For updated information, please see PPP Ineligibility Update: Businesses Ineligible for First Draw and Second Draw PPP Loans
The Coronavirus Aid, Relief, and Economic Security (“CARES”) Act was enacted to provide immediate assistance to individuals, families, and businesses affected by the COVID-19 emergency. Among other provisions, the Act allowed Congress to authorize the Small Business Administration (“SBA”) to temporarily guarantee forgivable loans under a new 7(a) loan program titled the Paycheck Protection Program (“PPP”). The initial funding for the PPP totaled $349 billion, which was quickly allocated.
On April 24, 2020, the President signed the Paycheck Protection Program and Health Care Enhancement Act (“PPPHCE Act”) to replenish the PPP. This includes $310 billion for PPP, with $250 billion to replenish the program and an additional $60 billion set aside for certain insured depository institutions, credit unions, and community financial institutions. This brings the total funding for the PPP to $659 billion.
A business is generally eligible for a PPP loan if it was operating on February 15, 2020, with 500 or fewer employees whose principal place of residence is in the United States, or if it is a business that operates in a certain industry and meets the applicable SBA employee-based size standards for that industry. There are other categories, including certain non-profit organizations, veteran organizations, and tribal organizations, and self-employed workers and independent contractors. In addition, the Treasury Department and SBA have issued interim final rules and frequently asked questions indicating that businesses must also meet the SBA’s definition for a “small business concern,” unless that requirement is specifically waived in the CARES Act and other guidance.
For PPP purposes, the SBA’s standard operating procedures makes some businesses ineligible, and the Treasury Department has provided further guidance. For example, ineligible businesses include:
- businesses that have defaulted on federal loans;
- businesses located in a foreign country or owned by undocumented (illegal) aliens;
- businesses utilizing a pyramid sale distribution plan;
- private clubs that limit the number of memberships for reasons other than capacity or businesses that restrict patronage;
- government-owned entities, excluding Native American Tribes; and
- passive businesses, such as a business that is subject to a management agreement, is primarily engaged in owning and leasing real estate, or is under additional guidance, and private equity firms and hedge funds.
Other eligibility criteria may apply depending on the specific characteristics of the business seeking the PPP loan.
Some businesses are ineligible because of the nature of the goods or services the business provides. Examples include:
- businesses engaged in lending, like banks, life insurance companies, finance companies, factoring companies, investment companies, bail bond companies, and other businesses whose stock-in-trade is money; however, there are limited exceptions;
- businesses engaged in any illegal activity, such as marijuana or cannabis-related businesses;
- businesses principally engaged in promoting religion;
- businesses deriving more than a certain amount of gross annual revenue from products or performances of a prurient sexual nature;
- businesses with an associate of poor character;
- businesses primarily engaged in political or lobbying activities; and
- speculative businesses such as those dealing in stocks or bonds, mining gold or silver in other than established fields, engaging in research and development, and building homes for future sale.
Historically, non-profits and certain businesses engaged in legal gambling activities were not eligible, but the program and guidance allow these types of businesses to participate. Additionally, there are limited circumstances under which certain businesses engaged in renting or leasing may be eligible. For example, eligible businesses include:
- businesses licensed as nursing homes or assisted living facilities and providing healthcare or medical services;
- businesses that lease equipment, household goods, or other items;
- businesses such as barber shops, hair salons, nail salons, and similar types of personal services businesses; and
- hotels, recreational vehicle parks, marinas, or similar types of businesses if certain requirements are met.
The Treasury and SBA have released extensive guidance on the eligibility of businesses. This resource is not a comprehensive summary of the relevant agency guidance. Please contact Schwabe, Williamson & Wyatt for help determining if your business is eligible for a PPP loan.
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