On April 6, 2020, the U.S. Small Business Administration (SBA) issued FAQs in an effort to provide timely additional guidance to address borrower and lender questions concerning the implementation of the Paycheck Protection Program (PPP).
The PPP was established by the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). The FAQs were released only four days after the SBA published the Interim Final Rule that was meant to implement the PPP. The CARES Act was enacted on March 27, 2020.
The SBA indicated that they will update the issued FAQs on a regular basis, and in fact issued updated FAQs on April 7, 2020. We expect the SBA’s guidance to change frequently as the PPP program evolves.
Although the FAQs are not law, they provide clarification regarding the SBA’s interpretation of a number of aspects of the PPP, including the following:
SBA / PPP Clarifications
- Paid Sick Leave. PPP loans covers payroll costs, including costs for employee vacation, parental, family, medical, and sick leave. However, the CARES Act excludes qualified sick and family leave wages for which a credit is allowed under the employer paid leave provisions of the Families First Coronavirus Response Act. Learn more about the Paid Sick Leave Refundable Credit here.
- Application Guidance. Borrowers and lenders may rely on the laws, rules, and guidance that was available at the time of the relevant application (in the case of loan applications filed or approved prior to the FAQs). However, borrowers whose previously submitted loan applications have not yet been processed may revise their applications based on clarifications reflected in these FAQs.
- Existing SBA Customers. If the PPP loan is being made to an existing customer and the necessary information was previously verified, lenders do not need to re-verify the information.
- Confirming Borrower Payroll Costs. Lenders are not required to verify the details of every borrower’s payroll costs calculations. It is the responsibility of the borrower to provide reliable payroll calculations, and the borrower must attest to the accuracy of those payroll calculations. Lenders are expected to perform only a good faith review. If a lender identifies errors during review, the lender should work with the borrower to remedy the error.
- Applicability of Affiliation Rules. Lenders are not required to make independent determinations of regarding applicability of affiliation rules to borrowers. It is the responsibility of the borrower to determine which entities (if any) are its affiliates and determine the employee headcount of the borrower and its affiliates. Lenders are permitted to rely on borrowers’ certifications.
- Evaluating Borrower Eligibility. A lender may consider whether a seasonal borrower was in operation on February 15, 2020 or for an 8-week period between February 15, 2019 and June 30, 2019 when evaluating PPP loan eligibility.
- Borrower Signatures. Lenders are permitted to accept signatures from a single individual who is authorized to sign on behalf of the borrower. However, only an authorized representative of the business seeking a loan may sign on behalf of the business. Therefore, an individual’s signature as an “Authorized Representative of Applicant” is a representation to the lender and to the U.S. government that the signer is authorized to make the certifications contained in the Borrower Application Form.
- Online Portals and Forms. Lenders may use their own online systems and any form they establish that asks for the same information (using the same language) as the Borrower Application Form. Lenders are still required to send the data to SBA using SBA’s interface.
- Payroll Costs Exclusion - $100k Employees. The exclusion of compensation in excess of $100,000 annually applies only to cash compensation, not to non-cash benefits, including contributions and payments for certain: (i) retirement plans; (ii) employee benefits consisting of group health care coverage, including insurance premiums; and (iii) state and local taxes assessed on compensation of employees.
- Payroll Costs Exclusion – Sole Proprietors and Independent Contractors. Any amounts that an eligible borrower has paid to an independent contractor or sole proprietor should be excluded from the eligible business’s payroll costs. However, an independent contractor or sole proprietor will itself be eligible for a loan under the PPP, if it satisfies the applicable requirements. We anticipate updated or even reversed guidance on this in the future, as this FAQ guidance, which is not law, expressly contradicts the legally binding provisions of the CARES Act stating that independent contractors are included in the definition of payroll costs.
- Federal Taxes. Payroll costs are calculated on a gross basis without regard to federal taxes imposed or withheld, such as the employee’s and employer’s share of FICA and income taxes required to be withheld from employees. As a result, payroll costs are not reduced by taxes imposed on an employee and required to be withheld by the employer, but payroll costs do not include the employer’s share of payroll tax.
Example: An employee who earned $4k/month in gross wages, from which $500 in federal taxes was withheld, would count as $4k in payroll costs. The employee would receive $3,500, and $500 would be paid to the federal government. However, the employer-side federal payroll taxes imposed on the $4k in wages are excluded from payroll costs under the statute.
- Borrowers Not Required to be Small Business Concerns. Borrowers are not required to qualify as a “small business concern” under existing law in order to participate in the PPP. In addition to small business concerns, a business is eligible for a PPP loan if the business has 500 or fewer employees whose principal place of residence is in the United States, or the business meets the SBA employee-based size standards for the industry in which it operates (if applicable). Similarly, PPP loans are also available for qualifying tax-exempt nonprofit organizations, tax-exempt veterans organizations, and Tribal business concerns that have 500 or fewer employees whose principal place of residence is in the United States, or meet the SBA employee-based size standards for the industry in which they operate.
- Eligibility of Small Business Concerns. Small business concerns may be eligible borrowers even if they have more than 500 employees, as long as they satisfy the existing statutory and regulatory definition of a “small business concern” under section 3 of the Small Business Act, 15 U.S.C. 632. A business may qualify if it meets the SBA employee-based or revenue-based size standard corresponding to its primary industry. Go to www.sba.gov/size for the industry size standards. Additionally, a business can qualify for the Paycheck Protection Program as a small business concern if it met both tests in SBA’s “alternative size standard” as of March 27, 2020: (1) maximum tangible net worth of the business is not more than $15 million; and (2) the average net income after Federal income taxes (excluding any carry-over losses) of the business for the two full fiscal years before the date of the application is not more than $5 million.
- Application of Affiliation Rules. Borrowers must apply the affiliation rules set forth in SBA’s Interim Final Rule on Affiliation when applying for a loan under the PPP. Note that the SBA’s existing affiliation exclusions apply to the PPP, including, for example the exclusions under 13 CFR 121.103(b)(2).
- Minority Shareholders Affiliate Rule. If a minority shareholder has the right to prevent a quorum or otherwise block action by the board of directors or shareholders, then the SBA will deem that minority shareholder to be an affiliate of that business due to control. If a minority shareholder in a business irrevocably waives or relinquishes certain rights under existing law, the minority shareholder would no longer be an affiliate of the business (assuming no other relationship that triggers the affiliation rules).
- Eligible Borrowers that Contract with a Professional Employer Organization (PEO). The SBA recognizes that some borrowers use PEOs or similar payroll providers, and that some state registration laws require them to report wage and other data on the EIN of the PEO or other payroll provider. In these cases, payroll documentation provided by the payroll provider that indicates the amount of wages and payroll taxes reported to the IRS by the payroll provider for the borrower’s employees will be considered acceptable PPP loan payroll documentation.
- Prior Felonies. Businesses are only ineligible if an owner of 20% or more of the equity of the applicant is, among other things, (i) presently incarcerated, on probation, on parole, or (ii) has been convicted, pleaded guilty, or pleaded nolo contendere for any felony within the last five years.
- Time Periods for Loan Calculations. Borrowers can calculate their aggregate payroll costs using data either from the previous 12 months or from calendar year 2019. For seasonal businesses, the applicant may use average monthly payroll for the period between February 15, 2019 or March 1, 2019, and June 30, 2019. An applicant that was not in business from February 15, 2019 to June 30, 2019 may use the average monthly payroll costs for the period January 1, 2020 through February 29, 2020.
- Employee Count for Loan Amount Calculations. Borrowers may use their average employment over the same time periods (described above) to determine their number of employees, for the purposes of applying an employee-based size standard. Alternatively, borrowers may elect to use SBA’s usual calculation: the average number of employees per pay period in the 12 completed calendar months prior to the date of the loan application (or the average number of employees for each of the pay periods that the business has been operational, if it has not been operational for 12 months). Note that determining the number of employees in connection with applying for forgiveness of a PPP loan is a separate calculation.
The SBA (and the Department of the Treasury) are updating guidance in near-real time as borrowers and lenders report on their experiences under the PPP program. We expect to continue to receive updated guidance to accommodate any new Congressional action on the program. Borrowers and lenders therefore should consult their trusted advisor regarding the latest guidance in effect at the time they file.