Who Is Not Eligible for a PPP Loan? A Complete Breakdown

Who Is Not Eligible for a PPP Loan? A Complete Breakdown

The Paycheck Protection Program closed to new applications on May 31, 2021, so nobody is eligible for a new PPP loan today. The question still matters enormously, though, because eligibility determines forgiveness, and federal enforcement against borrowers who did not qualify is active and running on a ten-year clock. If you are researching this now, you are almost certainly dealing with the aftermath rather than an application. Here is the detailed breakdown.

Program Status First

The PPP was created by the CARES Act in March 2020 and administered by the Small Business Administration. It ran through several phases before ending on May 31, 2021.

That matters for anyone asking who is not eligible for a PPP loan today, because the answer in the simplest sense is everyone. The program is closed and no new loans are being made.

The question remains live for several groups: borrowers seeking forgiveness, businesses under SBA review or audit, those facing federal investigation, lenders reconciling files, and researchers examining how the program was administered.

The Regulatory Basis

Understanding who is not eligible for a PPP loan requires knowing where the rules came from, because this caused genuine confusion at the time.

The CARES Act itself was expansive, and many observers initially believed it swept aside existing SBA lending restrictions. Then, on April 2, 2020, the day before lenders began accepting applications, the SBA issued its first Interim Final Rule stating that businesses ineligible under existing SBA rules were also ineligible for PPP.

Specifically, the IFR incorporated 13 CFR 120.110, the regulation titled “What businesses are ineligible for SBA business loans?”, along with the SBA’s Standard Operating Procedure 50 10.

This meant a decades-old list of exclusions written for conventional SBA 7(a) lending suddenly governed a pandemic relief program, with some carve-outs. The timing, one day before applications opened, contributed substantially to the confusion that followed.

The Core Exclusion List

The following categories appear in 13 CFR 120.110. Several were modified for PPP, and those modifications are covered in the next section, so read both together.

Non-profit businesses. Excluded under the general rule, though for-profit subsidiaries qualify.

Financial businesses primarily engaged in lending. Banks, finance companies, and factors. Pawn shops, despite lending, could qualify in some circumstances.

Passive businesses owned by developers and landlords that do not actively use or occupy the assets acquired or improved with loan proceeds, other than Eligible Passive Companies under 13 CFR 120.111.

Life insurance companies.

Businesses located in a foreign country, though US businesses owned by non-citizens could qualify.

Pyramid sale distribution plans.

Businesses deriving more than one-third of gross annual revenue from legal gambling activities.

Businesses engaged in any activity illegal under federal, state, or local law.

Private clubs and businesses limiting membership for reasons other than capacity.

Government-owned entities, except businesses owned or controlled by a Native American tribe.

Loan packagers earning more than one-third of gross annual revenue from packaging SBA loans.

Businesses with an Associate who is incarcerated, serving a sentence following adjudication of guilt, or under indictment for a felony or a crime involving financial misconduct or false statements.

Businesses in which the lender or any of its Associates holds an equity interest.

Businesses presenting live performances of a prurient sexual nature, or deriving significant revenue from prurient sexual material.

Businesses that previously defaulted on federal loans or federally assisted financing causing the government a loss, unless waived by the SBA for good cause. This extends to businesses owned or controlled by anyone who previously owned or controlled such a defaulting business.

Speculative businesses, a category that historically included certain builders constructing homes for future sale without contracts in place, alongside other ventures whose income depended on speculation rather than operations.

Businesses primarily engaged in political or lobbying activities.

Two points about this list are worth emphasizing. First, it was written long before the pandemic for a conventional government-guaranteed lending program where the SBA was managing default risk on commercial loans, not distributing emergency payroll support. Several exclusions that make sense in the former context sit awkwardly in the latter, which is a large part of why the incorporation of these rules generated so much criticism at the time.

Second, the list operates at the level of what a business primarily does rather than what it happens to do occasionally. Thresholds such as the one-third revenue tests for gambling and loan packaging exist precisely because the drafters were trying to capture a business’s dominant activity rather than any incidental revenue stream.

The PPP-Specific Modifications

This is where answering who is not eligible for a PPP loan becomes genuinely complicated, because several exclusions were suspended or waived specifically for PPP.

Nonprofits became eligible. The CARES Act expressly authorized 501(c)(3) organizations and certain others, overriding the general nonprofit exclusion. This was one of the most significant departures from standard SBA lending.

Religious organizations became eligible. The standard exclusion for businesses principally engaged in teaching, instructing, counseling, or indoctrinating religion was lifted for PPP. Faith-based organizations could receive loans, and SBA affiliation rules could be waived where affiliations stemmed from religious teaching or constituted part of the exercise of religion.

Legal gambling restrictions were relaxed. An Interim Final Rule issued April 24, 2020 modified the treatment of businesses with legal gaming revenue, easing the original one-third threshold.

Certain lobbying restrictions were adjusted relative to standard SBA treatment.

Criminal history rules were narrowed over time. The original restrictions regarding incarceration, probation, parole, and indictment were progressively loosened across the program’s phases, with the look-back periods for prior convictions shortened.

Nonprofit size standards changed. The American Rescue Plan Act, enacted March 11, 2021, raised the size standard for 501(c)(3) organizations from 500 employees total to 500 per physical location. The SBA later confirmed that organizations receiving loans before that date would not be denied forgiveness solely for exceeding 500 employees across multiple locations.

The practical consequence is that any analysis of who is not eligible for a PPP loan must account for which phase of the program applied, since rules changed repeatedly between April 2020 and May 2021.

Household Employers

A category worth separating out because it surprised many people. The SBA determined that household employers are ineligible because they are not businesses within the meaning of 13 CFR 120.100.

This meant individuals employing nannies, housekeepers, caregivers, or other domestic staff could not obtain a PPP loan for those payroll costs, even though they were genuine employers with genuine payroll obligations and genuine pandemic disruption.

Size Standards

Size was among the most common answers to who is not eligible for a PPP loan, and among the most frequently miscalculated.

The general threshold was 500 or fewer employees, though applicants could alternatively qualify under the SBA size standard for their industry, which is sometimes larger and measured by revenue rather than headcount.

Two complications caused frequent problems:

Affiliation rules. Employees of affiliated entities generally had to be counted together. A business with 200 employees owned by a private equity fund with several other portfolio companies might exceed the threshold once affiliates were aggregated. Affiliation could arise through ownership, common management, contractual relationships, or identity of interest, and the analysis was frequently not obvious from the face of an organizational chart.

Waivers existed for certain sectors, notably accommodation and food service businesses under NAICS code 72, which could apply the employee threshold per physical location rather than in aggregate, along with franchises carrying SBA franchise identifier codes and businesses that had received SBIC financing.

Second Draw loans were stricter, capping eligibility at 300 employees.

Second Draw Specific Requirements

Second Draw PPP loans, introduced in the Economic Aid Act of December 2020, added conditions. Businesses failing any of these were ineligible for a second loan regardless of first-round status:

The 25% revenue reduction requirement was the most consequential. Businesses that weathered the pandemic without that scale of decline were simply not eligible, which was the intended targeting.

Foreign Ownership Restrictions

Later program phases added restrictions concerning entities with significant ownership connections to certain foreign governments, reflecting national security concerns raised during the program.

Businesses were also required to certify regarding their principal place of business and the location of their operations and employees, and businesses located in foreign countries remained excluded throughout.

Bankruptcy: A Contested Question

One area genuinely deserves flagging as unsettled rather than clear.

The SBA’s position was that businesses in bankruptcy were ineligible for PPP loans. That position was challenged in litigation, and courts split on the question. A federal court in Alaska granted summary judgment for a debtor challenging its exclusion, while other courts reached different conclusions.

Anyone whose situation involves this issue should treat it as a matter requiring legal advice rather than a settled rule, since outcomes varied by jurisdiction and by the specifics of the case.

Public Companies and the Need Certification

Publicly traded companies were not categorically excluded, which generated significant controversy when large public companies received substantial loans in the first round.

The constraint operated through the good faith need certification. Borrowers certified that economic uncertainty made the loan request necessary to support ongoing operations. The SBA subsequently issued guidance stating that borrowers with substantial market value and access to capital markets were unlikely to be able to make that certification in good faith, and established a safe harbor period during which loans could be repaid without penalty.

Numerous public companies returned funds. This illustrates something important about who is not eligible for a PPP loan: some exclusions operated through certification requirements rather than through categorical bars, and the practical effect was similar.

Why This Still Matters

The enforcement dimension is why who is not eligible for a PPP loan retains real stakes years after the program closed.

Forgiveness depends on eligibility. A borrower who was never eligible faces denial of forgiveness and an obligation to repay.

SBA review continues. Loans, particularly larger ones, have been subject to review examining eligibility, loan amount calculation, and use of proceeds.

Federal enforcement is extensive. The Department of Justice has pursued a large volume of PPP fraud cases, and civil actions under the False Claims Act have targeted borrowers who obtained loans while ineligible.

The statute of limitations was extended. The PPP and Bank Fraud Enforcement Harmonization Act, enacted in 2022, extended the limitations period for PPP fraud to ten years. That is an unusually long window and means exposure persists well into the 2030s for loans made in 2020 and 2021.

An important distinction: a genuine good-faith error about a complex and repeatedly amended rule is not the same as deliberate fraud, and enforcement has generally focused on clear misrepresentation, fabricated payroll figures, non-existent businesses, and applicants who knew they did not qualify. That said, the distinction is one that lawyers and prosecutors argue about, which is precisely why professional advice matters here.

Common Misunderstandings

Several recurring errors shaped who ultimately received loans they should not have.

Assuming the CARES Act overrode all SBA restrictions. Many applicants and some advisers believed this initially, and the April 2 IFR contradicted it.

Ignoring affiliation rules. Businesses counted only their own employees without aggregating affiliates, particularly common among private equity and venture-backed companies.

Misunderstanding independent contractors. Contractors were not counted as employees for the applicant’s payroll calculation, since they could apply independently. Businesses including contractor payments in payroll costs inflated their loan amounts improperly.

Applying the wrong phase’s rules. Guidance changed repeatedly, and applicants sometimes relied on outdated or superseded rules.

Assuming cannabis businesses qualified. Because cannabis remains federally illegal, cannabis businesses fell under the exclusion for activity illegal under federal law, even where fully licensed under state law. This extended to some businesses deriving substantial revenue from serving the cannabis industry.

Overlooking the delinquent federal debt exclusion. Businesses with defaulted federal loans, including certain student loans held by owners in some circumstances, encountered problems.

Treating the need certification as a formality. It was a certification made under penalty of law, and the fact that it involved a judgment about economic uncertainty rather than a hard numerical test did not make it optional.

Assuming a lender’s approval settled the question. Lenders were permitted to rely substantially on borrower certifications, and approval did not constitute an SBA determination that the borrower was eligible. A number of borrowers reasonably but incorrectly treated funding as confirmation that their analysis was correct.

What to Do If You Have Concerns

Practical guidance for anyone who now suspects their situation is problematic.

Do not ignore it. The ten-year limitations period means the issue does not simply expire quietly, and problems identified during SBA review are considerably easier to address before they escalate.

Gather documentation. Application materials, payroll records, revenue figures supporting any reduction claim, records of how funds were spent, and the guidance in effect when you applied.

Establish what rules applied at your application date, since this is frequently decisive and frequently overlooked.

Consult a qualified attorney, particularly one experienced in SBA matters or white collar defense if enforcement is a realistic concern. This is not a situation for informal advice.

Involve your CPA on calculation and documentation questions.

Do not make unilateral disclosures or repayments without legal advice, since how and when such steps are taken affects your position.

Be careful with communications. Anything you write about the matter may later be discoverable.

Where the Authoritative Information Lives

For anyone researching who is not eligible for a PPP loan properly, the primary sources are:

• 13 CFR 120.110, the base ineligibility regulation, available through eCFR and Cornell’s Legal Information Institute.
• SBA Standard Operating Procedure 50 10, which elaborates the categories.
• The SBA Interim Final Rules, issued throughout the program and containing the PPP-specific modifications.
• SBA and Treasury FAQ documents, which clarified numerous points.
• The CARES Act, the Economic Aid Act, and the American Rescue Plan Act, the underlying statutes.

Secondary summaries, including this article, are useful for orientation but should never be relied upon for a decision with legal consequences. The rules changed repeatedly, applied differently across phases, and were interpreted variously by courts.

A Necessary Caveat

This is a general explanation of a closed federal program, not legal or financial advice for any specific situation.

PPP eligibility depended on the phase of the program, the applicant’s structure, affiliation relationships, industry classification, the guidance in effect on the application date, and in some areas on unresolved litigation. Two businesses that look similar may have had genuinely different eligibility positions.

Anyone facing a forgiveness denial, an SBA review, a subpoena, or a federal inquiry should obtain qualified legal representation rather than relying on any general summary.

The bottom line on who is not eligible for a PPP loan is that the program closed to new applications on May 31, 2021, so nobody can obtain one now, but eligibility continues to matter for forgiveness and enforcement. The exclusions came primarily from 13 CFR 120.110, incorporated by the SBA’s April 2, 2020 Interim Final Rule, covering financial businesses primarily engaged in lending, passive real estate holdings, life insurance companies, foreign-located businesses, pyramid schemes, businesses engaged in federally illegal activity including cannabis, private clubs, government-owned entities, businesses with defaulted federal debt, prurient businesses, and household employers, alongside size limits of 500 employees for First Draw and 300 plus a 25% revenue reduction for Second Draw. Several standard exclusions were waived for PPP, notably for nonprofits and religious organizations, and the rules shifted repeatedly across program phases, which is why the guidance in effect on your application date is often the decisive question.

Key Takeaways

• The Paycheck Protection Program closed to new applications on May 31, 2021, so no new loans are available.
• Eligibility still matters because it determines forgiveness and because federal enforcement remains active.
• The SBA’s April 2, 2020 Interim Final Rule incorporated 13 CFR 120.110, applying existing SBA exclusions to PPP.
• Excluded categories included lending businesses, passive landlord entities, life insurance companies, and foreign-located businesses.
• Businesses engaged in federally illegal activity were excluded, which barred state-licensed cannabis businesses.
• Household employers were ineligible because the SBA determined they are not businesses under 13 CFR 120.100.
• Nonprofits and religious organizations were made eligible for PPP despite standard SBA exclusions.
• First Draw loans generally required 500 or fewer employees, with affiliation rules aggregating related entities.
• Second Draw loans required 300 or fewer employees and at least a 25% revenue reduction in a comparable quarter.
• Public companies were not categorically barred but were constrained by the good faith need certification.
• Whether businesses in bankruptcy were eligible was litigated, and courts reached differing conclusions.
• The statute of limitations for PPP fraud was extended to ten years by legislation enacted in 2022.
• Rules changed repeatedly across program phases, so the guidance in effect on the application date is often decisive.
• Anyone facing forgiveness denial, SBA review, or federal inquiry should obtain qualified legal representation.