How Do I Know If I Qualify for a PPP Loan?

The Paycheck Protection Program (PPP) provided small businesses with forgivable loans to help retain employees and cover other expenses during the COVID-19 pandemic. If you’re wondering whether your business qualified for a PPP loan, this guide will walk you through the eligibility criteria and requirements.

What is the Paycheck Protection Program (PPP)?

The PPP was launched in 2020 as part of the CARES Act to provide economic relief to small businesses during the pandemic. It offered low-interest, partially forgivable loans to help employers retain employees and cover other expenses like rent and utilities.

The loans could be fully forgiven if at least 60% was spent on payroll costs and the rest on eligible expenses. The program stopped accepting new applications on May 31, 2021 but existing borrowers can still apply for forgiveness.

PPP Loan Eligibility Criteria

To qualify for a first or second draw PPP loan, your business had to meet these basic criteria:

• Operational on February 15, 2020
• Had 500 or fewer employees (or 300 for second draw loans)
• Open and operational at the time of application

You also had to provide documentation on your payroll expenses to determine the loan amount. Self-employed individuals could apply using net profit from IRS Form 1040 Schedule C.

Additional Eligibility Requirements

Beyond the basic criteria, there were additional factors that could affect your eligibility:

Type of business Most for-profit businesses qualified, but hedge funds private equity firms, and some speculative businesses were ineligible. Nonprofits and religious organizations were eligible.

Ownership If you own 20% or more of a business, you couldn’t have certain criminal records or defaults on federal loans. Some close relatives of lenders were also ineligible

Entity type: Sole proprietors, partnerships, S-corps and C-corps needed to provide IRS forms and payroll records from 2019 or 2020. Independent contractors had to show Schedule C net profit.

Use of first draw loan: To qualify for a second draw PPP loan, you had to have used up your full first draw loan amount.

Revenue reduction: Second draw applicants had to show at least a 25% gross revenue decline in any 2020 quarter compared to the same quarter in 2019.

How to Apply

To apply for a PPP loan, you submitted an application through an SBA-approved lender along with payroll documentation. The required documents varied based on your business structure:

• Sole proprietors: 2019 or 2020 Schedule C
• Partnerships: 2019 or 2020 IRS Form 1065 (including K-1s)
• S-corps and C-corps: 2019 or 2020 IRS Form 1120 and Form 941
• Independent contractors: 2019 or 2020 Schedule C

Lenders evaluated your eligibility and verified documents before approving loans.

Loan Amount Calculation

Your PPP loan amount was based on your historical payroll costs, calculated using one of two methods:

1. 2019 or 2020 IRS forms:

• Sole props/partnerships: Use Schedule C net profit
• S-corps/C-corps: Sum eligible payroll costs from Form 941

2. Lookback period:

• Sum eligible payroll costs over last 12 months
• For seasonal employers, use February 15 to June 30, 2019 or any consecutive 12-week period between May 1, 2019 and September 15, 2019

The loan amount was generally 2.5 times your average monthly eligible payroll costs, capped at $10 million.

How to Confirm Eligibility

To confirm if you qualified for a PPP loan, follow these steps:

• Review all eligibility criteria and requirements for your business type
• Gather required payroll/tax documents from 2019 or 2020
• Calculate your average monthly payroll under the two loan formulas
• Ensure you have payroll costs to include in the calculation
• Confirm you can show a 25% revenue reduction (for second draws)
• Check for any disqualifying factors like criminal records or federal loan defaults

Consulting with a lender, accountant or SBA representative can also help verify eligibility. Having complete paperwork prepared makes the application process smoother.

What To Do If You Don’t Qualify

If you didn’t qualify for a PPP loan, other options may be available:

• SBA disaster loans – Low interest loans up to $2 million for COVID-19 impacts
• SBA 7(a) loans – Loans guaranteed by the SBA for eligible small businesses
• Payroll tax credit – Refundable tax credit for keeping employees on payroll
• Traditional bank loans – Term loans and lines of credit from private lenders
• FinTech loans – Online lending platforms using alternative data for approvals
• Business credit cards – Cards with 0% intro APR could help manage short-term cash flow

Talk to your lender and advisor about alternatives to find the right funding solution for your business.

The Bottom Line

The PPP provided a vital lifeline for small business owners during COVID-19. To qualify, you had to evaluate your eligibility status, gather paperwork, calculate payroll costs and submit your application correctly. With the program ending, it’s important to understand the criteria in case similar relief options emerge in the future.

By reviewing the requirements in detail, gathering documents, and confirming eligibility, you can position your business to take advantage of any potential aid programs. Even if you didn’t qualify for PPP, exploring alternative financing can help you manage through challenging times.

While the SBA automatically audits PPP loans over $2 million, loans under $150,000 may also be audited. The SBA has the discretion to audit any PPP loan at any time.

Yes, PPP loan investigations are still ongoing. Federal agencies like the SBA Office of Inspector General (SBA-OIG) and the Department of Justice (DOJ) are actively pursuing cases of suspected PPP loan fraud.