Who Is Not Eligible For a PPP Loan: [Updated 2025 Guide]

Basic PPP Loan Requirements

“The Paycheck Protection Program is providing critical support to millions of small businesses and tens of millions of hardworking Americans.” — Steven Mnuchin, Former United States Secretary of the Treasury

Let’s get into PPP loan requirements by learning the simple eligibility criteria the Small Business Administration (SBA) has put in place. Here are the core qualifications that show if a business meets the requirements to be considered for PPP.

Business Size Limits

PPP loans have specific guidelines for size requirements based on employee count and industry standards. Businesses must meet one of these main criteria for first-draw PPP loans:

• Organizations with 500 or fewer employees who live primarily in the United States [1]

• Businesses that meet the SBA’s alternative size standard with a maximum tangible net worth under $15 million and average net income below $5 million in the two fiscal years before they apply [2]

There are some exceptions for specific industries:

• Accommodation and food service businesses (NAICS code 72) can qualify if they have up to 500 employees at each physical location [3]

• The employee limits might be higher for some industries that meet SBA’s size standards in their sector [2]

Your employee count should include:

• Full-time workers

• Part-time staff

• Employees on other arrangements [2]

Operating Date Requirements

The timeline requirements are simple but vital. Your business needs to show:

1. It was running before February 15, 2020 [4]

2. One of these conditions:

   • You paid salaries and payroll taxes for employees

   • You made payments to independent contractors

   • You ran the business as a self-employed individual, independent contractor, or sole proprietorship [5]

You can pick between two methods to verify your employee count:

1. Average employment during the loan amount calculation period

2. Average number of employees per pay period in completed calendar months before you apply [2]

Seasonal businesses need special attention. They should use the average number of employees per pay period over a 12-calendar week period [2]. You’ll need to keep detailed records of your business operations and employee counts since these affect your loan eligibility and possible forgiveness.

The best way to count your employees is to use the average number for each pay period over the last 12 months or from calendar year 2019 [6]. If your business is less than 12 months old, you’ll use the average number of employees for each pay period since you started operations [6].

Industry-Based Restrictions

Many industries must follow specific PPP loan eligibility rules. Businesses should know these limitations to avoid wasting time on applications they can’t get approved.

Illegal Business Activities

The SBA won’t give PPP loans to any business that breaks federal, state, or local laws. Marijuana and cannabis-related businesses can’t get loans because of federal laws, even if their state allows it [7]. This rule applies to companies that directly grow or sell cannabis and those that provide services or equipment to the industry [7].

Restricted Business Types

You’ll find major restrictions for financial institutions. These businesses can’t apply for PPP loans:

• Banks and life insurance companies

• Finance and factoring companies

• Investment firms

• Bail bond companies [8]

The SBA also disqualifies businesses that focus on:

• Religious promotion

• Political or lobbying work

• Pyramid sale distribution plans

• Adult content of a sexual nature [8]

Special Industry Cases

Some business types need extra attention when checking eligibility:

1. Third-party Management Agreements: You can’t qualify if another company controls your operations, employees, finances, and bank accounts [8].

2. Property-related Restrictions: The rules affect businesses that lease land for:

   • Cell phone towers

   • Solar panels

   • Billboards

   • Wind turbines [8]

Gaming and Entertainment Restrictions

PPP loan rules for gaming businesses have changed quite a bit. The SBA used to limit gaming businesses heavily, but new rules have changed things [9]. Here’s what you need to know:

• Small casinos and gaming operations with fewer than 500 employees can now get PPP loans [9]

• Your gaming revenue won’t automatically stop you from getting a loan [9]

• Adult entertainment venues face tough restrictions, especially those with live performances [10]

The SBA keeps track of everything through:

• Targeted audits of people who got loans

• Working with banks and financial institutions

• Smart data tools that spot possible fraud [11]

Your business must keep good records and follow these industry rules carefully. The Department of Justice looks closely at PPP loan fraud cases, especially when businesses might have lied about being eligible [11].

Financial Status Disqualifiers

“In three months, this Administration was able to act quickly to get funding into the hands of those who faced enormous obstacles as a result of the pandemic.” — Jovita Carranza, Former Administrator of the U.S. Small Business Administration

Financial problems can disqualify businesses from PPP loan eligibility, even after they submit an application. Knowing these disqualifiers helps businesses avoid wasting time on applications that will get rejected.

Bankruptcy Status Effect

Bankruptcy proceedings affect PPP loan eligibility by a lot. The Small Business Administration (SBA) has strict rules about bankruptcy status:

• Businesses or owners (with 20% or more ownership) in active bankruptcy proceedings can’t receive PPP loans when they apply [12]

• Applications sent before filing bankruptcy lose eligibility once bankruptcy proceedings start [8]

Some exceptions exist based on bankruptcy status:

1. Chapter 7 Bankruptcy: Eligibility comes back after the court issues a discharge order

2. Chapter 11, 12, or 13 Bankruptcy: Businesses can qualify again after receiving a plan confirmation order

3. Dismissed Cases: Companies become eligible right after the court dismisses their bankruptcy case [12]

Federal Loan Default Issues

Past money troubles with federal loans create big barriers to PPP eligibility. You won’t qualify if you have:

• Default status on existing SBA loans

• Past losses to the federal government through loan defaults

• Delinquent status on non-tax federal debt [8]

The PPP Note lists specific default triggers that affect eligibility:

1. Default on other loans with the current lender

2. Defaults that hurt repayment ability with other creditors

3. Failure to pay taxes on time

4. Bad changes in financial condition

5. Business structure changes without approval

6. Civil or criminal actions that affect loan repayment ability [13]

Businesses with money problems should know:

• Lenders need to tell borrowers about defaults quickly

• They must report defaults to the SBA

• Each lender decides about loan acceleration [13]

Businesses that might default should prepare:

1. Documentation Requirements:

   • Complete tax records

   • Current financial statements

   • Proof of financial stability

2. Repayment Obligations:

   • Principal and interest payments start after the deferral period

   • Payments begin when SBA makes its forgiveness decision [14]

So, businesses must keep proper documentation during the loan period. The SBA can:

• Look at loan applications even after approval

• Check if you were eligible

• Make sure loan amounts were correct

• Break down how funds were used [14]

PPP borrowers who run into money problems have options:

• Work with lenders to change payment terms

• Get professional help for compliance

• Keep detailed records of how they use funds [15]

These financial status disqualifiers help protect the program and make sure money reaches eligible businesses. Learning these restrictions helps organizations check their eligibility and avoid future compliance problems [16].

Ownership-Related Restrictions

Different business types have specific ownership-related rules:

• Independent Contractors and Sole Proprietorships: These typically do not have complex ownership structures, but individuals must not have any ownership restrictions or criminal backgrounds that disqualify them.

• Partnerships: All partners must meet the eligibility criteria, with specific restrictions related to ownership transfers and criminal background checks for those owning 20% or more of the business.

• Corporations: The business must disclose all beneficial owners (those with 20% or more ownership). Additionally, ownership changes, such as transferring 20% or more stock, need to be reported to lenders, and the SBA must approve changes in ownership that impact more than 50% of the company’s assets.

Government Official Ownership Rules

The Small Business Administration’s strict protocols apply to businesses with government connections. Businesses must disclose beneficial ownership data during PPP loan applications. Financial institutions don’t need to re-verify ownership information for existing customers unless their risk-based compliance approach suggests otherwise [17].

The core team verification requirements include:

• Collection of name, title, and ownership percentage

• Taxpayer identification number and address

• Date of birth for natural persons owning 20% or more

• Appropriate documentation for legal entity owners [17]

Ownership structure changes after receiving a PPP loan need careful attention. A “change of ownership” happens under these circumstances:

• Transfer of 20% or more common stock or ownership interest

• Sale of 50% or more assets measured by fair market value

• Merger with another entity [18]

Criminal Background Considerations

The SBA’s specific guidelines address criminal background restrictions for business owners. PPP loans exclude applicants if a 20% or more equity owner meets these conditions as of March 2021:

1. Faces current incarceration

2. Has pending felony charges

3. Was convicted of financial crimes within five years, including:

   • Fraud

   • Bribery

   • Embezzlement

   • False statements on loan applications [19]

The June 24 interim rule changed eligibility criteria for owners with criminal histories [20]. These revisions made several changes:

• Businesses with owners facing misdemeanor charges became eligible

• Restrictions on probation or parole status eased significantly

• Previous limitations on felony convictions within five years stayed the same [21]

The Department of Justice actively investigates potential fraud cases. They focus on businesses that might misrepresent their eligibility status. Purchasers must take responsibility for these aspects when ownership changes involve 50% or more of assets:

• PPP borrower obligations

• Compliance with loan terms

• Maintaining proper documentation [18]

Businesses planning ownership changes must:

1. Notify PPP lenders in writing before closing

2. Provide copies of proposed agreements

3. Submit relevant documentation for approval [6]

The SBA takes 60 calendar days to review ownership change requests [18]. Original borrowers remain responsible for:

• Performance of loan obligations

• Certifications made during application

• Compliance with PPP requirements

• Retention of required documentation [6]

The SBA maintains recourse against new owners if unauthorized fund usage occurs after ownership changes [6]. This protects program integrity while allowing legitimate business transitions to move forward smoothly.

Documentation Requirements

All businesses, regardless of their structure, must provide proper documentation for PPP loan applications. Here’s a breakdown:

• Independent Contractors and Sole Proprietorships: Need IRS Form 1040 Schedule C, 1099-MISC, and other documents like bank statements to verify income and operational status.

• Partnerships: Must submit partnership tax returns (including Schedule K-1) and employee count records.

• Corporations: Must provide tax records, including Form 940/941, W-3, and other documentation that verifies the number of employees and operational status.

All businesses must maintain proper documentation for six years for loans over $150,000, and four years for loans under that threshold.

Key Takeaways for Entity Types

• Independent Contractors and Sole Proprietorships: Generally have fewer restrictions but must prove self-employment status and show they were operational before February 15, 2020.

• Partnerships and Corporations: Must meet broader SBA size standards or industry-specific exceptions, and they are subject to more complex documentation and ownership change requirements.

Each entity must ensure that their eligibility is well-documented, and they should follow industry-specific restrictions to avoid loan denial or forgiveness rejection.

Documentation Deal Breakers

Proper documentation can make or break your PPP loan eligibility. Missing or incomplete paperwork will automatically disqualify you. Let’s get into the documentation you need to make your PPP loan application successful.

Missing Tax Records

Your tax documentation needs will vary based on your business structure and employee status. Businesses with employees need these tax records:

• IRS Form 940 or quarterly Form 941s to verify payroll [22]

• State quarterly wage unemployment insurance tax filings

• Federal tax returns that show business operations

• Form W-3 to verify employee wages [23]

Self-employed individuals and independent contractors must show:

• 2019 or 2020 IRS Form 1040 Schedule C [24]

• Proof that your business operated through February 15, 2020

• Bank statements or 1099-MISC forms that confirm your income [24]

The SBA has strict rules about keeping documents. Businesses with loans over $150,000 must keep their PPP documentation for six years after loan forgiveness or full repayment [25]. Smaller loans have different requirements:

• Keep employment records for 4 years after applying for forgiveness

• Store other relevant documents for 3 years after submitting forgiveness forms [25]

Incomplete Financial Statements

Your financial statements need detailed attention. Businesses must keep these detailed records:

Payroll Documentation:

• Bank statements that verify cash compensation [26]

• Reports from third-party payroll service providers

• State wage reporting forms

• Unemployment insurance filings [26]

Business Expense Records:

• Receipts for mortgage interest payments

• Lease agreements with payment proof

• Documents showing utility payments [26]

•  

Your forgiveness application must include:

• Receipts for employer health insurance contributions

• Records of retirement plan contributions

• Account statements that confirm eligible expenses [26]

Lenders must keep detailed documentation for ten years after the final loan disposition [27]. This includes:

• All financing applications

• Lending agreements

• Financial instruments

• Supporting materials and correspondence [27]

The SBA reviews loan documentation to check:

• Your original eligibility status

• Loan amount calculations

• How you used the funds [28]

Submitting incomplete or wrong documentation has serious consequences:

• Your loan forgiveness could be denied

• You might have to repay amounts that were wrongly forgiven

• Forgiven funds could have tax implications [28]

Your business should follow these record-keeping practices:

• Set up separate accounts for PPP funds

• Track eligible expenses systematically

• Keep detailed payroll records

• Document all covered operational costs [26]

The Department of Justice looks closely at cases with documentation problems, focusing on:

• Wrong financial information

• Incomplete expense records

• Wrong employee counts

• Unauthorized use of funds [29]

Conclusion

PPP loan eligibility restrictions remain crucial for businesses with existing loans or forgiveness applications. The program ended in 2021, yet these guidelines affect thousands of businesses across the country.

Businesses must assess their status on multiple fronts. This includes simple size requirements, industry limits, financial standing, ownership structure, and documentation needs. A single oversight can result in loan denial or forgiveness rejection.

Strict documentation rules protect against fraud and ensure proper fund distribution. A business’s detailed records of eligibility status, financial documents, and fund usage must be kept for required periods. This comprehensive approach protects lenders and borrowers while preserving the program’s integrity.

Note that PPP loan compliance extends beyond the original approval. Knowledge of these restrictions helps you direct existing obligations and avoid legal issues. Your documentation should stay current, and you should seek professional guidance whenever needed.

FAQs

Q1. Who is not eligible for a PPP loan? Businesses not eligible for PPP loans include those not in operation before February 15, 2020, entities in bankruptcy proceedings, businesses engaged in illegal activities, and companies with controlling interests held by high-ranking government officials. Additionally, hedge funds, private equity firms, and businesses that have defaulted on federal loans within the last seven years are ineligible.

Q2. What are the basic requirements for PPP loan eligibility? To be eligible for a PPP loan, businesses generally must have 500 or fewer employees, been in operation before February 15, 2020, and have paid salaries and payroll taxes for employees or made payments to independent contractors. Some exceptions exist for certain industries regarding employee count limits.

Q3. Are there any industry-specific restrictions for PPP loans? Yes, there are industry-specific restrictions. Businesses involved in illegal activities, including marijuana-related businesses (even in states where it’s legal), are ineligible. Certain financial institutions, businesses promoting religion, and those involved in political or lobbying activities are also restricted. The gaming industry has seen changes in eligibility rules over time.

Q4. How does a business owner’s criminal background affect PPP loan eligibility? A business may be ineligible if a 20% or more equity owner is currently incarcerated, faces pending felony charges, or was convicted of financial crimes within the past five years. However, the rules have been eased for owners with misdemeanor charges or those on probation or parole.

Q5. What documentation is crucial for PPP loan applications? Essential documentation includes tax records such as IRS Form 940 or 941s, state quarterly wage unemployment insurance tax filings, and federal tax returns. For self-employed individuals, Form 1040 Schedule C is required. Comprehensive financial statements, including payroll documentation and business expense records, are also crucial. Incomplete or inaccurate documentation can lead to loan denial or forgiveness rejection.

Common Misconceptions About PPP Loan Eligibility

Understanding the eligibility criteria for PPP loans can be complex, and several misconceptions often arise. Here are some common misunderstandings and the facts to clarify them:

Misconception 1: Only Businesses with Employees Qualify

Many believe that only businesses with traditional employees can apply for PPP loans. However, self-employed individuals, independent contractors, and sole proprietors are also eligible if they file an IRS Schedule C with their Form 1040.

Misconception 2: Businesses in Bankruptcy Can’t Apply

While active bankruptcy proceedings generally disqualify a business from receiving a PPP loan, there are exceptions. For example, businesses that have completed Chapter 7 bankruptcy may regain eligibility after a discharge order is issued.

Misconception 3: All Nonprofits Are Eligible

Not all nonprofit organizations qualify for PPP loans. Only certain types of nonprofits, such as 501(c)(3) organizations, are eligible. Other types, like 501(c)(6) organizations, may have different eligibility criteria.

Misconception 4: PPP Loans Are Only for Payroll

While the primary purpose of PPP loans is to cover payroll costs, they can also be used for other expenses, such as mortgage interest, rent, and utilities, up to a certain percentage of the loan amount.

Misconception 5: Loan Forgiveness Is Automatic

Loan forgiveness is not automatic. Borrowers must apply for forgiveness and provide documentation showing that the funds were used for eligible expenses. Meeting the criteria for forgiveness is crucial to avoid repayment.

Misconception 6: Large Corporations Are Always Ineligible

While the program targets small businesses, larger companies in specific industries may qualify if they meet the SBA’s size standards or if they have fewer than 500 employees per location, such as in the hospitality industry.

By addressing these misconceptions, businesses can better understand their eligibility and navigate the PPP loan process more effectively. Always consult with a financial advisor or CPA for guidance tailored to your specific situation.