Additional Guidance Regarding PPP Loans from SBA as of April 6, 2020
The Small Business Administration (“SBA”), together with the US Department of the Treasury, has provided additional guidance in interpreting the Interim Final Rule effective April 2, 2020 in connection with the Paycheck Protection Program (“PPP”) Loans in the form of questions and answers. Most notable are the following points:
- The $100,000 cap on employee compensation only applies to cash compensation. It does not apply to non-cash benefits such as employer contributions to defined-benefit or defined-contribution retirement plans, payments for the provision of employee benefits consisting of group health care coverage, including insurance premiums; and payment of state and local taxes on compensation of employees, or employer contribution.
- If a business has more than 500 employees, but is a “Small Business Concern,” as defined in Section 3 of the Small Business Act, 15 U.S.C. 632 (generally deemed to be an enterprise which is independently owned and operated and which is not dominant in its field of operation), it will not be disqualified from receiving a PPP loan on the basis of having more than 500 employees. A business can qualify if it meets the SBA employee-based or revenue-based size standard corresponding to its primary industry. The industry size standards can be found at www.sba.gov/size. A business can also qualify as a “Small Business Concern” if it meets both tests in the SBA’s “alternative size standard” as of March 27, 2020. The tests are (i) 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.
- PPP loans cover payroll costs, including costs of employee vacation, parental, family, medical and sick leave. However, qualified sick and family leave wages for which a credit is allowed under sections 7001 and 7003 of the Families First Coronavirus Response Act (Public Law 116-127) are excluded under the CARES Act.
- Seasonal businesses may still be eligible for a PPP loan, a lender may consider whether the seasonal borrower was in operation on February 15, 2020 or for an eight-week period between February 15, 2019 and June 30, 2019.
- Payroll costs are calculated on a gross basis without regard to federal taxes imposed or withheld such as employee’s and employer’s share of Federal Insurance Contributions Act (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.
- Eligible borrowers that contract with third-party payers such as Professional Employer Organizations (“PEO”) or other payroll providers are eligible for a PPP loan and the 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. This includes Schedule R (Form 941), Allocation Schedule for Aggregate Form 941 Filers, attached to the PEO’s Form 941, Employer’s Quarterly Federal Tax Return or just a statement from the payroll provider documenting the amount of wages and payroll taxes.
- Borrowers can calculate their aggregate payroll costs using data either from the previous 12 months or from calendar year 2019. Borrowers may use their average employment over the same time periods to determine their number of employees, for the purposes of applying an employee-based size standard. Borrowers could also elect to use the SBA’s usual calculation which is 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).
- Payments that an eligible borrower makes to an independent contractor or sole proprietor should not be included in calculations of the payroll costs. Independent contractors or sole proprietors could themselves be eligible for a loan under PPP if they satisfy the applicable requirements.
- Borrowers who previously submitted loan applications that have not yet been processed may revise their applications based upon the new guidance provided.
- Borrowers are required to apply the SBA’s affiliation rules under 13 C.F.R. 121.301(f) and must certify on the application form that the borrower is eligible to receive a PPP loan.
For more information on the topic discussed, contact:
E-Alert is a quarterly newsletter that features the latest thinking from Tannenbaum Helpern's various departments.