Recipients who have received funds under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), Paycheck Protection Program (PPP) need to understand and follow some very important rules:

1. You must use at least 75% of the funds for eligible payroll costs (see SBA Part Six for specifics). You can pay the payroll costs even though your business is closed and the employees aren’t working.
2. You must not use more than 25% for the following permitted uses: mortgage interest payments (not principal), rent, utilities and interest on pre-existing debts. All of these obligations must have existed as of Feb. 15, 2020. Interest on other debts is not a forgivable use of the loan proceeds.
3. If you intentionally break either Rule 1 or Rule 2 above, you can be prosecuted for fraud, as a federal offense. Also, the government will make you pay back the funds spent for unauthorized purposes, and the SBA has reserved the right to “pierce the corporate veil” to pursue members of LLC’s and shareholders of corporations personally that it feels is a bad actor. Any violations can be reported by whistleblowers (such as your disgruntled employees or ex-spouses). The media is already focusing in on abuses of the PPP, and one has to expect this scrutiny is only going to increase.
4. You must use 75% for payroll costs within eight weeks of the date of receipt of the loan funds (so that clock is already ticking for many), or else your PPP will turn into a loan that must be paid back. Meeting the 75% requirement is a threshold requirement for loan forgiveness. The formula for this is complicated, and if you think you may be in that situation, see SBA Part Six and Part Eight for more details.

Please visit our COVID-19 Toolkit for all of Taft’s updates on the coronavirus.