for a safe harbor and are presumed to have been made in good faith. In Question #46 of its PPP Frequently Asked Questions, the SBA added that organizations with loans below $2 million are generally less likely to have had access to adequate sources of liquidity in the current economic environment than organizations that obtained larger loans.
The SBA has clarified that because Second Draw PPP loan borrowers must demonstrate that they have had a 25% reduction in gross revenues, all Second Draw PPP loan borrowers will be deemed to have made the required certification concerning the necessity of the loan in good faith. The loan amounts received by borrowers for First and Second Draw PPP loans will not be aggregated.
Organizations can use the proceeds of First and Second Draw PPP loans to cover the following expenses incurred during a period of up to 24 weeks following the date of loan disbursement:
- Payroll costs, including:
- Salaries and wages (capped at $100,000 per year for each employee);
- Employee benefits, including costs for vacation, parental, family, medical, or sick leave, separation or dismissal payments, group health care benefits (including insurance premiums), and retirement benefits; and
- State and local taxes on compensation; and
- Insurance costs for life, disability, vision, or dental insurance.
- Mortgage interest on obligations incurred before February 15, 2020 (excluding mortgage principal and prepayments);
- “Covered operations expenditures,” meaning payment for business software or cloud computing services that facilitate 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;
- “Covered property damage costs,” meaning costs related to property damage and vandalism or looting due to public disturbances that occurred during 2020 that were not covered by insurance or other compensation;
- “Covered supplier costs,” meaning expenditures made for essential goods under contracts or purchase orders that were in effect before the borrower’s covered period or, in the case of perishable goods, before or at any time during the covered period;
- “Covered worker protection expenditures,” meaning operating or capital expenditures to facilitate the adaptation of the borrower’s activities to comply with federal, state or local laws or guidance related to sanitation, social distancing, or any other worker or customer safety requirement related to COVID-19; and
- Refinancing an SBA Economic Injury Disaster Loan (EIDL) made between January 31, 2020 and April 3, 2020.
Borrowers that receive First and Second Draw PPP loans must use all proceeds of their First Draw loan on eligible expenses before disbursement of the Second Draw loan.
EIDL recipients may receive PPP loans, and vice versa, as long as the proceeds of such loans are not used for the same purpose. There is no longer a requirement that proceeds from an EIDL advance be deducted from the loan forgiveness amount on a PPP loan, which means that EIDL advances may be fully forgiven if the PPP loan forgiveness requirements are met.
The SBA will require organizations that use PPP loans for unauthorized purposes to repay the unauthorized amounts. Knowing misuse will subject the organization to additional liability, including charges for fraud.
For First Draw PPP loans, an organization may borrow up to 2.5 times the organization's average monthly payroll costs from the last year, or $10 million. Second Draw PPP loans are capped at $2 million.
First and Second Draw PPP loans will be fully forgiven if at least 60% of the total proceeds are used to cover payroll costs during a period of between 8 and 24 weeks, selected by the borrower, after the loan is disbursed ("the covered period"). Borrowers may also receive partial forgiveness for an amount less than the total amount of their loan, so long as 60% of the forgiveness amount was spent on payroll costs. Even if they used their funds for permissible purposes during the covered period, an entity's forgiveness amount may be reduced if they failed to maintain employee and compensation levels.
To be forgivable, qualifying payroll costs must have been paid within the covered period, which begins on the date the lender disburses the PPP loan and ends on a date selected by the borrower between 8 and 24 weeks thereafter.
Payroll costs are considered paid on the day that paychecks are distributed, or the organization originates an ACH credit transaction. An organization is also eligible for loan forgiveness for payroll costs covering the last pay period of the covered period if they are paid on or before the next regular payroll date. For employees who are not working but are still on payroll, payroll costs are incurred based on the schedule established by the organization (typically, each day that the employee would have performed work).
Hazard pay and bonuses are eligible PPP payroll costs, so long as total compensation for any individual employee does not exceed $100,000 annually, prorated for the covered period. Organizations may also pay furloughed employees even if they do not perform any work during the covered period. With respect to employee benefits, the following benefits are eligible for loan forgiveness: (1) employer contributions for employee health insurance (including life, disability, vision, or dental insurance and premiums); (2) employer contributions to employee retirement plans; and (3) state and local taxes assessed on employee compensation (e.g., state unemployment insurance tax) paid by the employer. Note that other employer expenses for benefits (such as gym memberships and other employee perks) cannot be covered by PPP loan proceeds. Employee contributions (whether pre-tax or after-tax) to health insurance plans and retirement plans also are not eligible.
The following non-payroll expenses incurred during the covered period are eligible for loan forgiveness, so long as they make up no more than 40% of the forgiveness amount:
- mortgage interest (not including any interest prepayment or payment of principal) on an obligation for real or personal property incurred before February 15, 2020;
- rent or lease payments under agreements in force before February 15, 2020;
- utility payments (defined as electricity, gas, water, transportation, telephone, or internet access) for which service began before February 15, 2020. These costs are forgivable if they are either paid during the covered period, or incurred during the covered period and paid on or before the next regular billing date, even if the billing date is after the covered period;
- interest payments on debt obligations incurred before February 15, 2020;
- refinancing an SBA EIDL loan made between January 31, 2020, and April 3, 2020;
- covered operations expenditures (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);
- covered property damage costs (costs related to property damage and vandalism or looting due to public disturbances that occurred during 2020 that was were not covered by insurance or other compensation);
- covered supplier costs (expenditures made for essential goods under contracts or purchase orders that were in effect before the borrower’s covered period or, in the case of perishable goods, before or at any time during the covered period); and
- covered worker protection expenditures (operating or capital expenditures to facilitate the adaptation of the borrower’s activities to comply with federal, state or local laws or guidance related to sanitation, social distancing, or any other worker or customer safety requirement related to COVID-19.
These costs are forgivable if they are either paid during the covered period, or incurred during the covered period and paid on or before the next regular billing date, even if the billing date is after the covered period.
Reductions in Loan Forgiveness
Loan forgiveness will be reduced if a First or Second Draw PPP borrower either: (1) reduces the number of full-time equivalent employees during the covered period as compared to the designated reference period; or (2) reduces the salary of any employee by more than 25% compared to the last calendar quarter. A “full-time equivalent” (FTE) employee means an employee who works 40 hours or more, on average, each week. The organization can select one of the following as the “reference period”: (i) February 15, 2019 through June 30, 2019; or (ii) January 1, 2020 through February 29, 2020.
There are some exemptions to the loan forgiveness reduction rules for First and Second Draw PPP borrowers. These exemptions apply to borrowers that:
- have offered to restore employee hours at the same salary and wages, even if the employees have not accepted;
- terminated an employee for cause or had an employee voluntarily resign or voluntarily request a schedule reduction;
- eliminated reductions by December 31, 2020, or—for a PPP loan made after December 27, 2020, the last day of the loan’s covered period; or
- received a loan of $50,000 or less.
Borrowers are also exempted from the loan forgiveness reduction rules if they are able to document in good faith an inability to return to the same level of business activity as before February 15, 2020, because they had to comply with public health requirements or guidance issued between March 1, 2020 and December 31, 2020 (or, for a PPP loan made on or after December 27, 2020, not later than the last day of the loan’s covered period) relating to COVID-19 (COVID Requirements or Guidance). Specifically, borrowers that can document that they reduced their number of FTE employees due to a reduction in business activity to comply with the COVID Requirements or Guidance are exempt from any reduction in their PPP forgiveness amount. Such documentation must include copies of applicable COVID Requirements or Guidance for each business location and relevant borrower financial records.
Example: A state association of Community Action Agencies receives a PPP loan. Its annual training and technical assistance conference was scheduled to take place during the PPP covered period, but the state association was forced to cancel the conference due to a local government shutdown order covering all non-essential businesses, based in part on COVID-19 guidance issued by the CDC in March 2020. Because the state association’s business activity during the covered period was reduced (as compared to its activity before February 15, 2020) due to compliance with COVID Requirements or Guidance, the state association satisfies the exemption and will not have its forgiveness amount reduced because of a reduction in FTEs during the covered period. The state association must in good faith maintains records regarding the reduction in business activity and the local government’s shutdown orders that reference a COVID Requirement or Guidance as described above.
As mentioned above, a reduction in an employee’s salary or wages in excess of 25 percent will also result in a reduction in the loan forgiveness amount (unless the borrower is exempt). For each new employee in 2020 and each existing employee who was not paid more than the annualized equivalent of $100,000 in any pay period in 2019, an organization must reduce the total forgiveness amount by the total dollar amount of the salary or wage reductions that are in excess of 25 percent of base salary or wages between January 1, 2020 and March 31, 2020 (the reference period), subject to exceptions for organizations who restore reduced wages or salaries (discussed above). This reduction calculation is performed on a per employee basis, not in the aggregate. To ensure that organizations are not doubly penalized, the salary/wage reduction applies only to the portion of the decline in employee salary and wages that is not attributable to the FTE reduction.
Example: A borrower is using a 24-week covered period. This borrower reduced a full-time employee’s weekly salary from $1,000 per week during the reference period to $700 per week during the covered period. The employee continued to work on a full-time basis during the covered period, with an FTE of 1.0. In this case, the first $250 of salary reduction (25% of $1,000) is exempted from loan forgiveness reduction. When applying for loan forgiveness, this borrower would list $1,200 as the salary/hourly wage reduction for that employee (representing the $50 weekly reduction not exempted from loan forgiveness, multiplied by 24 weeks).
If the organization received an EIDL advance prior to a PPP loan, the forgivable portion of its PPP loan will NOT be reduced by the amount of the EIDL advance.
Applying for Loan Forgiveness
After the covered period has ended, a borrower may apply for loan forgiveness from its lender by completing the Loan Forgiveness Application Form 3508, or a lender equivalent. A borrower may use Form 3508S if it received an individual First or Second Draw PPP loan of $150,000 or less. A borrower may use Form 3508EZ if it received a loan of more than $150,000 and can meet one of the following qualifications:
- Borrower did not reduce the annual salary or hourly wages of any employee by more than 25% during the covered period compared to the most recent full quarter before the covered period; AND the borrower did not reduce the number of employees or the average paid hours of employees between January 1, 2020 and the end of the covered period (ignoring reductions: (i) that arose from an inability to rehire individuals who were employees on February 15, 2020 if the borrower was unable to hire similarly qualified employees for unfilled positions on or before December 31, 2020 (or, for a PPP loan made after December 27, 2020, the last day of the covered period); and (ii) in an employee’s hours that the borrower offered to restore and the employee refused).
- Borrower did not reduce annual salary or hourly wages of any employee by more than 25% during the covered period compared to the most recent full quarter before the covered period; AND the borrower was unable to operate during the covered period at the same level of business activity as before February 15, 2020, due to compliance cpwith COVID Requirements or Guidance.
A borrower must submit separate loan forgiveness applications for First and Second Draw PPP Loans.
The 3508 and 3508EZ applications require submitting documents that verify the number of full-time equivalent employees and pay rates, and records of payments on eligible expenses. The organization must also certify that the documents are accurate and that it used the forgiveness amount to retain employees and make eligible payments. The lender may rely on the certifications made and documentation provided by the organization, and does not need to conduct any further verification. The lender has 60 days from the date it receives the completed application to review the application and make a decision about loan forgiveness.
Once the lender determines the organization is eligible for partial or full loan forgiveness, the lender submits its decision to the SBA for payment of the forgivable amount. The SBA may, at this point, review the lender’s decision, including the PPP loan and forgiveness applications in addition to verifying that the organization was eligible for a PPP loan and had an adequate basis to make the economic necessity certification, if applicable. If the SBA determines that the organization is ineligible for the loan amount or loan forgiveness amount claimed by the organization, the lender must deny the loan forgiveness application in whole or in part and may seek repayment of the outstanding PPP loan balance.
An organization must retain PPP documentation in its files for six years after the date the loan is forgiven or repaid in full, and must permit authorized representatives of SBA, including representatives of its Office of Inspector General, to access such files upon request. Borrowers of less than $150,000 must retain records relevant to the loan forgiveness form that prove compliance with the PPP requirements—with respect to employment records, for the 4-year period following submission of the loan forgiveness application, and with respect to other records, for the 3-year period following submission of the loan forgiveness application.
Any amount of First or Second Draw PPP loan that is not forgiven becomes a term loan with an interest rate of 1%. If a PPP loan received an SBA loan number on or after June 5, 2020, the loan has a five-year maturity. If a PPP loan received an SBA loan number before June 5, 2020, the loan has a two-year maturity, unless the borrower and lender mutually agree to extend the term of the loan to five years. The promissory note for the PPP loan should state the term of the loan. Loan payments will be deferred for borrowers who apply for loan forgiveness until SBA remits the borrower's loan forgiveness amount to the lender. LIf a borrower does not apply for loan forgiveness, loan payments will be deferred until 10 months after the last day of the covered period.
For additional information, see the following resources:
- Sections 1102 and 1106 of the CARES Act
- Paycheck Protection Program Flexibility Act of 2020
- Title III, Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act, Consolidated Appropriations Act, 2021
- PPP Extension Act of 2021
- FAQs about the PPP Program (updated regularly)
- SBA PPP Forgiveness Page
***Updated April 23, 2021
This resource is part of the Community Services Block Grant (CSBG) Legal Training and Technical Assistance (T/TA) Center. It was created by Community Action Program Legal Services, Inc. (CAPLAW) in the performance of the U.S. Department of Health and Human Services, Administration for Children and Families, Office of Community Services Cooperative Agreement – Grant Award Number 90ET0467-03. Any opinion, findings, conclusions, or recommendations expressed in these materials are those of the author(s) and do not necessarily reflect the views of the U.S. Department of Health and Human Services, Administration for Children and Families.