CARES Act: Paycheck Protection Program Provides Small Business Loans to Support Employees

March 27, 2020 (Updated August 27, 2020)

The CARES Act’s Paycheck Protection Program provides loans targeted to small businesses to help keep their workers employed during the coronavirus (COVID-19) pandemic, and offers loan forgiveness to borrowers maintaining a high percentage of employees on payroll. This LawFlash provides the latest developments in PPP loan availability, eligibility, and forgiveness, as well as a comprehensive overview of the PPP and related guidance.


I. Latest Update: The most recent programmatic changes and updates from Congress, the Small Business Administration (SBA), and the US Department of the Treasury

II. Forgiveness Application: Process and substance overview

III. SBA Guidance: Key interim final rules and FAQs

IV. Background & Overview: Loan details, borrower eligibility, and forgiveness

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Congress has extended the Paycheck Protection Program (PPP) through August 8, giving borrowers an additional month to submit an application. To address concerns from the small business community regarding certain restrictions contained in the PPP, the Paycheck Protection Program Flexibility Act of 2020 was signed into law on June 5, supplemented by new Interim Final Rules (see Revisions to First Interim Final RuleRevisions to Third and Sixth Interim Final Rules, and Revisions to Loan Forgiveness Interim Final Rule, SBA Loan Review Procedures Interim Final Rule and Treatment of Owners and Forgiveness of Certain Nonpayroll Costs Interim Final Rule) issued by the SBA, which collectively include the following changes to the program:

  • The forgiveness period for loans is now the earlier of (a) 24 weeks after the date the loan was originated and (b) December 31, 2020. For loans made before June 5, the original eight-week forgiveness period may be extended to (a) or (b) above, or the borrower may elect to retain the original eight-week forgiveness period.
    • A borrower may submit a loan forgiveness application any time on or before the maturity date of the loan, including before the end of the forgiveness covered period, if all loan funds have been used. Only FTE and salary reductions made before a borrower applies for forgiveness will impact forgiveness amount.
  • A 60% payroll costs rule replaces the 75% payroll costs rule such that
    • at least 60% of all PPP loan proceeds must be used for payroll costs; and
    • in order to receive full loan forgiveness, a minimum of 60% of a borrower’s forgivable amount must be spent on payroll costs. However, the rule no longer treats the 60% payroll costs rule as a threshold for receiving any forgiveness, and borrowers that spend less than 60% of loan proceeds on payroll costs are still eligible for partial forgiveness.
  • The covered period for a borrower’s good faith attempts to rehire employees is extended from the original February 15–June 30 timeframe to February 15–December 31.
  • PPP loans made before June 5 have a maturity of two years; however, borrowers and lenders may mutually agree to extend the maturity of such loans to five years. PPP loans made on or after June 5 have a maturity of five years.
  • Borrowers may delay payment of payroll taxes.
  • If a borrower submits to its lender a loan forgiveness application within 10 months after the end of its loan forgiveness covered period, its payments will be deferred until the date on which SBA remits the loan forgiveness amount to the lender.
  • PPP loan funds may only be used for (1) payroll costs; (2) costs related to the continuation of group healthcare benefits during periods of paid sick, medical, or family leave, and insurance premiums; (3) mortgage interest payments (but not mortgage prepayments or principal payments); (4) rent payments (only as attributable to the borrower and not a tenant or sub-tenant of the borrower); (5) utility payments; (6) interest payments on any other debt obligations that were incurred before February 15, 2020; and (7) refinancing an SBA Economic Injury Disaster Loan (EIDL) loan made between January 31–April 3, 2020. Note that this exhaustive list does not include the full slate of uses provided for traditional SBA 7(a) loans.
  • Compensation Caps:
    • Per Employee Cash Compensation Cap: Each employee can receive a maximum of (1) up to $15,385 for eight weeks or (2) up to $46,154 for 24 weeks.
    • Owner Compensation Replacement Cap: Individuals with self-employment income can receive a maximum of (a) eight weeks’ worth of 2019 net profit (up to $15,385) for eight weeks or (b) 2.5 months’ worth of 2019 net profit (up to $20,833) for 24 weeks.
  • A borrower’s forgiveness amount will not be reduced if the borrower is able to document an inability to return to the same level of business activity that existed before February 15, 2020 resulting directly or indirectly from compliance with requirements imposed by the Secretary of Health and Human Services (HHS), the Director of the Centers for Disease Control and Prevention (CDC), or the Occupational Safety and Health Administration (OSHA) during the period March 1–December 31, 2020, related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID–19.
    • The SBA has noted that borrowers can read this exemption broadly. For example, a borrower that is required to close its physical store due to compliance with requirements in the locality that all non-essential business activities cease, based in part on guidance issued by the CDC in March 2020 can take advantage of this exemption.
  • Rent payments to a related party are eligible for loan forgiveness as long as (1) the rent payment amount is no more than the amount of mortgage interest owed on the property during the loan forgiveness covered period and is attributable to the space rented by the business and (2) the lease and the mortgage were entered into prior to February 15, 2020. Any ownership in common between the business and the property owner is a related party for these purposes.
    • While rent or lease payments to a related party may be eligible for forgiveness, mortgage interest payments to a related party are not eligible for forgiveness.
  • Owner-employees with less than a 5% ownership stake in a C- or S Corporation PPP borrower are not subject to the owner-employee compensation rule, which caps the amount of loan forgiveness for payroll compensation attributable to an owner-employee.

The SBA released a new EZ version of the forgiveness application requiring fewer calculations and less documentation for borrowers that meet certain criteria.

Appeals: The SBA created a streamlined process for appealing decisions regarding PPP loans and forgiveness applications. An overview of those procedures can be found in the August 11, 2020 interim final rule.

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The SBA released the revised PPP Loan Forgiveness Application on June 16, which, along with the Interim Final Rule regarding loan forgiveness on May 22, and FAQ on release throughout August 2020, include the following key features:

  • Payroll Cost Calculations (must be at least 60% of amount requested in forgiveness application in order to receive fully forgiveness):
    • The total amount includes “costs incurred or paid” during the Covered Period or the Alternative Payroll Period (as defined below) expanding the number of payroll cycles that may be forgiven. Payroll costs incurred but not paid during the Covered Period will be forgiven if paid on or before the next regular payroll date.
    • Borrowers with a biweekly (or more frequent) payroll schedule may elect to use an Alternative Payroll Period, which will begin on the first day of the first pay period immediately after the disbursement date of the PPP loan (notes below that reference the Covered Period also apply to the Alternative Payroll Period).
    • Payroll compensation for owner-employees and self-employed individuals is capped at the lesser of (1) 8/52 * 2019 compensation or (2) $15,385 per individual.
    • Payroll compensation for owners and self-employed individuals is capped at (a) eight weeks’ worth (8/52) of 2019 net profit (up to $15,385) for eight weeks or (b) 2.5 months’ worth (2.5/12) of 2019 net profit (up to $20,833) for 24 weeks.
  • Non-Payroll Cost Calculations: Non-payroll costs (e.g., mortgage interest, rent, utilities, etc.) must either be (1) paid during the Covered Period or (2) incurred during the Covered Period and paid on the next regular billing date, even if that payment date is after the Covered Period.
  • $2 Million Check-the-Box: Borrowers, including their affiliates, with loans in excess of $2 million will check-the-box, likely leading to prioritized audits. Applicant is certifying that all information in the forgiveness application is true and correct which includes this check box.
  • FTE Calculation: The application does not use SBA’s prior 30-hour full-time metric for calculating full-time employees (FTEs). Rather, it uses, at the election of the applicant, either (1) a 40-hour FTE or (2) treatment of every employee working fewer than 40 hours as a .5 FTE.
  • Allowable FTE Reductions: The application clarifies that there are four types of FTE reductions that will not result in reductions in forgiveness:
  1. FTE reductions made between February 15–April 26, 2020, which were restored no later than December 31.
  2. Any FTE reductions where the borrower in good faith is able to document one of the following:
    • An inability (a) to rehire individuals who were employees of the eligible recipient on February 15, 2020 and (b) to hire similarly qualified employees for unfilled positions on or before December 31, 2020. (Note: Borrowers are required to inform the applicable state unemployment insurance office of any employee’s rejected rehire offer within 30 days of the employee’s rejection of the offer.)
    • An inability to return to the same level of business activity as such business was operating at before February 15, 2020, due to compliance with requirements established or guidance issued by the HHS, CDC, or OSHA during the period March 1–December 31, 2020 related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID–19.
  3. Any reduction of hours for which (1) the borrower made a good faith, written offer to restore reduced hours; (2) the offer was for the same salary or wages and same number of hours as earned in the last pay period prior to the reduction in hours; (3) the offer was rejected; and (4) the borrower has maintained records documenting the offer and its rejection.
  4. Any employees who during the Covered Period (1) were fired for cause, (2) voluntarily resigned, or (3) voluntarily requested and received a reduction of their hours.
  5. Any FTE reductions subsequently filled by a new employee no later than the next pay period (no gaps).
  • Personal Property Rent and Mortgage Interest: Personal property rent (e.g., business equipment) and personal property “mortgage” loan interest (e.g., secured vehicle fleet loan interest) are forgivable solely to the extent such lease agreement or mortgage obligation was in place prior to February 15, 2020.
  • Economic Impact Disaster Loans: As expected, the application requests information regarding any completed or pending EIDL loan application, and the SBA will reduce the amount forgiven by the amount of any EIDL advance that was received. However, any amount of refinanced EIDL funds will be included for purposes of determining the percentage of use of proceeds for payroll costs (but not for forgiveness purposes).
  • Documentation: The application specifies which supporting documents have to be provided to the lender and which have to be retained by the borrower even if not provided (e.g., records relating to a determination of “necessity”). The record retention period is six years after forgiveness or repayment, and SBA retains audit rights.

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III. SBA Guidance

Since the passage of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, the SBA has released ongoing guidance[1] on the Paycheck Protection Program. Key updates include the following:

  • Certification of Necessity: Pursuant to updated SBA guidance released on April 23, in making the certification that “the uncertainty of current economic conditions makes necessary the loan request to support [a borrower’s] ongoing operations,”[2] borrowers must take into account “their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business.”[3] The guidance further notes that it is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith, and such a company should be prepared to demonstrate to the SBA, upon request, the basis for its certification. On April 28, the SBA indicated that the same guidance regarding access to liquidity applies to private companies. This certification and all other aspects of a PPP application carry significant fraud risk (for more detail, read our LawFlash: CARES Act’s Substantial Relief Funds Create Fraud Risk). On May 14, the SBA extended the safe harbor for any borrower that applied for a PPP loan, prior to April 24, that repays the loan in full by May 18. Additionally, the SBA provided the following guidance[4], adding further substantive elements to the safe harbor[5]:
    • Any borrower that, together with its affiliates, received PPP loans with an original principal amount of less than $2 million will be deemed to have made the required certification concerning the necessity of the loan request in good faith.
    • For borrowers with loans greater than $2 million, if SBA determines in the course of its review that a borrower lacked an adequate basis for the required certification concerning the necessity of the loan request, SBA will seek repayment of the outstanding PPP loan balance and will inform the lender that the borrower is not eligible for loan forgiveness. If the borrower repays the loan after receiving notification from SBA, SBA will not pursue administrative enforcement or referrals to other agencies based on its determination with respect to the certification concerning necessity of the loan request.
  • Counting Employees of Foreign Affiliates & Pre-May 5 Safe Harbor: Pursuant to an Interim Final Rule issued on May 18, a borrower must count and include all employees of its domestic and foreign affiliates in determining eligibility for the PPP, except in those limited circumstances where the affiliation rules expressly do not apply. Any entity that, together with its domestic and foreign affiliates, does not meet the 500-employee or other applicable PPP size standard is therefore ineligible for a PPP loan. Due to “reasonable borrower confusion based on SBA guidance,” the SBA will not find any borrower that applied for a PPP loan prior to May 5, 2020 to be ineligible based on the borrower’s exclusion of non-US employees from the borrower’s calculation of its employee headcount if the borrower (together with its affiliates) had no more than 500 employees whose principal place of residence is in the United States.
  • Employee Rehires: A borrower’s forgiveness amount will not be reduced if the borrower lays off an employee, offers to rehire the same employee and the employee declines the offer, or if a borrower is able to document an inability to return to the same level of business activity that existed before February 15, 2020 resulting directly or indirectly from compliance with requirements imposed by HHS, CDC, or OSHA.
  • “Corporate Group” Funding Cap: The amount of PPP funds a “corporate group” can receive is capped at $20 million. Businesses are considered part of a corporate group if they are “majority owned, directly or indirectly, by a common parent.”
  • 60% Payroll Costs Rule: 60% of all loan proceeds must be used toward payroll costs. To receive full loan forgiveness, 60% of loan proceeds must be used toward payroll costs during the forgivable period; however, partial forgiveness will be offered to borrowers. 
  • Partnerships
    • Partnerships (and LLCs filing taxes as partnerships) are eligible for PPP loans to cover costs, including compensation for partners; however, only one application should be submitted per partnership (which should cover the costs of the partnership and the partners).
    • Self-employment income of a general active partner (Schedule K-1 income) may be reported as a payroll cost up to $100,000.
    • A partner in a partnership may not submit a separate PPP loan application for himself/herself as a self-employed individual. 
  • Hedge Funds and Private Equity Firms: Both are ineligible to receive PPP loans.
  • Private Equity Portfolio Companies: The SBA issued additional guidance regarding PE portfolio companies, emphasizing their need to properly analyze the “necessity” of a PPP loan pursuant to the new “certification of necessity” guidance.
  • Affiliation Rule and Minority Shareholders: If a minority shareholder irrevocably waives or relinquishes its existing rights, subject to certain conditions, such minority shareholder would no longer be considered an affiliate of the business for purposes of determining small business size status.
  • $100,000 Payroll Cost Threshold: The CARES Act excludes from “payroll costs” any employee compensation in excess cash compensation of $100,000; however, that exclusion does not apply to non-cash benefits (e.g., retirement plan contributions, healthcare benefits, insurance premiums, and state and local taxes).
  • Professional Employer Organizations (PEOs)/Payroll Providers: Businesses that contract with third-party payers such as PEOs may use payroll documentation from the payroll provider as acceptable PPP loan payroll documentation.
  • 12-Month Payroll Cost Calculation: Businesses may calculate their aggregate payroll costs using data either from the previous 12 months or from calendar year 2019.

Additional SBA guidance on the PPP can be found here:

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IV. Paycheck Protection Program – Background & Overview

The US Senate’s vote to enact the Coronavirus Aid, Relief, and Economic Security (CARES) Act includes extraordinary public health spending to confront the coronavirus (COVID-19) pandemic, immediate cash relief for individual citizens, a broad lending program for small businesses, and targeted relief for hard-hit industries. Title I of the CARES Act—the Keeping Workers Paid and Employed Act—includes paycheck protection and loan forgiveness, and small business contracting relief.

The Keeping Workers Paid and Employed Act supports workers and small businesses weathering the economic impacts of the COVID-19 crisis. This act, in conjunction with the Enhancement Act, provides for $659 billion in new and increased federally guaranteed PPP loans through the SBA targeted to small businesses to help keep their workers employed.

By maintaining employees on their payroll through the duration of the crisis, these small businesses can qualify for PPP loan forgiveness. The Keeping Workers Paid and Employed Act is also retroactive, incentivizing small businesses to rehire employees who have recently been laid off.

On April 23, the US Congress passed the Paycheck Protection Program and Health Care Enhancement Act (Enhancement Act), which expanded funding for the existing PPP.

  • $310 billion increase in PPP funding, bringing the total authorized amount to $659 billion:
    • $30 billion set aside for loans by insured depository institutions and credit unions with assets between $10-50 billion
    • $30 billion set aside for loans made by (1) community financial institutions, and (2) insured depository institutions and credit unions with assets less than $10 billion
  • $10 billion increase in Emergency Economic Injury Disaster Grants with expanded access for agricultural enterprises (as defined in the Small Business Act) with not more than 500 employees


The PPP offers two-year loans of up to $10 million with an interest rate of 1.00% on a first-come, first-served basis. The total amount of the loan will be the lesser of the $10 million maximum and 2.5 times the borrower’s average monthly payroll for the past 12 months (excluding any compensation over $100,000). During the period of February 15, 2020 through August 8, 2020 for loans made before June 5 (unless 24-week forgiveness period is elected) or December 31, 2020 for loans made on or after June 5 (the Covered Period), the SBA will guarantee 100% of issued PPP loans. Loan proceeds may be used by small businesses to cover payroll costs (excluding individual employee compensation over $100,000), group healthcare benefits, mortgage interest payments, rent, utilities, and interest on other debt incurred prior to the Covered Period, and certain other existing 7(a) loan eligible uses.

  • Collateral and Fee Waivers: Collateral requirements, borrower and lender fees, prepayment penalties, personal guarantee requirements, and certain other traditional SBA loan requirements are waived.
  • Optional Deferment: Automatic deferment of principal, interest, and fees for a period of six months and may be extended for up to 1 year.
  • Increased Lender Pool and Flexibility: The SBA delegated to lenders the authority to make determinations on borrower eligibility and creditworthiness through streamlined SBA channels. Furthermore, the SBA administrator and the secretary of the US Department of the Treasury have the authority to add additional lenders to the PPP.
  • Loan Limitations. Loan proceeds may not be used for employee compensation in excess of an annual salary of $100,000 or for certain taxes or other employee payments covered under other recent COVID-19 federal legislation. However, the $100,000 salary exclusion only applies to cash compensation above $100,000, not to non-cash benefits (e.g., retirement plan contributions, healthcare benefits, insurance premiums and state and local taxes). Additionally, EIDL and SBA loans may not be used for the same purposes (treatment of outstanding EIDL loans was addressed in a FAQ released on August 11, 2020).


Under the PPP, small businesses (including sole proprietors, paid independent contractors, and other self-employed individuals), nonprofits, and other specified businesses that have been operational since February 15, 2020 are all eligible for PPP loans. Additionally, the legislation has expanded the current definitions of “small business” to allow access to a greater number of borrowers.

“Small Business”: Borrowers must either be small businesses under current SBA rules for financial assistance (generally based on NAICS code limitations or an “alternative size standard”[4]) or they must qualify under any of the additional categories applicable to the PPP, and the SBA “affiliation rules” apply unless noted below:

  • Fewer than 500 employees, full-time and part-time, whose principal place of residence is in the United States (full- or part-time, but not including independent contractors/individuals who receive 1099s) regardless of revenue
  • Hospitality and restaurant businesses that ordinarily would not be small but that have (1) more than one physical location and (2) no more than 500 employees per physical location (the “affiliation rule” is waived for these businesses)
  • Franchises assigned a franchise identifier code by the SBA
  • A business that receives financial assistance from a Small Business Investment Company
  • Sole-proprietors, paid independent contractors, and other self-employed individuals

Certification: In order to secure a loan, borrowers must provide a good faith certification that

  • the uncertainty of current economic conditions makes necessary the loan request to support the ongoing operations of the business;
  • the business will use the funds to retain workers and maintain payroll or make mortgage interest payments, lease payments, and utility payments; and the business is not applying for or already receiving duplicative funds from another SBA program.

Prioritized Borrowers: The SBA will encourage lenders to prioritize loans for small businesses in underserved and rural markets, including veteran-owned businesses, businesses owned by socially and economically disadvantaged individuals, women-owned businesses, and businesses in operation for less than two years.


This powerful feature of the PPP makes borrowers eligible for loan forgiveness on all loan proceeds used during the period that is the earlier of (a) 24 weeks following the origination of the loan and (b) December 31, 2020 on (1) payroll costs, (2) mortgage interest payments, (3) rent payments (only as attributable to the borrower and not a tenant or sub-tenant of the borrower) and (4) utility payments. Forgiveness applies to both principal and any accrued interest.

The amount forgiven cannot exceed the principal amount of the loan, and the amount forgiven will be reduced based upon reductions in employees (calculated on an FTE basis) or employee salaries (in excess of 25%) during the forgiveness period—rehiring and/or normalizing salaries for recently impacted employees, however, will negate certain loan forgiveness reductions.

  • Tax Treatment: Amounts forgiven will be treated as non-taxable cancelled indebtedness (for more on this topic, read our LawFlash, Taxpayers Receiving PPP Loans: IRS Provides Important Guidance on Expense Deduction).
  • Process: Borrowers will submit an application to the lender that will originate the loan, and the lender must issue a decision on the application within 60 days, with a significantly shorter turnaround expected. Lenders will process loan forgiveness applications directly, and the SBA will purchase the forgiven loan from the lender within 90 days of forgiveness—lenders are granted safe harbor to protect them from liability when facilitating this process. Any loan amounts not forgiven at the end of one year are carried forward as an ongoing loan, with the 100% loan guarantee remaining in place.


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If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:

Andrew T. Budreika
Michelle Catchur
Kurt W. Rademacher
Andrew P. Rocks
Benjamin W. Stango

New York
Kristen V. Campana
Crystal Fang

Sandra J. Vrejan
Ian M. Wenniger
Christopher L. Melendez

Elizabeth Khoury Ali
Tara McElhiney

Los Angeles
David V. Chang

Orange County/Los Angeles
Steven L. Miller

Washington, DC
Shah M. Nizami
Katelyn M. Hilferty


[2] See Enhancement Act at Pg. 11

[3] See FAQ, Question 31

[4] 15 USC § 632 (a)(5)

[5] Note, however, that pursuant to the Interim Final Rule issued on May 22, 2020, “For a PPP loan of any size, SBA may undertake a review at any time in SBA’s discretion.”