Payroll Protection Loans Under the CARES Act: Updated FAQs for Companies Seeking Assistance

April 3, 2020

By Wendy A. Lisman, Caitlin B. Houlton Kuntz, Erin M. Byom, Levi J. Smith, Marguerite J. Ahmann and Eldri L. Johnson

Additional updated information posted April 24, 2020: “Additional PPP Funding Available Soon and More SBA Clarifications

The Coronavirus Aid, Relief and Economic Security Act (CARES Act) recently signed into law creates a specific loan program through the Small Business Administration (SBA) to help small businesses retain employees and pay critical expenses in this challenging time.

The “Paycheck Protection Program” (PPP) expands and modifies the SBA’s current 7(a) loan guaranty program to provide up to $349 billion of federally-guaranteed loans for small businesses. These loans can be issued by qualified SBA lenders and are available to an expanded group of eligible borrowers during the period beginning February 15, 2020, through June 30, 2020. The maximum loan amount is $10.0 million. The loan provisions under the CARES Act are designed to keep small businesses, and their employees, at work.

Please note that additional guidance and regulations may be released by the SBA, and as such, the explanations below may continue to evolve.

A separate list of Frequently Asked Questions for Lenders will be forthcoming.

In addition to these FAQs, please refer to the following resources, which are being periodically updated by the Department of the Treasury:

Are the PPP loans under the CARES Act and the SBA Economic Injury Disaster Loans (EIDL) the same?

No. The SBA loans offered under the CARES Act and the SBA EIDL differ in eligibility requirements and terms. This Q&A addresses the loans that are available under the CARES Act.

In its April 2, 2020 Interim Final Rule, the SBA advised that borrowers who received an SBA EIDL loan from January 31, 2020, through April 3, 2020, may still apply for a PPP loan. If an EIDL loan was not used for payroll costs, the borrower would be eligible for a PPP loan. A borrower who used its EIDL loan proceeds to cover payroll costs would still be eligible for a PPP loan but must refinance the EIDL loan with its PPP loan proceeds. The SBA’s Interim Final Rule further states that proceeds from any advance up to $10,000 on the EIDL loan will be deducted from the loan forgiveness amount on the PPP loan.

For information specific to SBA EIDLs, please see our FAQ on SBA Economic Injury Disaster Loans Due to COVID-19.

How much money could a borrower receive through a PPP loan under the CARES Act?

The maximum loan amount is $10.0 million. A borrower will be eligible for the lesser of:

  • 2.5 times the borrower’s average total monthly “payroll costs” (as such term is defined below) that were incurred in the prior 12 months before the loan is made; plus
  • The outstanding amount of a loan that was made under the SBA’s disaster loan program during the period beginning on January 31, 2020, and ending on the date which the covered loan may be refinanced as part of this new loan program; or
  • $10.0 million.

To arrive at this calculation, the SBA has laid out the following helpful methodology:

  • Step 1: Aggregate payroll costs for the last twelve months for employees whose principal place of residence is the U.S. Payroll costs are defined below.
  • Step 2: Then, from that aggregation, subtract any compensation paid to an employee in excess of an annual salary of $100,000 and/or any amounts paid to an independent contract or sole proprietor in excess of $100,000 per year.
  • Step 3: Divide the amount you come to in Step 2 by 12. This is the average monthly payroll cost.
  • Step 4: Multiply the average monthly payroll cost in Step 3 by 2.5.
  • Step 5: Finally, add the outstanding amount of an EIDL made between January 31, 2020, and April 3, 2020, minus the amount of any advance under an EIDL COVID-19 loan, since the advance does not have to be repaid.

If the borrower’s business was not in existence from February 15, 2019 – June 30, 2019, the borrower is eligible for the lesser of:

  • 2.5 times the borrower’s average total monthly payroll costs incurred from January 1, 2020 – February 29, 2020; plus
  • The outstanding amount of a loan that was made under the SBA’s disaster loan program during the period beginning on January 31, 2020 and ending on the date which the covered loan may be refinanced as part of this new loan program; or
  • $10.0 million.

Follow the same calculation steps as above.

The following may be helpful illustrations for the maximum amount calculation:

Example 1:  No employees make more than $100,000

Annual payroll: $120,000
Average monthly payroll: $10,000
Multiply by 2.5 = $25,000
Maximum loan amount is $25,000

Example 2:  Some employees make more than $100,000

Annual payroll: $1,500,000
Subtract compensation amounts in excess of an annual salary of $100,000: $1,200,000
Average monthly qualifying payroll: $100,000
Multiply by 2.5 = $250,000
Maximum loan amount is $250,000

Example 3:  No employees make more than $100,000, outstanding EIDL loan of $10,000

Annual payroll: $120,000
Average monthly payroll: $10,000
Multiply by 2.5 = $25,000
Add EIDL loan of $10,000 = $35,000
Maximum loan amount is $35,000

Example 4:  Some employees make more than $100,000, outstanding EIDL loan of $10,000

Subtract compensation amounts in excess of an annual salary of $100,000: $1,200,000
Average monthly qualifying payroll: $100,000
Multiply by 2.5 = $250,000
Add EIDL loan of $10,000 = $260,000
Maximum loan amount is $260,000

Note that in its Interim Final Rule, the SBA clarifies that independent contractors have the ability to apply for a PPP loan on their own, so they do not count as employees for purposes of a borrower’s PPP loan calculations.

You can only apply for one loan under this program, so consider applying for the maximum amount.

What are the basic terms of a PPP loan?

All loan terms will be the same for every borrower, with a two-year maturity and 1.00 percent interest rate. Loan payments will be deferred for six months, but interest will accrue over this period.

There are no personal guarantee or collateral requirements for these loans, nor will there be prepayment penalties or fees.

Who is eligible to obtain a PPP loan?

During the covered period (February 15, 2020 through June 30, 2020), certain small businesses and other organizations meeting an employee size requirement are eligible to obtain PPP loans.

Eligible businesses include:

  • “Small business concerns,” defined in section 3 of the Small Business Act.
  • Any business, 501(c)(3) nonprofit organization, 501(c)(19) veteran’s organization, or tribal business concern (as described in section 31(b)(2)(c) of the Small Business Act) with 500 employees or fewer (or, if applicable, the SBA’s size standards for its industry, whichever is greater).
  • Businesses in the “Accommodation and Food Services” sector (Sector 72 of NAICS) with 500 or fewer employees per physical location. Sector 72 generally applies to establishments that provide their customers with lodging and/or meals, snacks or beverages for immediate consumption, such as hotels, motels, restaurants.
  • Sole proprietors, independent contractors and eligible self-employed individuals, as defined in the Families First Coronavirus Response Act (Families First Act), that submit the necessary supporting documentation to the SBA.

Otherwise eligible businesses will be ineligible in the following instances:

  • The borrower is engaged in any activity that is illegal under federal, state or local law;
  • The borrower is a household employer (individuals who employ household employees such as nannies or housekeepers);
  • An owner of 20 percent or more of the equity of the borrower is incarcerated, on probation, on parole; presently subject to an indictment, criminal information, arraignment or other means by which formal criminal charges are brought in any jurisdiction; or has been convicted of a felony within the last five years; or
  • The borrower, or any business owned or controlled by the borrower or the borrower’s owners, has ever obtained a direct or guaranteed loan from SBA or any other Federal agency that is currently delinquent or has defaulted within the last seven years and caused a loss to the government.

Ineligible businesses include, with a few exceptions, businesses engaged in lending, passive businesses, life insurance companies, businesses located in a foreign country or owned by undocumented aliens, businesses selling through a pyramid plan, businesses engaged in legal gambling activities, businesses that restrict patronage, government owned businesses, businesses that promote religion, businesses owned by an SBA lender or affiliate, business providing prurient sexual material, businesses primarily engaged in political or lobbying activities, and speculative businesses. See additional information regarding eligibility guidelines at SBA Statement of Procedures 50 10 5(K).

Who is considered an “employee” for purposes of the eligibility requirements?

The term “employees” includes those employed on a full-time, part-time or other basis. Independent contractors do not count as employees for purposes of loan calculations. Similarly, household employees, such as nannies or housekeepers, cannot be counted as employees (and household employers are not eligible for loans under this program).

Will the SBA’s affiliation rules apply for the purposes of eligibility?

Generally, yes, although they will be waived for certain businesses, including:

  • Businesses in the accommodation and food services sector (Sector 72 of NAICS) with 500 or fewer employees;
  • Franchises that have been assigned SBA franchisor identifier codes, and
  • Businesses that receive financial assistance from a Small Business Investment Company.

Otherwise, it appears that the SBA’s affiliation rules will continue to apply, though there remains considerable ambiguity surrounding how the SBA will interpret these rules for purposes of this program. For example, the Act expressly states that the SBA’s affiliation rules will apply to 501(c)(3) nonprofit organizations and 501(c)(19) veterans’ organizations in the same manner as a small business concern. However, the SBA’s Interim Final Rules state that eligible small business concerns are subject to the SBA’s affiliation rules (unless specifically waived under the Act), but are silent on their application to 501(c)(3) nonprofit organizations and 501(c)(19) veterans’ organizations and or tribal business concerns (as described in section 31(b)(2)(c) of the Small Business Act).

The SBA has advised that it intends to promptly issue additional guidance with regard to the applicability of affiliation rules to PPP loans.

How could PPP loan proceeds be used?

Since the program is designed to help keep employees at work, proceeds from a PPP loan may only be used for certain purposes, primarily toward payroll protection.

Permitted uses include:

  • “Payroll costs,” as defined in the Act;
  • Costs related to the continuation of group health care benefits during periods of paid sick, medical or family leave, and insurance premiums;
  • Mortgage interest payments, excluding mortgage prepayments or principal payments;
  • Rent payments, including rent under a lease agreement;
  • Utilities payments; and
  • Interest on any other debt obligations incurred before February 15, 2020; and/or
  • Refinancing an SBA EIDL loan made between January 31, 2020, and April 3, 2020.

Notably, the SBA has advised that at least 75 percent of the loan proceeds must be used for “payroll costs,” as defined in the Act and discussed further below. The percentage used for payroll costs would include any refinanced EIDL amounts.

Please note that for purposes of loan forgiveness, the borrower will have to document the proceeds used for payroll costs in order to determine the amount of forgiveness.

What kinds of expenses qualify as “payroll costs?”

“Payroll costs” means the sum of:

  • Employee compensation (e.g., salary, wages, commissions, cash or equivalents);
  • Payment for vacation, parental, family, medical or sick leave;
  • Allowance for dismissal or separation;
  • Payment for group health benefits, including insurance premiums;
  • Payment for any retirement benefit;
  • State and local payroll taxes; and
  • The sum of any compensation paid to a sole proprietor or independent contractor (i) that is a wage, commission, income net earnings from self-employment or similar compensation and (ii) that does not exceed $100,000 in one year, prorated for the covered period.

Payroll costs do not include:

  • Individual employee compensation above $100,000 per year, prorated for the covered period;
  • Certain federal taxes;
  • Compensation to employees whose principal place of residence is outside of the US; and
  • Sick and family leave wages for which credit is allowed under the Families First Coronavirus Response Act.

What if a borrower uses PPP funds for purposes other than permitted uses?

In its Interim Final Rule, the SBA states that those who use PPP funds for unauthorized purposes will be directed to repay those amounts. Further, borrowers who knowingly use the funds for unauthorized purposes will be subject to additional liability, such as fraud charges. If one of the borrower’s shareholders, members or partners uses PPP funds for unauthorized purposes, the SBA will have recourse against the shareholder, member or partner for the unauthorized use.

Are these loans eligible for forgiveness?

Yes. The loan is eligible for forgiveness up to the full principal amount of the loan and any accrued interest. The amount of the loan eligible for forgiveness will be equal to the sum of payments made for specific expenses:

  • Payments made toward mortgage interest
  • Payments made toward covered rent
  • Payments made toward covered payroll costs
  • Payments made toward covered utility expenses

Note, however, that because PPP loans are intended to keep workers employed, no more than 25 percent of the forgiven amount can be attributable to non-payroll costs. Said another way, if a borrower uses more than 25 percent of the loan proceeds to pay for anything other than qualifying payroll costs, even for otherwise permissible uses like rent and utilities, those amounts will not be forgiven.

What if the borrower cut back on staff or wages? Is the borrower’s loan still eligible for forgiveness?

Possibly. The forgiveness amount could be reduced if a borrower reduces staff or salaries within certain thresholds.

If a borrower reduces full time employees, the forgiveness amount will be reduced by an amount determined by the following equation:

  • The total forgiveness amount, multiplied by:
  • The average number of full-time employees of borrower per month during the covered period, divided by:
    • At borrower’s option, (1) the average number full-time employees of borrower per month between February 15, 2019, and June 30, 2019, or (2) the average number of full-time employees of borrower per month between January 1, 2020, and February 29, 2020; or
    • If the borrower is a “seasonal employer,” as determined by the SBA, the average number of full-time employees per month between February 15, 2019, and June 30, 2019.

If a borrower reduces salaries or wages, the forgiveness amount will be reduced by the total amount of reductions in salaries or wages during the covered period in excess of 25 percent of the employee’s total salary or wages during the most recent full quarter the employee was employed before the covered period. Note that for purposes of this equation, “employees” include only those who, for any pay period in 2019, were paid at an annualized rate of $100,000 or less.

While the above calculations can only be used to reduce the forgiveness amount, not increase it, a borrower who employs “tipped employees,” as defined by Fair Labor Standards Act, could also receive forgiveness for additional wages paid to such employees.

What if the borrower rehires its employees and raises salaries once things improve?

The forgiveness reduction penalties will not apply if, for employees or salaries reduced between February 15, 2020, and 30 days after the enactment of the CARES Act, the borrower rehires employees or raises salaries (or both, if the situation demands) back to their previous levels by June 30, 2020. Note that regulations prescribed by the SBA may make de minimis exceptions to these requirements.

What will be the process for loan forgiveness?

A borrower will need to submit an application for loan forgiveness to the appropriate lender. While additional details and forms have not yet been developed, the application will require, at a minimum, the following:

  • Documentation of the number of full-time employees and salaries or wages paid during the relevant periods, including federal payroll filings and state payroll, income and unemployment insurance filings
  • Documentation of qualifying expenses
  • Certification by an eligible representative of borrower that (1) the documentation submitted is true and correct and (2) the forgiveness amount was indeed used for qualifying expenses; and
  • Any other documentation determined necessary by SBA

After an application is submitted, the lender has 60 days to make a determination. Lenders will then work with the SBA to be reimbursed for the forgiven amount.

Where can a borrower apply?

A borrower can apply through any existing SBA lender or through any federally insured depository institution, federally insured credit union and Farm Credit System institution that is participating. Visit www.sba.gov for a list of SBA lenders.

When can a borrower apply?

  • Starting April 3, 2020, small businesses and sole proprietorships can apply for and receive loans to cover their payroll and other certain expenses through existing SBA lenders.
  • Starting April 10, 2020, independent contractors and self-employed individuals can apply for and receive loans to cover their payroll and other certain expenses through existing SBA lenders.
  • Other regulated lenders will be available to make these loans as soon as they are approved and enrolled in the program.

How does a borrower apply?

A borrower will need to complete the PPP loan application and submit the application with the required documentation to an existing SBA lender that is available to process the application by June 30, 2020. A link to the current application can be found above.

If you are eager to start your application, we recommend consulting with your local lender to see if they are an existing SBA-approved lender. For now, borrowers can apply through any existing SBA lender or through any federally insured depository institution, federally insured credit union and Farm Credit System institution that is participating. Other regulated lenders will be available to make these loans once they are approved and enrolled in the program.

A borrower must also provide the lender with payroll documentation to confirm eligibility and determine the maximum amount of the loan.

Does a borrower need to apply for other funds before applying for a PPP loan?

No. The SBA has waived its usual requirement (Credit Elsewhere) that a borrower try to obtain some or all of the loan amount needed from other sources.

Can e-signatures or e-consents be used if a borrower has more than one owner?

Yes, e-signatures or e-consents can be used.

Can a borrower apply for more than one PPP loan?

No, each borrower may only apply for one loan. Borrowers should consider this when applying to ensure they are requesting a loan in an amount sufficient for their business, subject to the other limitations applicable to the PPP loans.

Are PPP loans awarded on “first-come, first served” basis?

Yes.

What will a borrower need to certify in the application process?

There are a number of certifications and authorizations included on the application form that the borrower must make. The borrower must certify to the following in good faith:

  • The business was in operation on February 15, 2020, and had employees for whom it paid payroll taxes/salaries, or paid independent contractors as reported on Form(s)1099-MISC;
  • Current economic uncertainty makes the loan request necessary to support ongoing operations of the applicant;
  • The funds received from the loan will be used for to retain workers and maintain payroll, or for mortgage payments, lease payments and utility payments;
  • The applicant will provide documentation to lender verifying the number of full-time equivalent employees on applicant’s payroll as well as dollar amounts of payroll costs, covered mortgage interest payments, covered rent payments, and covered utilities for the eight-week period following the loan;
  • An acknowledgement by applicant that loan forgiveness will be provided for the sum of documented payroll costs, covered mortgage interest payments, covered rent payments and covered utilities. Not more than 25 percent of the forgiven amount may be for non-payroll costs;
  • An acknowledgement by applicant that from February 15, 2020, through December 31, 2020, the applicant has not and will not receive another loan under the PPP;
  • The applicant must further certify that information provided in the application and supporting documents is true and accurate in all material respects;
  • And an acknowledgement that the lender will confirm the eligible loan amount using the required documents submitted.

It is important for the borrower to note that the lender may rely on the borrower’s good faith certifications and may also rely on borrower documentation for loan forgiveness. The lender may also share borrower’s tax information with authorized representatives of the SBA. If the borrower knowingly uses loan proceeds for unauthorized purposes, the borrower could be held liable for fraud.

Further, borrowers may be held criminally liable in varying degrees if they knowingly make false statements in order to obtain a loan. Under the application and new rule, it is unclear how a borrower may be held liable if a certification is made in good faith and the certification ultimately turns out to be false.

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