CO— Paycheck Protection Loans Questions Answered

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23 Frequently Asked PPP Loan Questions, Answered

The federal Paycheck Protection Program offers forgivable loans to small businesses, but it has been changed several times. We answer all of your biggest questions.

By: Sean Ludwig, Contributor

This article was updated on 01/14/21.

One of the most extensive parts of the U.S. government’s response to COVID-19 disruptions for businesses was the creation of the Paycheck Protection Program (PPP). This program has distributed more than $500 billion in loans since its creation. However, the program has changed several times since it was originally created in March 2020. As such, many small businesses struggle to navigate some aspects of the PPP, such as eligibility and forgiveness.

In order to bring more clarity, we’ve compiled some of the most popular questions that have been asked and answered during our Small Business Update series and National Small Business Town Halls from the U.S. Chamber of Commerce. These virtual events have featured expert commentary on PPP and other issues facing small businesses during this uncertain time.

Here are popular questions businesses have been asking about PPP.

How does the Paycheck Protection Program (PPP) work?

The PPP emergency loan program was created as part of the $2 trillion CARES Act in March 2020 and was authorized to distribute more than $600 billion in forgivable loans to small businesses. The program originally had just $350 billion allocated, but another $320 billion was added by Congress in April in order to help more businesses. Congress extended the PPP application deadline once more to August and then closed applications for the rest of 2020.

In late December 2020, Congress passed the $900 billion Coronavirus Response and Relief Supplemental Appropriations Act (CRRSAA) in order to help more businesses impacted by COVID-19. The CRRSAA fixed issues with PPP and put more money behind the program so businesses can apply for first-time and “second-draw” PPP loans. It also altered the criteria businesses needed to meet in order to be eligible for first-time and second-time loans and made forgiveness a little easier.

PPP loans are issued by private lenders and credit unions, and then they are backed by the Small Business Administration (SBA). The basic purpose of the PPP is to incentivize small businesses to keep workers on payroll and/or to rehire laid-off workers that lost wages due to COVID-19 disruptions. As long as businesses spend their loan money correctly, the full amount can be forgiven.

How do I apply for a first or second PPP loan?

Businesses can submit applications for PPP loans to SBA-approved private lenders, credit unions, and fintech companies. Businesses should start the process by talking to any lender they currently work with first to see if they are taking part in the PPP program. If you do not have an existing lending relationship, you may want to apply with a fintech company. The SBA also has a tool called Lender Match that can help businesses find an approved PPP lender.

For the latest wave of PPP loans that were approved in December 2020, applications opened for select community-based lenders on January 11, 2021, and then they will open up to more lenders in the following weeks. Applications for the latest PPP loans are open until March 31, 2021, or until all funding has been exhausted.

What’s different about the second-draw PPP loans?

The CRRSAA created the opportunity for businesses and nonprofits to apply for a second PPP loan if they meet certain criteria. The second-draw loans are more targeted than first-time PPP loans, and to qualify, businesses must 1) have previously received a PPP loan and used the full amount only for authorized uses; 2) have fewer than 300 employees; and 3) have had a 25% reduction in gross receipts during at least one quarter of 2020 versus the same quarter of 2019. The maximum loan size for a second PPP loan is $2 million versus $10 million for a first-time PPP loan. Additionally, the SBA has created a hub on second-draw PPP loans that may be useful.

How do I calculate the maximum amount for my PPP loan?

For first-time PPP loans, businesses and nonprofits generally can request a maximum loan amount of 2.5 times the average monthly 2019 payroll. Insurance payments can also be included in payroll costs. The SBA has also created an explainer for first-time PPP loans that outlines calculations for different types of businesses.

For second-draw PPP loans, the maximum loan amount is calculated as 2.5 times average monthly 2019 or 2020 payroll costs for a maximum of $2 million. For borrowers in the accommodation and food sectors, they may qualify to use a higher calculation of 3.5 times average monthly 2019 or 2020 payroll costs, but the maximum amount remains at $2 million. Work with an accountant or financial advisor to make sure you calculate the loan amount correctly.

What are the loan terms?

The interest rate for all PPP loans is set at 1%. PPP loans that were issued before June 5, 2020, mature in two years. Loans issued after June 5, 2020, have a maturity of five years. The maximum loan size for a first-time PPP loan is $10 million, and the maximum loan size for a second-draw loan is $2 million. No personal guarantee or collateral is required. Also, both the government and lenders involved with PPP are not allowed to charge small businesses any fees for processing these loans.

Do I qualify for a first or second PPP loan?

For first-time PPP loans, the majority of small businesses with fewer than 500 employees and select types of businesses with fewer than 1,500 employees are able to apply if they experienced revenue declines in 2020. Many 501(c)(3) non-profits, 501(c)(19) veteran organizations, tribal business concerns and self-employed workers/sole proprietors are eligible to apply. As of December 2020, 501(c)(6) nonprofits, local news media companies and housing cooperatives were added to the list of organizations that could apply. All publicly traded companies are prohibited from receiving PPP loans.

Businesses can apply for a PPP loan as long as they were operational on February 15, 2020, and had paid employees at that time (even if the owner is the only employee). The SBA’s 500-employee threshold includes all types of employees: full-time, part-time and any other status.

Lenders will also ask for a “good faith certification” that 1) the uncertain economic conditions make the loan request necessary to support operations, and 2) the borrower will use the loan proceeds for specific purposes like payroll and approved expenses.

How can I get my PPP loan forgiven?

Generally speaking, the loan can be fully forgiven if at least 60% has been spent on employee payroll. As of December 2020, the other 40% can be used on the following: (1) qualifying mortgage interest or rent obligations; (2) utility costs; (3) operations costs such as business and accounting software; (4) property damage such as destruction from civil unrest that was not insured; (5) supplier costs on essential goods; and (6) worker protection expenditures such as personal protective equipment (PPE) and sneeze-guards.

Forgiveness is primarily based on employers continuing to pay employees at normal levels during the eight-to-24-week period following the origination of the loan. Employers must attempt to keep headcount and payroll at the level it was before the pandemic to have the loan fully or partially forgiven.

Read our guide to PPP loan forgiveness for more details.

What can I do to maximize PPP loan forgiveness?

First, carefully document all the ways you spend PPP funds. Second, no matter what else you do, make sure 60% of the loan is spent strictly on payroll costs. Notably, there may be some leeway on headcount if you document that you tried to hire or rehire and could not get back to where you were on total employees. If you are able to rehire some workers and you spend 60% of funds on payroll, you should be able to get most or all of the loan forgiven.

Do businesses with smaller PPP loans have to do less paperwork?

Yes, Congress has said it will offer simplified PPP forgiveness for any business that took out a loan of less than $150,000. A one-page application for forgiveness will be released. The application will likely be similar or the same as the PPP Loan Forgiveness Form 3508S.

Can I use an EIDL grant and a PPP loan?

As of December 2020, Congress has changed the provisions surrounding Economic Injury Disaster Loan (EIDL) grants and PPP loans. Originally, if you received an EIDL grant, that would count against how much of your PPP loan was forgiven. Now businesses that are eligible to receive EIDL grants up to $10,000 while also having first- and second-draw PPP loans fully forgiven.

Is my business allowed to use the Employee Retention Tax Credit and PPP?

When PPP was originally announced, businesses had to choose whether to take advantage of the Employee Retention Tax Credit (ERTC) or take out a PPP loan. As of December 2020, Congress changed the provisions so businesses can now use both. The expansion of ERTC can provide considerable benefits to businesses, regardless if they took out a PPP loan.

Read our updated guide to the Employee Retention Tax Credit (ERTC) for more information.

Will the IRS be taxing the PPP loans or expenses paid for with PPP loans?

No, the IRS will not be taxing the PPP loans in any way. Originally, the IRS had ruled that expenses that were paid for with PPP loans were not deductible business expenses. However, in December 2020, this was changed, and businesses can now deduct regular business expenses paid for with PPP loan proceeds. The change applies to all issued PPP loans.

Read our explainer regarding the tax implications of PPP loans for more details.

I applied for a PPP loan. How can I find out about my current status?

There are two major steps for getting a PPP loan: The private lender must approve your application and then the SBA must approve it. Check with your lender to see if they can tell where your application is in the process and if you have a loan origination number from the SBA.

My bank has not processed my PPP application yet. Can I apply through another lender as well?

Yes, you can apply for a PPP loan through multiple lenders. But you should only accept one PPP loan.

Will my PPP loan be audited?

Small loans most likely won’t be targeted for auditing as long as your business has followed all the rules and you document your PPP spending. However, all PPP loans above $2 million will automatically be audited. If you are concerned about this, talk it over with your lender before accepting a PPP loan.

Should I pay employees with PPP funds even if my business is closed?

Yes, the law was designed to enable businesses to pay workers, no matter if they are performing different tasks outside of their normal job or not even working at all. The idea is to keep workers connected to their employers so that, ideally, once businesses open back up, employers are able to bring workers back to normal duties.

For independent contractors and sole proprietors, how do you document the cash you draw from the PPP loan to have it forgiven?

You should clearly document all expenses and maintain a separate PPP account that shows how you are using the PPP money. You want to make the process transparent in order to make it easier for the bank to forgive your loan.

If you have a workforce reduction, are you allowed to increase owner or other employee pay to meet the 60% threshold PPP requires?

Yes, you could increase an owner or another employee’s pay slightly. But make sure that you are not going over the $100,000 compensation limit and make sure the pay is well documented.

If I normally pay vacation pay and/or a bonus, can I do it now under the PPP program instead of later in the year like I normally would?

Be careful if you think about doing this. If you were normally accruing vacation pay or issuing bonuses during this same period last year, then you should be fine. But if you are doing things differently in a deliberate manner, this could set off red flags. Operate like you normally do.

Is it necessary to open a separate banking account to utilize PPP funds?

It is strongly encouraged to open a separate account for PPP funds in order to track where the money is going and to maximize forgiveness. However, it’s best to discuss this with your accountant or financial advisor to see what makes the most sense for your operation.

Can I add new employees during the PPP loan forgiveness period, and can their payroll be included for forgiveness?

Yes. The PPP has been designed so you can hire or rehire workers for your operation. You can hire new employees in order to get back to the average headcount and payroll of your business and have your loan forgiven.

What should an employer who has received a PPP loan do about an employee who is receiving unemployment insurance that exceeds their normal wages and they don’t want to come back?

An employee has the right not to come back, but you should remind them they’ve officially been offered the job back in writing. Employees that reject documented offers of re-employment “may forfeit eligibility for continued unemployment compensation,” according to the SBA. If an employee refuses to come back, keep documentation in order to show that when you are trying to maximize loan forgiveness.

As a small business owner, I’m confused about how we pay for rent, utilities, etc., when my PPP loan is 60% for employee payroll. The balance remaining based on the formula will not cover rent. What can I do?

The main purpose of the PPP loan is to maintain or rehire employees, so you must spend at least 60% on payroll. Businesses are encouraged to also look at state and local resources and to talk with local banks about additional short-term loan options. Businesses can also apply for EIDL grants to help cover costs.

For more resources from the U.S. Chamber of Commerce:

All of our coronavirus content in one place.

COVID-19 Vaccine FAQs

Reopening Guide and Resources

Main Street Lending Program Guide

Social Media Toolkit for Reopening for Reopening

State-by-State Business Reopening Guide, with interactive map

Paycheck Protection Loan Guide

Economic Injury Disaster Loan Guide

Guide to PPP Loan Forgiveness

Employee Retention Tax Credit Guide

Coronavirus Response Toolkit for Businesses

Customizable flyer for businesses to communicate with customers

Find your local Chamber of Commerce

The U.S. Chamber of Commerce Foundation's list of small business resources for coronavirus assistance

CARES Act Guide for Independent Contractors and 1099 Workers

CO— aims to bring you inspiration from leading respected experts. However, before making any business decision, you should consult a professional who can advise you based on your individual situation.