SBA 7(a) Loans Under the Paycheck Protection Program

April 04, 2020

By: Louis Vlahos, Tax Partner

The CARES Act established a new Paycheck Protection Program (the “PPP”) to allow small businesses and many nonprofits to seek loans through the Small Business Administration’s “7(a)” loan program. The PPP’s stated goal is to get badly needed funds into the hands of these organizations and individuals so as to enable them, and their employees, to survive the severe economic downturn that has accompanied our response to the Coronavirus.

The PPP is authorized to issue up to $349 billion in total 7(a) loans through June 30, 2020. In order to expedite the infusion of these funds into the economy, the program contemplates the use of streamlined eligibility criteria.

The SBA will guarantee 100% of loans made under the PPP, and the loans will be nonrecourse as to any individual owner of an eligible recipient, except to the extent such individual owner uses the loan proceeds for other than one of the permitted uses described below.

In addition, the loan may be forgiven, without adverse tax consequences, provided the proceeds are used for permitted purposes during the 8-week period beginning on the date the loan is originated, and provided certain other conditions are satisfied.

Eligible Recipients

Loans will be available during the covered period (February 15 through June 30, 2020) for:

  • Any business, or any nonprofit exempt from tax under Sec. 501(c)(3) of the Internal Revenue Code, with a number of employees equal to the greater of (i) up to 500, or (ii) the number of employees set by the SBA for borrowers operating in a particular industry.
  • Sole proprietors, independent contractors, and eligible self-employed workers.
  • Hotel and food service chains with 500 or fewer employees per location.

In general, the SBA rules on company affiliates, which are used to determine small business size, are applied for purposes of determining whether a business satisfies the above employee-cap.

However, these affiliation rules are waived for franchises, food or lodging companies with 500 or fewer employees, as well as for businesses that receive financial assistance from a small business investment company.

Loan Amount

Eligible recipients may receive loans of up to the lesser of (i) $10 million or (ii) 2.5 times (250%) of their average monthly payroll costs for the one year preceding the date of the loan.

In determining its payroll cost, an eligible recipient may generally include: salary, wages (or similar compensation); payment for sick leave, medical leave, family/parental leave, or vacation leave; allowance for dismissal or separation; payment for health care benefits, including premiums; payment of retirement benefit; and payment of state or local tax assessed on the compensation of employees.

For purposes of the above rule, “salary” does not include that portion of an individual employee’s compensation in excess of $100,000 (as prorated for the covered period). Certain withholding taxes are also excluded.

However, in determining its total payroll costs, the employer-business may add to this “capped” amount the value of any leave, health care, retirement and other identified benefits provided to its employees.

What’s more, payroll costs do not include any “qualified sick” or “family leave” wages paid by the business for which a credit is allowed to the business under the Families First Coronavirus Response Act.

In the case of a sole proprietor or independent contractor, their payroll cost is generally equal to their net earnings from self-employment or similar compensation or income for the period, but not in excess of $100,000 annually, as prorated for the covered period.

An example may help to illustrate this rule. Assume a business with several employees and an annual payroll of $1.5 million. Some of these employees have an annual salary in excess of $100,000. Assume further that, after subtracting the compensation amounts in excess of $100,000, the remaining payroll is $1.2 million. Assume this results in an average monthly payroll of $100,000. This amount is multiplied by 2.5 to yield the maximum loan amount of $250,000.

Allowed Uses

Recipients may use the loan proceeds for the following approved purposes: (i) payroll costs, including salaries, commissions, regular paid leave, and health-care benefits; (ii) interest on any indebtedness that was incurred by the business in the ordinary course, that is secured by real or personal property, and that was incurred before February 15, 2020; (iii) rent under a lease that was in force before February 15, 2020; and (iv) payment for utilities for which service began before February 15, 2020.

In fact, a loan applicant is required to make a “good faith certification” that, given the economic hardship arising from our response to the virus, the funds are necessary to support the applicant’s ongoing business operations, and will be used to retain workers, maintain payroll, pay for utilities, pay for rent and similar expenses.


The Act waived SBA rules requiring that recipients pay certain fees, provide collateral, give personal guarantees, and demonstrate an inability to obtain credit elsewhere.

The SBA is directed to assume that eligible loan applicants in operation as of February 15, 2020 have been adversely affected by COVID-19, and lenders are required to allow such loan applicants to defer payments for a period of between six and twelve months.

Loan Forgiveness

Recipients of loans under the PPP may apply for forgiveness of the principal amounts of the loans, provided the loan proceeds were used to fund approved costs (described above) for the period from February 15, 2020 through June 30, 2020.

Specifically, in order to qualify for loan forgiveness, a recipient must expend the loan principal for the approved uses over the 8-week period beginning on the date the loan was originated. Of this amount, at least 75 percent must be applied toward payroll costs; in other words, permitted, non-payroll costs are limited to 25 percent of the loan principal.

The amount of loan forgiveness will be reduced for businesses that, in response to the economic conditions arising from the health crisis, (i) reduce by more than 25 percent the salaries of those employees who during 2019 were compensated at an annualized rate of not more than $100,000, or (ii) release employees. However, if these terminated employees are rehired by June 30, 2020, and if such salaries are restored by such date, the entire loan may be forgiven, provided the proceeds were used for an approved purpose.

Significantly, the canceled debt will be excluded from a borrowers’ gross income for income tax purposes; it will not be treated as taxable cancellation of indebtedness income.

Continuing Indebtedness

Any loan that remains outstanding following a borrower’s application for forgiveness – for example, because employees were not reinstated – will have a maximum maturity of 10 years following such application, and bear a maximum interest rate of 4 percent. The SBA will continue to guarantee the remaining balance.

Frequently Asked Questions

As guidance continues to evolve, the Treasury Department has set up a Frequently Asked Questions (“FAQs”) page on their website. This addition allows the SBA and Treasury to provide timely additional guidance to address borrower and lender questions about the PPP, covering topics such as lender verification requirements, qualification for eligibility using the alternative “small business concern” standard, affiliation rules, time periods and eligible income used to calculate loan amount and forgiveness, and treatment of applications filed prior to the issuance of the Final Rule.

Here is a link to the Treasury Department FAQs:

Paycheck Protection Program –  Frequently Asked Questions


More Information from Farrell Fritz

For more information on the Paycheck Protection Program, please visit: https://www.farrellfritz.com/paycheck-protection-program-what-you-need-to-know/

COVID-19 Crisis Response and Help

To access a special report on The CARES Act by Tax Partner, Lou Vlahos, please visit: https://www.farrellfritz.com/coronavirus-aid-relief-and-economic-security-act-impact-summary/

For additional resources, please visit the Farrell Fritz COVID-19 Crisis Response and Help page: https://www.farrellfritz.com/covid-19-update/

For other Business Resource & Recovery opportunities, please visit: https://www.farrellfritz.com/business-resources-and-recovery/

  • Related Practice Areas: Commercial Finance & Banking, Corporate, Labor & Employment, Not-for-Profit, Real Estate, Tax
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