CARES Act Establishes Paycheck Protection Program

April 2, 2020

By: Eric N. Fischer, Naomi Smith

The CARES Act establishes a new Paycheck Protection Program under the Small Business Administration (“SBA”) Section 7(a) loan program designed to help eligible businesses stay open and retain employees by providing loans to pay operational costs during the COVID-19 emergency. This program is different than the existing SBA loans and the SBA Economic Injury Disaster Loan (“EIDL”) under Section 7(b) of the SBA Act established under the FFCRA


Applications for the Paycheck Protection Program loans, described in more detail below, and recently-issued SBA guidance can be found here


Businesses considering the Paycheck Protection Program should be mindful of the following:


  • Businesses may receive loans under the Paycheck Protection Program and even if they’ve received an EIDL; however, the loans may not be for the same purpose.
  • Businesses are not eligible for the Paycheck Protection Program and the Employee Retention Tax Credit (described in more detail below).
  • Borrowers under the Paycheck Protection Program whose loans are forgiven are not eligible for delay of payroll taxes under the CARES Act (described in more detail below).



Paycheck Protection Program Loans


Generally, under the Paycheck Protection Program, small businesses and nonprofits with fewer than 500 employees  are eligible for loans until June 30, 2020 in amounts of up to $10 million. Loan proceeds are to be used for the following uses:


  1. payroll costs;
  2. interest on mortgage obligations incurred prior to February 15, 2020;
  3. rent, under lease agreements in force prior to February 15, 2020;
  4. utility payments, for which service began prior to February 15, 2020; and
  5. Interest on pre-existing debt obligations incurred prior to February 15, 2020.


The CARES Act also provided that the Paycheck Protection Program loans may also be used to refinance existing indebtedness, including EIDLs made between January 31, 2020 and the date the Paycheck Protection Program loans are made available.


Small businesses and sole proprietorships may start applying for loans starting on April 3, 2020, and independent contractors and self-employed individuals may start applying for loans starting on April 10, 2020. As of now, only existing SBA lenders may process applications. Visit for a list of SBA lenders.





The amount of the loan cannot exceed the sum of 2.5 times the average monthly payroll costs during the year prior to the loan and the amount of any EIDLs being refinanced (if applicable). Special rules apply to seasonal employers and employers not in business for a full year for purposes of calculating payroll costs. These rules can be found in the instructions to the Paycheck Protection Application Form.


Payroll costs include:


  • Compensation to employees that is a salary, wage, commission or similar compensation; cash tips; vacation, parental, family, medical, or sick leave; allowance for dismissal or separation; group health care benefits; retirement benefits; and state or local taxes on the compensation of employees; and
  • Compensation to sole proprietors, or independent contractors that is an amount not more than $100,000 in 1 year (prorated for February 15 - June 30, 2020).


Payroll costs do not include:


  • Compensation of an employee in excess of $100,000/year (prorated for February 15 - June 30, 2020);
  • Federal income taxes;
  • Compensation for employees who principally reside outside the U.S.; and
  • Qualified sick and family leave wages for which a borrower receives a credit under §§ 7001 and 7003 of the Families First Coronavirus Response Act.


Based on the most recent SBA guidance that Paycheck Protection Program Loans have a fixed interest rate of 0.5%. Borrower and lender fees to the loans are waived, and lenders are required to defer payments of principal, interest, and fees by the borrower for at least 6 months and may defer for up to 1 year. Note, however, that interest will continue to accrue during the deferral period.


The borrower must also give a good faith certification that:

  1. the loan request is necessary to support the concern’s ongoing operations due to the uncertain economic conditions;
  2. the funds will be used to retain workers and maintain payroll or make mortgage, lease, and utility payments;
  3. the concern does not have an application pending for another SBA loan for the same purpose; and
  4. Between February 15, 2020 and December 31, 2020, the concern has not already received an SBA loan for the same purpose.


Unlike certain other SBA loans, neither collateral nor a personal guarantee is required, and the SBA requirement that the borrower was unable to obtain credit elsewhere has been waived. Because these loans are 100% federally guaranteed, in making its determination as to creditworthiness, lenders will only consider whether the business was operational on February 15, 2020, and had employees for whom it paid salaries and payroll taxes, or paid independent contractors.





Eligible businesses include: (a) any business that qualifies as a “small business concern” under current SBA rules, and (b) any other business concern (even if they do not meet the “small business concern” definition under the SBA Act), nonprofit under 501(c)(3), veterans organization under (501(c)(19), or Tribal business concern that employs not more than the greater of: (i) 500 employees, or (ii) the maximum size standard in number of employees for a particular industry set forth in the SBA’s size standards tool.


There is a special eligibility rule for businesses in the hospitality and dining industries. For these and other businesses assigned a North American Industry Classification System (NAICS) beginning with 72 (i.e., the “accommodation and food services” industry) with more than one physical location, if it employs 500 or fewer employees per location, the business is eligible to receive a loan.


Individuals who operate under a sole proprietorship or as an independent contractor, and certain self-employed individuals, are also eligible.


Generally, the applying business (including nonprofits) must include its affiliates and subsidiaries in determining whether it is eligible to participate in the program due to the size of its business. SBA affiliation rules will apply in determining the size of a business for purposes under the CARES Act, subject to certain carveouts for (i) businesses assigned a NAICS beginning with 72 (i.e., the “accommodation and food services” industry); (ii) franchises that have been assigned a franchise identifier code by the SBA; and (iii) small businesses that receive financing through the Small Business Investment Company program.





Loans made under the program are eligible for forgiveness up to amounts paid by the business during the first eight weeks following loan origination for the following expenditures to the extent existing as of February 15, 2020 (as demonstrated by verified documentation borrowers must submit to the lender):


  1. payroll costs;
  2. interest payments on mortgage obligations;
  3. rent payments; and
  4. utility payments.


Note that while pre-existing non-mortgage debt obligation payments are authorized use of loan proceeds, those payments are not eligible for forgiveness.


The SBA guidance and Paycheck Protection Program Application Form state: “Due to likely high subscription, it is anticipated that not more than twenty-five percent (25%) of the forgiven amount may be for non-payroll costs.”


The amount forgiven is lowered proportionately by reductions in full time employment or where wages fall by more than 25% during the between February 15, 2020 and June 30, 2020. If you reduce the number of full time employees or salary between February 15, 2020 and April 27, 2020 but rehire employees or restore compensation before June 30, 2020, such reductions will not count to reduce the amount of your loan forgiveness. The reductions in amounts forgiven can be mitigated by rehiring laid off employees no later than June 30, 2020.


Borrowers must apply for loan forgiveness to your lender with the required documents. The lender will issue a decision on applications for loan forgiveness within 60 days of receiving the completed application and required documentation. Under the SBA guidance, the loan amount not forgiven will have a maturity date of 2 years from the date of the application for forgiveness.  The forgiven amount of the loan will not be includible in the borrower’s gross income for federal tax purposes.   



Visit Nyemaster Goode's Paycheck Protection Program Resource Center