The Paycheck Protection Program (PPP) established by the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) makes available up to $349 billion in potentially forgivable loans to small businesses to assist those businesses in paying payroll costs and certain other expenses. We previously circulated a legal alert that outlines the terms and conditions of the PPP.
The Small Business Administration (SBA) has recently published a document providing answers to frequently asked questions relating to the PPP. The SBA intends to update the document on a regular basis. Below we highlight some of the guidance provided therein as of the date of this legal alert.
Businesses eligible to receive PPP funds include the following, to the extent operating on February 15, 2020:
- Small businesses, nonprofits, veterans organizations, and tribal business concerns:
- with 500 or fewer employees whose principal place of residence is in the U.S.;
- with more than 500 employees if the business meets an applicable employee-based size standard established by the SBA for the primary industry in which the business operates; or
- in the hotel and food services industries, which fall under NAICS code 72, with 500 or fewer employees per physical location;
- Sole proprietors, self-employed individuals, and independent contractors; and
- Businesses that qualify as “small business concerns” under the Small Business Act
The size standard that must be met for a business to qualify as a “small business concern” is either the employee-based or revenue-based size standard established by the SBA for the primary industry in which the business operates or the SBA’s alternative size standard as of March 27, 2020. The alternative size standard requires that both (1) the maximum tangible net worth of the business be 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 loan application be not more than $5 million.
Aggregation with Affiliates:
It is the applicant’s responsibility to apply the SBA’s affiliation rules (summarized by the SBA here) to determine all of its affiliates, as well as the aggregate employee headcount of the applicant and its affiliates, before submitting a PPP loan application.
Breaking Affiliation with a Minority Owner:
Under the SBA’s affiliation rules, a minority owner of an entity is deemed to be an affiliate of that entity if the minority owner can prevent a quorum or otherwise block action by the entity’s board of directors/managers or by the entity’s owners. However, the SBA has made clear that if the minority owner irrevocably gives up those rights, it will no longer be deemed an affiliate of the entity for purposes of the PPP (assuming no other relationship creates affiliation under the SBA’s affiliation rules).
Use of a Payroll Provider:
Employees of an eligible borrower that uses a Professional Employer Organization or other payroll provider will not be considered employees of the payroll provider. In connection with its PPP loan application, an applicant may provide a lender with payroll documentation prepared by the applicant’s payroll provider indicating wages and payroll taxes that such payroll provider reported to the IRS with respect to the applicant’s employees.
Certain Exclusions from “Payroll Costs”:
$100,000 per Employee Limit: The definition of “payroll costs” under Section 1102 of the CARES Act excludes the compensation of an individual employee in excess of an annual salary of $100,000. The SBA has clarified that this exclusion applies only to cash compensation and not to non-cash benefits.
Federal Payroll and Income Taxes: Payroll costs do not include the employer’s share of federal payroll taxes. Payroll costs do include, and should not be reduced by, an employee’s share of federal payroll taxes and any income taxes required to be withheld from an employee.
Amounts Paid to Independent Contractors: Any amounts paid by an applicant to an independent contractor or sole proprietor should be excluded from the applicant’s calculated payroll costs. Independent contractors and sole proprietors may be eligible to apply for their own PPP loans.
Time Period for Determining Average Payroll Costs and Number of Employees:
To calculate their maximum loan amounts, applicants may use payroll cost data either from the previous 12 months or from the 2019 calendar year. Seasonal businesses may instead refer to the period from either February 15 or March 1, 2019 to June 30, 2019, and new businesses may instead refer to the period from January 1, 2020 to February 29, 2020.
The same time periods may be used to calculate the average number of employees of an applicant and its affiliates, to determine whether the applicant is eligible for a PPP loan based on number of employees. Alternatively, an applicant may use the average number of employees per pay period for the most recent 12 completed calendar months prior to the date of the loan application, or for each pay period during which the applicant was in operation in the case of new businesses.
Time Period for Determining Loan Forgiveness:
The amount eligible for loan forgiveness will be determined based on a borrower’s eligible costs over the eight-week period beginning on the date the loan is funded.
Date of First Disbursement of a Loan:
A lender is required to make the first disbursement of a loan no later than ten days after the date of loan approval.
Authorization to Sign Application and Make Certifications Therein:
A single authorized representative of an applicant may sign the PPP loan application on behalf of the applicant. However, by doing so, this person is representing to the lender and the U.S. government that he or she is authorized to make the certifications set forth in the application, with respect to both the applicant and each owner of 20% or more of the applicant’s equity.
The SBA has provided a standard form promissory note that may be used by lenders in connection with PPP loans. Alternatively, lenders may use their own promissory notes.
Effect of Updated Guidance:
No action need be taken by an applicant or lender based on updated guidance from the SBA after the submission of the applicant’s PPP loan application. However, an applicant may revise its loan application if the loan has not yet been received, in order to reflect updated guidance from the SBA.