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Additional Guidance and Clarity from SBA on CARES Act PPP Loans

The Small Business Administration (SBA) recently provided additional guidance regarding frequently asked questions in relation to the CARES Act Paycheck Protection Program (PPP) loans. To view the complete response related to the guidance, click here: PPP FAQ.

Below we summarized some key takeaways:

The SBA clarified who the PPP loan is available to in questions two and three. Based on their clarification there are three different ways for applicants to qualify for the PPP loan:

1. Small Business Concerns: Small business concerns can 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 can qualify if it meets the SBA employee-based or revenue-based size standard corresponding to its primary industry. Please click here for the industry size standards from the SBA.

2. Alternative Size Standard Small Business Concern: A business can qualify for the PPP as a small business concern if it meets both tests in SBA’s “alternative size standard” as of March 27, 2020:

    • The maximum tangible net worth of the business is not more than $15 million.
    • 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.

    3. Extended Definition Through CARES Act: 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.

      Many of us have been grappling with how to calculate the monthly payment for payroll costs that are eventually multiplied by 2.5 in order to determine the maximum amount of the PPP loan. The SBA provided the following guidance in question 10 of their frequently asked questions:

      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.

      In addition, there was discussion surrounding when does the elimination of employee compensation in excess of an annual salary of $100,000 applies. Is it before or after non-cash benefits? The SBA provided the following guidance in question seven of their frequently asked questions:

      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.
      • Payment of state and local taxes assessed on compensation of employees.

      TBG Note: Based on the above guidance, payroll costs would be determined on the gross payroll of the employees, reduced for an individual employee’s compensation in excess of an annual salary of $100,000. After this is done, additional items that can be added for purposes of determining payroll costs include employer contributions to retirement plans, employer payments for group health care coverage, and payment of state and local taxes assessed on compensation such as Employer Unemployment Compensation tax.

      Many applicants have questions about whether the payroll costs are determined based on the 2019 calendar year, or the 12 months prior to the PPP loan application date. The SBA provided the following guidance in question 15 of their frequently asked questions:

      In general, borrowers can calculate their aggregate payroll costs using data either from the previous 12 months or from the 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.

      Most applicants who receive the PPP loan are trying to optimize the amount of debt forgiveness. The amount of debt forgiveness is determined based on the expenses that are paid after eight-weeks of the loan origination date. In previous guidance, the SBA determined that no more than 25 percent of the debt forgiveness amount can be for non-payroll costs. The SBA provided the following guidance in question 20 of their frequently asked questions regarding when the eight-week period for debt forgiveness would begin:

      The eight-week period begins on the date the lender makes the first disbursement of the PPP loan to the borrower. The lender must make the first disbursement of the loan no later than ten calendar days from the date of loan approval.

      In addition, the SBA guidance issued made it very clear that it is the applicant’s responsibility to determine whether or not they qualify for the PPP loan, including the review and determination of the affiliation rules. The SBA provided the following guidance in question four of their frequently asked questions:

      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.

      Lastly, they also provided guidance that it is the responsibility of the applicant to provide an accurate calculation of payroll costs. Lenders are expected to perform a good faith review. The SBA provided the following guidance in question one of their frequently asked questions:

      Providing an accurate calculation of payroll costs is the responsibility of the borrower, and the borrower attests to the accuracy of those calculations on the Borrower Application Form. Lenders are expected to perform a good-faith review, in a reasonable time, of the borrower’s calculations and supporting documents concerning average monthly payroll cost. For example, minimal review of calculations based on a payroll report by a recognized third-party payroll processor would be reasonable. In addition, as the PPP Interim Final Rule indicates, lenders may rely on borrower representations, including with respect to amounts required to be excluded from payroll costs.

      As a reminder, an applicant who applies for PPP loan must certify the following:

      1. The applicant was in operation on February 15, 2020, and had employees for whom it paid salaries and payroll taxes or paid independent contractors, as reported on a Form 1099-MISC.

      2. Current economic uncertainty makes this loan request necessary to support the ongoing operations of the applicant.

      3. The funds will be used to retain workers and maintain payroll or make mortgage interest payments, lease payments, and utility payments; I understand that if the funds are knowingly used for unauthorized purposes, the federal government may hold me legally liable such as for charges of fraud. Not more than 25 percent of loan proceeds may be used for non-payroll costs.

      4. Documentation verifying the number of full-time equivalent employees on the payroll as well as the dollar amounts of payroll costs, covered mortgage interest payments, covered rent payments, and covered utilities for the eight-week period following this loan will be provided to the lender.

      5. Loan forgiveness will be provided for the sum of documented payroll costs, covered mortgage interest payments, covered rent payments, and covered utilities. As explained above, not more than 25 percent of the forgiven amount may be for non-payroll costs.

      6. During the period beginning on February 15, 2020, and ending on December 31, 2020, the applicant has not and will not receive another loan under this program.

      7. I further certify that the information provided in this application and the information provided in all supporting documents and forms is true and accurate in all material respects. I understand that knowingly making a false statement to obtain a guaranteed loan from SBA is punishable under the law, including under 18 USC 1001 and 3571 by imprisonment of not more than five years and/or a fine of up to $250,000; under 15 USC 645 by imprisonment of not more than two years and/or a fine of not more than $5,000; and, if submitted to a federally insured institution, under 18 USC 1014 by imprisonment of not more than thirty years and/or a fine of not more than $1,000,000.

      8. I acknowledge that the lender will confirm the eligible loan amount using the tax documents I have submitted. I affirm that these tax documents are identical to those submitted to the Internal Revenue Service. I also understand, acknowledge, and agree that the Lender can share the tax information with SBA’s authorized representatives, including authorized representatives of the SBA Office of Inspector General, for the purpose of compliance with the SBA Loan Program Requirements and all SBA reviews.

      If you have questions regarding the PPP loans program, please do not hesitate to reach out to our experts at The Bonadio Group.

      The information and advice we are providing for this matter relates to COVID-19 legislative relief measures. Because legislative efforts are still ongoing, we expect that there may be additional guidance and clarification from regulators that could modify some of the advice and information provided to you, after the conclusion of our engagement. We therefore make no warranties, expressed or implied, on the services provided hereunder.