The brand new stimulus bill (the CARES Act) makes forgivable loans available to small businesses through a new Paycheck Protection Program (PPP) administered through the Small Business Administration. The loans are designed to allow businesses to continue to fund payroll and are forgivable if certain standards for keeping employees on the job are maintained.

What businesses are eligible for a PPP loan?

PPP loans are generally available to a business (including a sole proprietorship, independent contractor, self-employed individual, or a qualifying nonprofit organization) if it meets the existing SBA standard for a small business or as an employee headcount that is lower than the greater of (i) 500 employees or (ii) the employee-size standard, if any, under the applicable NAICS Code which, depending on the specific Code, may be as high as 1,500 employees.

However, the employee limit does not apply for businesses that (a) are in the “accommodation and food services” sector under the NAICS (NAICS Code 72) and (b) maintain more than one physical location, in which case there is a 500-employee cap for each physical location.

Affiliation considerations related to “small business” eligibility

Pursuant to the SBA “affiliation rules,” applicants for PPP loans must include their affiliates when applying size tests to determine eligibility. The affiliate rules are difficult to apply, and you should talk to a lawyer to consider how they apply to you.

However, the CARES Act waives the affiliation requirement for the following applicants:

  • Businesses in the accommodation or food service sector (NAICS Code 72) with no more than 500 employees per location
  • Franchises with codes assigned by the SBA
  • Businesses that receive financial assistance from one or more small business investment companies (SBIC)

How much can I borrow?

Companies can expect loans in an amount equal to 2.5 times the average total monthly payroll costs in the one-year period before the loan is made (or from January 1, 2020 through February 29, 2020, if the business did not exist in the previous year) with a cap of US$10 million. Under the CARES Act, “payroll costs” is the sum of all payments for compensation, which includes (1) salaries, wages, commissions, or similar compensation; (2) payment of cash tips or the equivalent; (3) payment for vacation, parental, family, medical and sick leave; (4) allowances for dismissal or separation; (5) payment for group health care benefits and premiums; (6) retirement benefits; and (7) state and local tax assessed on employee compensation.

Payroll costs do not include (1) employee compensation over US$100,000 per year; (2) compensation of an employee whose principal place of residence is outside the US; or (3) qualified sick leave or family leave wages for which a credit is allowed under Section 7001 or 7003 of the Families First Coronavirus Response Act.

If a borrower has also obtained an economic injury disaster loan after January 31, 2020, the outstanding amount of the economic injury disaster loan will count against the US$10 million cap for purposes of calculating the amount available.

What can the loan proceeds be used for?

Loan proceeds under the PPP must be used to pay allowable payroll costs, interest on mortgage obligations (but not principal payments), rent (including utilities) and interest on debt that existed as of February 15, 2020. The loan proceeds may not be used to pay salaries over US$100,000.

What is forgiven under the PPP loans?

The principal amount of a PPP loan may be forgiven for costs incurred and paid during the eight-week period after the origination of the loan for eligible payroll costs, interest payments on mortgages (not including any principal payment), rent payments, and utility payments.

Forgiveness for rent under a lease agreement, mortgage interest and utility payments are only allowed for those services and contracts that were in place before February 15, 2020.

To the extent that proceeds of the loan are applied to ineligible expenses, that is, expenses other than rent, utility payments, mortgage interest payments, or excess compensation (individual employee or 1099 contractor compensation in excess of US$100,000 per year), those expenses are not eligible for forgiveness.

The amount of loan forgiveness may be ratably reduced if the employer reduces the number of full-time equivalent (FTE) employees as compared to either (a) the period from February 15, 2019 through June 30, 2019, or (b) the period from January 1, 2020 through February 29, 2020 (the employer chooses which period to compare) or if the employer reduces the pay of any employee by more than 25 percent as of the last calendar quarter.

Employers who re-hire workers previously laid off as a result of the COVID-19 crisis will not be penalized for having a reduced payroll for the beginning of the relevant period. If, during the period from February 15, 2020 through the date that is 30 days after enactment of the CARES Act, there is either a reduction in the number of, or wages paid to, FTE employees and the employer eliminates the reduction by June 30, 2020, the amount of loan forgiveness will be determined without regard to the reduction. Forgiveness may also include additional wages paid to tipped workers.

What is the maturity and interest of the loan?

PPP loans mature no later than 10 years after issuance and have a maximum interest rate of 4 percent.

Where can you apply for a PPP loan?

PPP loans are made by SBA-certified lenders (more than 800 financial institutions currently), in all 50 states, through delegated authority from the SBA. The SBA provides a tool on its website to match you to a certified lender.

Tom Reems is an attorney at Squire Patton Boggs in Denver. For more information contact or in Denver; or,, or in Washington, D.C.

This article does not constitute legal advice and no attorney-client relationship is formed with Squire Patton Boggs by virtue of this article.