SBA Paycheck Protection Program Frequently Asked Questions Updated to Address Key Issues

April 7, 2020

The Small Business Administration's Paycheck Protection Program (PPP) authorizes up to $349 billion for low-interest loans of up to $10,000,000 to borrowers to fund eligible payroll costs, interest on mortgage payments (which includes mortgages on real property and personal property), rental payments, utilities payments, and for other permitted purposes. The PPP expands the already existing 7(a) loan program by relaxing certain size standards, waiving certain affiliation rules, and making portions of the loan forgivable. The Small Business Administration (SBA) published an interim final rule (the “Interim Final Rule”) on April 2, 2020, discussed in our prior alert here. The SBA crafted the Interim Final Rule to more specifically address which businesses might be eligible, clarify the affiliation rules, and generally explain how the PPP would work.

Despite this additional guidance, many questions were left unanswered due to ambiguities in the Interim Final Rule and inconsistencies between it and the language of the CARES Act. To resolve these ambiguities and inconsistencies, the SBA released a Frequently Asked Questions (FAQ) resource, which was most recently updated on April 6, 2020 and is available here. The updated FAQ answers many of these unresolved questions. Below are some of the key questions addressed in the FAQ.

Question 3: Does my business have to qualify as a small business concern (as defined in section 3 of the Small Business Act, 15 U.S.C. 632) in order to participate in the PPP?

Answer: “No. 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 described in section 501(c)(3) of the Internal Revenue Code (IRC), tax-exempt veterans organization described in section 501(c)(19) of the IRC, and Tribal business concerns described in section 31(b)(2)(C) of the Small Business Act 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.”

Question 7: The CARES Act excludes from the definition of payroll costs any employee compensation in excess of an annual salary of $100,000. Does that exclusion apply to all employee benefits of monetary value?

Answer: “No. The exclusion of compensation in excess of $100,000 annually applies only to cash compensation, not to non-cash benefits, including:

  • employer contributions to defined-benefit or defined-contribution retirement plans;
  • payment for the provision of employee benefits consisting of group health care coverage, including insurance premiums; and
  • payment of state and local taxes assessed on compensation of employees.”

Question 8: Do PPP loans cover paid sick leave?

Answer: “Yes. 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 sections 7001 and 7003 of the Families First Coronavirus Response Act (Public Law 116–127).”

Question 14: What time period should borrowers use to determine their number of employees and payroll costs to calculate their maximum loan amounts?

Answer: “In general, 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.”

“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. 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).”

Question 15: Should payments that an eligible borrower made to an independent contractor or sole proprietor be included in calculations of the eligible borrower’s payroll costs?

Answer: “No. 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.”

Question 16: How should a borrower account for federal taxes when determining its payroll costs for purposes of the maximum loan amount, allowable uses of a PPP loan, and the amount of a loan that may be forgiven?

Answer: “Under the Act, payroll costs are calculated on a gross basis without regard to (i.e., not including subtractions or additions based on) federal taxes imposed or withheld, such as the 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.”

“For example, an employee who earned $4,000 per month in gross wages, from which $500 in federal taxes was withheld, would count as $4,000 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 $4,000 in wages are excluded from payroll costs under the statute.”

Footnote 2 to Question 16 adds that “Further, because the reference period for determining a borrower’s maximum loan amount will largely or entirely precede the period from February 15, 2020, to June 30, 2020, and the period during which borrowers will be subject to the restrictions on allowable uses of the loans may extend beyond that period, for purposes of the determination of allowable uses of loans and the amount of loan forgiveness, this statutory exclusion will apply with respect to such taxes imposed or withheld at any time, not only during such period.”

Question 17: I filed or approved a loan application based on the version of the PPP Interim Final Rule published on April 2, 2020. Do I need to take any action based on the updated guidance in these FAQs?

Answer: “No. Borrowers and lenders may rely on the laws, rules, and guidance available at the time of the relevant application. However, borrowers whose previously submitted loan applications have not yet been processed may revise their applications based on clarifications reflected in these FAQs.”

The FAQ provides more certainty for potential borrowers and lenders under the PPP. Nonetheless, we realize that not all of the ambiguities and questions about the PPP have been resolved. Each business’s situation is unique and may not have been addressed by the SBA. Lewis Rice will continue to monitor any additional guidance from the SBA and provide further updates. If your business is still unsure whether it may be eligible for a loan, how to complete the loan application, or about any other aspect of the PPP, please reach out to one of the authors above or another member of the Lewis Rice COVID-19 Task Force.

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