What Was PPP Round 3 and How Did It Work?

The Paycheck Protection Program (PPP) was a federal loan initiative designed to help small businesses keep employees on payroll during the COVID-19 pandemic. By early 2021, a third round of funding was introduced under the Economic Aid Act, offering additional relief. This phase included both first-time loans and “second draw” loans for businesses that had previously received PPP funds but needed further assistance.

Eligibility Requirements

Businesses seeking funding in the third round had to meet specific criteria. For second-draw loans, applicants needed 300 or fewer employees, a reduction from the 500-employee limit in earlier rounds. Restaurants, hotels, and other hospitality businesses under NAICS code 72 could apply based on a per-location employee cap, allowing multi-location businesses to qualify even if their total workforce exceeded 300.

A revenue decline of at least 25% in any quarter of 2020 compared to the same quarter in 2019 was required for second-draw loans. Gross receipts included all revenue sources—sales, interest, dividends, and rents—before expenses.

Certain businesses were ineligible, including lobbying organizations, politically affiliated entities, and publicly traded companies. Permanently closed businesses could not apply, though those temporarily shut down due to pandemic restrictions remained eligible.

Application Steps

Businesses applied through an approved lender, such as banks, credit unions, or online financial institutions. The Small Business Administration (SBA) maintained a list of authorized lenders, many of which offered online submission portals.

Applicants provided documentation verifying payroll, revenue decline, and operational status, typically including IRS Form 941 for payroll verification, bank statements, and profit-and-loss statements. Second-draw applicants completed SBA Form 2483-SD, while first-time borrowers used Form 2483. These forms required business structure details, tax identification numbers, and certifications of economic necessity.

Lenders reviewed applications for accuracy before submitting them to the SBA. Processing times varied, with some approvals taking days and others delayed due to verification issues or high application volumes. Once approved, funds were deposited into the business’s bank account, typically within 10 days. Borrowers had to follow program guidelines on fund usage and maintain documentation for potential audits or forgiveness applications.

Calculating Loan Amount

Loan amounts were based on payroll costs, with formulas depending on business type and industry. The standard calculation took the average monthly payroll from either 2019 or 2020 and multiplied it by 2.5. Payroll costs included wages, salaries, employer-paid benefits like health insurance and retirement contributions, and state and local payroll taxes. Compensation for individual employees was capped at an annualized $100,000.

Restaurants and hospitality businesses under NAICS code 72 received a higher multiplier of 3.5 times average monthly payroll due to the severe impact of pandemic restrictions.

For sole proprietors, independent contractors, and self-employed individuals, loan amounts were based on net profit as reported on IRS Schedule C. The maximum loan cap was $20,833 if using the $100,000 income limit.

Lenders verified calculations and required supporting tax forms, such as IRS Form 940 or Form 944 for businesses with employees, while sole proprietors submitted Schedule C from Form 1040. Errors in payroll calculations or missing documentation could delay approval.

Eligible Usage of Funds

PPP Round 3 maintained strict guidelines on fund usage. At least 60% of loan proceeds had to go toward payroll expenses, including wages, employer-covered health insurance premiums, retirement contributions, and certain payroll taxes.

Non-payroll expenses included rent, mortgage interest, and utilities. This round also expanded eligible costs to include supplier payments for essential goods, worker protection expenses like PPE and facility modifications for COVID-19 safety compliance, and certain software or cloud computing services necessary for business operations.

Forgiveness Process

To qualify for loan forgiveness, businesses had to document proper fund usage and submit an application to their lender, which then forwarded it to the SBA for approval. Borrowers could apply as soon as all funds were spent but had to do so within 10 months after their covered period ended to avoid repayment obligations. The covered period could be either 8 or 24 weeks.

The SBA provided different forgiveness application forms based on loan size. Loans of $150,000 or less used SBA Form 3508S, requiring minimal documentation. Larger loans required SBA Form 3508 or 3508EZ, which involved detailed payroll and expense verification.

Lenders reviewed applications for compliance with the 60/40 payroll-to-non-payroll spending rule. Reductions in employee headcount or wages could impact forgiveness amounts. Any unforgiven portion converted into a loan at 1% interest, repayable over five years.

Tax Implications

The tax treatment of PPP Round 3 loans had significant implications. Initially, there was uncertainty about whether expenses paid with forgiven PPP funds could be deducted, but the Consolidated Appropriations Act of 2021 confirmed that qualifying expenses remained fully deductible for federal tax purposes.

Forgiven loans were not considered taxable income at the federal level, but state tax treatment varied. Some states followed federal guidelines, while others taxed forgiven amounts or disallowed deductions for related expenses. Businesses had to review state-specific tax laws to determine their obligations.

Recipients were required to maintain accurate records for potential audits, as improper fund use or misrepresentation of financial hardship could result in penalties or repayment demands.