Do You Qualify for a PPP Loan? Complete Eligibility Guide

When the Paycheck Protection Program launched in 2020, millions of small business owners found themselves asking the same question: "Do I qualify?" The answer wasn't always straightforward—eligibility rules changed multiple times, requirements varied by business structure, and the documentation needed could be confusing.

While the PPP program ended on May 31, 2021, understanding its qualification criteria remains valuable for several reasons: you might still be navigating forgiveness for an existing loan, preparing for potential similar future programs, or simply trying to understand what relief you missed out on.

Let's break down exactly who qualified for PPP loans, what documentation was required, and the specific rules that determined eligibility.

The Basic Eligibility Framework

At its core, the PPP was designed to help small businesses keep workers employed during the COVID-19 pandemic. The fundamental requirements were remarkably simple, but the devil was in the details.

Core eligibility criteria for First Draw PPP loans:

• Your business was operational before February 15, 2020
• You were currently operating or had been affected by COVID-19
• You employed 500 or fewer employees (or met SBA size standards)
• You were located in the United States or its territories

That last point was crucial—the 500-employee threshold applied on a per-location basis for businesses in certain industries like food service and hospitality. A restaurant chain with 20 locations, each employing 40 people, could still qualify even though the total exceeded 500 employees.

Who Could Apply?

The PPP cast a wide net, covering most business structures and many nonprofit organizations.

Eligible entities included:

• Sole proprietorships and independent contractors
• Self-employed individuals
• Single-member LLCs
• Partnerships and multi-member LLCs
• S corporations and C corporations
• Nonprofit organizations (501(c)(3) and 501(c)(19) veterans organizations)
• Tribal businesses
• Housing cooperatives
• Small agricultural cooperatives

Key insight: The broad eligibility meant that if you had business income and filed taxes, you likely qualified—even if you had no employees beyond yourself.

Understanding the Employee Count

The 500-employee threshold seemed straightforward until you dug into the details. The SBA used specific definitions that could significantly impact your eligibility.

How employees were counted:

• Full-time, part-time, and temporary employees all counted
• Employees were counted regardless of where they worked (including remote workers)
• The count included all employees across affiliated businesses, following SBA affiliation rules

Affiliation rules: These were perhaps the most complex part of PPP eligibility. Generally, businesses under common ownership or control had to combine their employee counts. For example, if you owned two businesses—one with 300 employees and another with 250—the combined 550 employees could have made you ineligible.

Exception to affiliation rules: Many businesses in the hospitality and food service industries (those with NAICS codes starting with 72) were exempt from affiliation rules, as long as each location had 500 or fewer employees.

Alternative Size Standard

If your business exceeded the 500-employee threshold, you might still have qualified under the SBA's "alternative size standard." This was a two-part test:

Both conditions had to be met:

1. Your business's maximum tangible net worth was not more than $15 million
2. Your average net income after federal income taxes for the two full fiscal years before the application didn't exceed $5 million (excluding carry-over losses)

This alternative opened the door for slightly larger businesses that still needed support.

Second Draw PPP: Stricter Requirements

If you already received a First Draw PPP loan, you could apply for a Second Draw loan, but with additional requirements.

Second Draw eligibility criteria:

• You employed 300 or fewer employees (note the lower threshold)
• You used or would use the full amount of your First Draw loan
• You experienced at least a 25% reduction in gross receipts during one quarter of 2020 compared to the same quarter in 2019

Measuring the revenue decline: You could compare either:

• Any quarter in 2020 to the same quarter in 2019, or
• Full year 2020 to full year 2019

This flexibility meant businesses hit hard in Q2 2020 could qualify even if they recovered later in the year.

Required Documentation by Business Type

The documentation you needed varied significantly based on your business structure. Getting this right was essential—incomplete applications often faced delays or denial.

Self-Employed Individuals and Independent Contractors

Required documents:

• 2019 or 2020 Schedule C showing net profit
• 2019 or 2020 IRS Form 1099-MISC (if applicable)
• Invoice, bank statement, or book of record showing you were in business on or before February 15, 2020

Key point: Your net profit from Schedule C determined your loan amount. If you reported a loss or zero profit, you weren't eligible—the PPP based calculations on profit, not gross income.

Sole Proprietors

Required documents:

• Schedule C with reported net profit
• 2019 or 2020 IRS Form 1040 Schedule SE (Self-Employment Tax)
• If you had employees: Payroll tax filings (940, 941, or 944)

Common confusion: Many sole proprietors wondered whether they could include their own compensation. The answer was yes—your net profit essentially represented your compensation.

Partnerships and Multi-Member LLCs

Required documents:

• 2019 or 2020 IRS Form 1065 (including K-1s)
• 2019 or 2020 IRS Forms 940, 941, or 944 (if applicable)

Important rule: Partnerships filed one application for the entire partnership, not separate applications for each partner. Partner compensation could be included up to $100,000 per partner annually (roughly $20,833 per partner for the 2.5-month loan calculation).

S Corporations and C Corporations

Critical requirement: You needed active payroll to qualify. Owner distributions alone didn't count.

Required documents:

• 2019 or 2020 IRS Form 1120 or 1120S
• Payroll tax filings (940, 941, or 944)
• Documentation showing you were operating before February 15, 2020

Common pitfall: Some S-corp owners who primarily took distributions with minimal W-2 wages found their loan amounts disappointingly small. The PPP based calculations on W-2 wages, not distributions.

Nonprofit Organizations

Required documents:

• IRS determination letter showing 501(c)(3) or 501(c)(19) status
• 2019 or 2020 IRS Form 990 (or 990-EZ)
• Payroll documentation (940, 941, or 944)

Eligibility note: Most 501(c)(3) nonprofits qualified regardless of size. 501(c)(19) veterans organizations were also eligible.

What Disqualified You?

Understanding what made you ineligible was just as important as knowing qualification criteria.

Automatic disqualifications included:

• You weren't in business on February 15, 2020
• You had an owner with a prior fraud conviction
• You had recent defaults on SBA or federal loans
• You operated primarily as a hedge fund or private equity firm
• You were engaged in speculative activities
• You derived more than one-third of gross annual revenue from legal gambling
• You were involved in lobbying activities (with some exceptions)
• You were a business engaged in pyramid sales distribution

The ownership disclosure requirement: You had to disclose anyone owning 20% or more of your business. Certain criminal convictions for those owners could disqualify your application.

Recent changes in ownership: If your business changed hands shortly before or after February 15, 2020, additional scrutiny applied. The SBA wanted to ensure loans went to established businesses, not entities created specifically to access PPP funds.

Special Rules for Specific Industries

Certain industries had unique considerations or faced additional restrictions.

Hospitality and food service: These businesses (NAICS code 72) received more favorable treatment:

• Exemption from affiliation rules
• Employee counts per physical location rather than company-wide
• These provisions recognized the devastating impact COVID-19 had on restaurants, bars, and hotels

Healthcare providers: Eligible, but with specific rules about what healthcare expenses could be included in loan calculations.

Faith-based organizations: Houses of worship and religious organizations could apply, though specific guidance evolved during the program.

Agricultural businesses: Small agricultural cooperatives with 500 or fewer employees qualified, but complex rules applied to determining payroll costs for seasonal workers.

Loan Amount Calculations

Understanding whether you qualified was only half the battle—you also needed to know how much you could borrow.

The basic formula: 2.5 times your average monthly payroll costs

• For seasonal businesses: 2.5 times average monthly payroll for the 12-week period beginning February 15, 2019, or March 1, 2019
• For new businesses: 2.5 times average monthly payroll costs for January and February 2020

Maximum loan amounts:

• First Draw: $10 million
• Second Draw: $2 million

Payroll costs included:

• Salaries, wages, commissions, and tips (capped at $100,000 annualized per employee)
• Employer health insurance contributions
• Employer retirement contributions
• State and local payroll taxes

Payroll costs excluded:

• Employee compensation above $100,000 annually
• Employer FICA taxes
• Income taxes withheld from employee wages
• Wages for employees whose principal residence was outside the United States

Special Considerations for Seasonal Businesses

If your business operated seasonally, you had options for determining your loan amount.

Calculation flexibility:

• You could use the 12-week period beginning February 15, 2019, through June 30, 2019
• Alternatively, you could use March 1, 2019, through June 30, 2019
• Or any consecutive 12-week period between May 1, 2019, and September 15, 2019

This flexibility ensured seasonal businesses could base their loan on peak operational periods rather than slow seasons.

What If You Had Questions About Eligibility?

Many businesses fell into gray areas where eligibility wasn't immediately clear.

Resources that helped:

• SBA's frequently asked questions (updated regularly during the program)
• Your existing lender or other participating lenders
• Small Business Development Centers (SBDCs)
• SCORE mentors
• Accountants and CPAs familiar with PPP rules

The certification requirement: Applicants had to certify in good faith that the loan was necessary to support ongoing operations. This "necessity certification" became controversial for larger, well-capitalized businesses, with some returning loans after public pressure.

Looking Forward: Lessons for Future Programs

While the PPP has ended, understanding its structure helps prepare for potential future relief programs.

Key takeaways:

• Keep your business records current and organized
• Maintain clear documentation of your employee count and payroll
• Understand your business structure's implications for government programs
• Know your NAICS code and size standard
• Keep tax returns filed and up to date

Record-keeping matters: Businesses with organized financial records navigated the PPP application process much more smoothly. Having immediate access to tax returns, payroll reports, and business formation documents made the difference between a quick approval and a frustrating delay.

Beyond Qualification: The Bigger Picture

Qualifying for the PPP was just the first step. The program's real value came from proper use of funds and achieving forgiveness. If you did qualify and received a loan, the work of tracking expenses, maintaining payroll, and documenting everything properly became paramount.

The level of financial organization required for PPP compliance—separate accounts, meticulous expense tracking, detailed payroll records—represented a best practice that all businesses should maintain regardless of whether they're pursuing loan forgiveness.

Maintain Financial Clarity for Future Opportunities

Whether you qualified for PPP or not, one lesson stands out: having well-organized financial records positions your business for success and opens doors when opportunities arise. Beancount.io provides plain-text accounting that makes your financial data completely transparent and accessible—every transaction is human-readable, version-controlled, and ready for analysis. When the next opportunity or challenge comes, you'll be prepared. Get started for free and take control of your financial records.