On Friday, March 27, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was signed into law. The $2.2 trillion stimulus package aims to provide comprehensive relief to individuals and businesses following the unprecedented impact of COVID-19 on our economy and our communities. Below are our answers to many questions related to the Paycheck Protection Program (PPP) under the Act.
Since the enactment of the CARES Act, the Small Business Administration (SBA) and the Department of the Treasury (Treasury) released additional details and clarifications. The Q&A below is up-to-date based on the latest guidance, and we will continue to provide additional details as they are released.
Who is this for?
- The Paycheck Protection Program of the CARES Act provides relief primarily to small businesses and nonprofits with up to 500 employees.
- To be eligible, institutions must have been substantially impacted by COVID-19 and in business as of February 15, 2020.
- Borrowers must certify that the funds will be used for approved purposes and that they are not receiving assistance for these items from another source.
What is the Paycheck Protection Program (PPP)?
- The PPP expands loan eligibility under the SBA’s 7(a) program with the intention of assisting businesses with covering costs related to payroll (including healthcare and certain related expenses), mortgage interest, rent, leases, utilities and interest on existing debt.
- Details and updates on the program can be found on the Treasury’s Assistance for Small Businesses site; borrowers should consult with their attorneys and tax advisors on participation, but below is a summary of frequently asked questions regarding the program.
Eligibility to Participate in the Paycheck Protection Program
What size business can qualify for a PPP loan?
- A small business concern (as defined in section 3 of the Small Business Act, 15 U.S.C. 632) can qualify through the SBA’s size standard corresponding to a company’s primary industry)1 or the SBA’s “alternative size standard” test as of March 27, 2020:
- Maximum tangible net worth (defined as Total Assets – Intangible Assets – Total Liabilities) is not more than $15 million; and
- Average net income after federal income taxes (excluding any carryover losses) of the business for the two prior full fiscal years is not more than $5 million.
- Any business concern, qualifying 501(c)(3) tax-exempt nonprofit organization, 501(c)(19) tax-exempt veterans organization and Tribal business concern described in section 31(b)(2)(C) of the Small Business Act can qualify if it:
- Has no more than 500 employees whose principal place of residence is in the United States; or
- Meets the SBA employee-based size standards for the industry in which it operates.
Are there any exceptions to the size standards?
- Businesses with a NAICS code2 beginning with 72 (accommodation and food services) are eligible if they employ no more than 500 people per physical location.
- The SBA typically considers the employees of affiliated businesses in the total calculations, so if the business and its affiliates in aggregate exceed the size standard used to determine eligibility, the business typically won’t qualify.
Who is ineligible?
- Applicants who cannot fulfill the requirements on the loan application form (Paycheck Protection Program Application Form).
- Household employers (individuals who employ household employees such as nannies or housekeepers).
- With the exception of the nonprofit organizations determined eligible by the CARES Act, businesses not eligible for PPP loans are identified in 13 CFR 120.110, including:
- Financial businesses primarily engaged in lending.
- Passive businesses owned by developers and landlords that do not actively use or occupy the assets acquired or improved with loan proceeds.
- Businesses engaged in speculative activities (including hedge funds and private equity firms).
- Life insurance companies.
- Public companies are also likely ineligible (per guidance from the SBA FAQs) given their ability to access capital markets. Such companies should be prepared to demonstrate the basis for their need to the SBA, upon request.
What if it was recently determined that my company is ineligible to participate but I already received a PPP loan?
- On May 13, 2020, the SBA and Treasury determined any borrower, together with its affiliates, that received PPP loans of less than $2 million will be deemed to have made the required certification concerning the necessity of the loan request in good faith (for eligibility purposes) but borrowers with loans greater than $2 million are subject to review for compliance with program requirements.
- If the SBA determines in the course of its review that a borrower did not need the loan, the SBA will seek repayment of the outstanding loan, and the borrower will not be eligible for forgiveness.
- The SBA will not pursue administrative enforcement or referrals to other agencies if the loan is repaid after receiving notification from the SBA.
- The SBA provided a safe harbor period for borrowers to repay PPP loans obtained based on a misunderstanding or misapplication of the required certification standard. Borrowers who repaid the loan in full by May 18, 2020 will be treated as having made a good faith certification that “current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.”
What is the definition of an employee, and how is the number of employees calculated?
- The SBA typically counts anyone on the payroll whose principal place of residence is in the United States as one employee, regardless of hours worked or temporary status.
- For non-seasonal businesses, headcount is calculated by using the average number of employees: (i) from the previous 12 months; (ii) from calendar year 2019; or (iii) per pay period in the 12 completed calendar months prior to the date of the loan application.
- For seasonal businesses, headcount is calculated by using the average number of employees: (i) from February 15, 2019, to June 30, 2019; or (ii) from March 1, 2019, to June 30, 2019.
- For businesses not in business from February 15, 2019, to June 30, 2019, headcount is calculated by using the average number of employees: (i) for the period January 1, 2020, through February 29, 2020; or (ii) the average number of employees for each of the pay periods that the business has been operational.
How does the SBA determine whether two businesses or nonprofits are “affiliates”?
- In most cases, a borrower will be considered together with its affiliates for purposes of determining eligibility for the PPP.
- The SBA considers two businesses to be affiliates if one controls or has the power to control the other, or if a third party (or parties) controls or has the power to control both.
- Per an update on May 5, 2020, the SBA also clarified that employees of foreign affiliates (in addition to U.S. affiliates) should be included in the employee calculation.
- Principles of affiliation governing the PPP are outlined in 13 CFR § 121.301(f), which we recommend all clients review carefully with their legal counsels.
What factors does the SBA consider when determining if two businesses or nonprofits are “affiliates”?
- The Applicable Affiliation Rules from April 3, 2020, highlighted four tests to determine if an applicant should be considered together with its affiliates:
- Affiliation arises when one person or entity owns or has the power to control more than 50% of a business’s voting equity.
- The SBA may treat options, convertible securities and agreements to merge as if they have been exercised, when determining if control exists.
- Affiliation arises when the officers, managing members or partners of one business also control the management of another business.
- Affiliation arises when there is an identity of economic interest between close relatives (e.g., two spouses).
Do the affiliation rules apply to all businesses?
- No. In addition to the SBA’s existing affiliation exclusions under 13 CFR § 121.103(b)(2), the CARES Act waives the affiliation rules for:
- Businesses with a NAICS code beginning with 72 (accommodations and food services) with no more than 500 employees;
- Franchises assigned a franchise identifier code by the SBA; and
- Businesses that receive financial support from an SBIC.
- Additionally, the SBA has published guidance that the relationship of a faith-based organization to another organization is not considered an affiliation if the relationship is based on a religious teaching or belief, or otherwise constitutes a part of the exercise of religion.
- Loan applicants must make a reasonable, good faith determination that they qualify for this exemption.
If my company has funding from a private equity firm or other financial sponsor, can I still participate?
- Sponsor-backed companies typically have difficulty getting 7(a) loans because the SBA’s affiliation rules may require the total number of employees across all of the sponsor’s portfolio companies to be 500 or fewer.
- Clients with questions about the affiliation rules should also check with their accountants or attorneys.
Paycheck Protection Program Loan Details
What can the loan be used for?
- Loans are to be used for payroll costs (excluding amounts above a prorated annual salary of $100,000 for employees who make more than that amount), mortgage/debt interest, rent on real and personal property, utilities, and refinancing an Economic Injury Disaster Loan (EIDL) made between January 31, 2020, and April 3, 2020.
What is the maximum size of the loan?
- The maximum loan amount is the lesser of 2.5 times the business’s average monthly payroll costs and $10 million.
- For non-seasonal employers, average monthly payroll is the average total monthly payments for payroll during 2019 (per the application), or the previous 12 months (according to guidance on April 6, 2020).
- For seasonal employers, average monthly payroll is the average total monthly payments for payroll for the period from February 15, 2019, to June 30, 2019 (or March 1, 2019, to June 30, 2019, at the election of the borrower).
- For businesses that were not in operation from February 15, 2019, to June 30, 2019, average monthly payroll is the average total monthly payments for payroll for the period from January 1, 2020, to February 29, 2020.
How are payroll costs calculated?
- The CARES Act defines payroll costs as:
- The compensation of an employee (whose principal residence is in the United States), in the form of salary, wages, commissions or other compensation (not to exceed $100,000 per year, as prorated for the 8 week covered period after the issuance of the loan).
- Cash tip or equivalent (based on employer records of past tips or a reasonable, good-faith employer estimate of such tips).
- Payment for vacation, parental, family, medical or sick leave (unless the employer receives a credit under the Families First Act).
- Allowance for dismissal or separation.
- Group healthcare benefits, including insurance premiums.
- Retirement benefits.
- State/local payroll taxes (not federal payroll taxes, including items such as Social Security and Medicare).
- For an independent contractor or sole proprietor: wage, commissions, income or net earnings from self-employment or similar compensation (not to exceed $100,000 per year, as prorated for the covered period).
- Payroll costs are calculated on a gross basis without subtracting federal taxes that are imposed on the employee or withheld from employee wages.
- Clients should work with their accountants to calculate their payroll costs.
Should payments made to an independent contractor or sole proprietor be included in the calculations of the eligible borrower’s payroll costs?
- 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.
- An independent contractor or sole proprietor will itself be eligible for a loan under the PPP if it satisfies the applicable requirements.
Is there a limit on the amount of compensation I can include in my payroll costs?
- Yes. When calculating average payroll costs, an employer may not consider any amounts paid as compensation to an employee in excess of $100,000 per year, as prorated for the covered period, or any compensation of an employee whose principal place of residence is outside of the United States.
What are other terms of the loan?
- The rate on all PPP loans is 1.0% per year.
- The maturity for all PPP loans is two years but can be repaid early without any penalty.
- You will not have to make any principal or interest payments for six months following the date of disbursement of the loan.
What fees are associated with the loan?
- The SBA waives all SBA guaranty fees, including upfront and annual servicing fees.
- Lenders may not collect fees from the applicant, but will receive a processing fee from the SBA of between 1% and 5% of the loan amount, depending on its size.
- If an agent assists the borrower, the lender will compensate the agent out of the fee it receives from the SBA, at a rate of 0.25%–1% of the loan amount, depending on its size.
Accessing the Paycheck Protection Program
How do I gain access to the PPP?
- Clients should work with their existing SBA lenders.
- If the client’s bank was not previously an existing SBA lender, they should still confirm with the lender to see if they will be participating in the PPP, as the Treasury also authorized many other lenders to extend loans under the PPP.
What do I need to apply for a PPP loan?
- Clients should expect that many businesses will be applying for these loans, and the application site may be overloaded.
- Applicants must submit SBA Form 2483 (Paycheck Protection Program Application Form). Guidance on April 6, 2020 states lenders may use their own online systems and own forms that ask for the same information (using the same language) as the Borrower’s Application Form.
- Applicants will also be required to submit payroll documentation along with their applications, such as payroll processor records, payroll tax filings, Form 1099-MISC, or income and expenses from a sole proprietorship.
- For borrowers that do not have any such documentation, the borrower must provide other supporting documentation, such as bank records, sufficient to demonstrate the qualifying payroll amount.
- The Treasury has released an information sheet for interested borrowers. We encourage all clients to work closely with their accountants and other advisors to prepare their applications and supporting documentation.
What will I be required to certify?
- On the application, an authorized representative of the applicant will be required to certify a number of things in good faith (please see the application for a full list), but a few to note:
- The borrower 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.
- Applicant is eligible to receive a loan under the rules in effect at the time the application is submitted that have been issued by the SBA.
- Current economic uncertainty makes the loan necessary to support the borrower’s ongoing operations.
- The funds will be used to retain workers and maintain payroll, or to make mortgage, lease and utility payments; applicant may be held legally liable for knowingly using funds for unauthorized purposes.
- From 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.
What is the deadline to apply for a loan?
- The deadline to apply for a PPP loan is the earlier of June 30, 2020 (per the CARES Act) or when the $659 billion of authorized funding has been disbursed.
What if some of the additional guidance provided by the SBA and the Treasury changes my application? Do I need to take any action?
- Borrowers and lenders may rely on the laws, rules and guidance available at the time of the relevant application.
- Borrowers whose previously submitted loan applications have not yet been processed may revise their applications based on clarifications reflected in the FAQs.
Paycheck Protection Program Loan Forgiveness
Is there a loan forgiveness provision under the PPP?
- Yes. There is the potential for the loan principal (and interest accrued thereon) to be forgiven up to the amount spent on payroll costs, mortgage interest, rent on real or personal property, and/or utilities during the covered period.
- Mortgages, leases and service contracts must have originated prior to February 15, 2020, for payments to be eligible.
- No more than 25% of the forgivable amount may be used for non-payroll expenses.
- The amount of the loan forgiveness will be reduced if there is a reduction in the number of employees or wages in excess of 25% of total wages during the period.
How does a reduction in employee headcount affect my loan forgiveness?
- The forgivable amount of the loan will be multiplied by the ratio of the average number of full-time equivalent employees3 per month during the covered period to the average number of full-time equivalent employees during a reference period.4
- If this ratio is less than 1:1, loan forgiveness will be reduced proportionately.
What if I already laid off or furloughed workers?
- If a business reduced its employee headcount between February 15, 2020 and April 26, 2020, it can qualify for a safe harbor provision by restoring employee headcount to February 15, 2020 levels by no later than June 30, 2020.
- If an employee is fired for cause, voluntarily resigns, or voluntarily requests a schedule reduction, it will not be held against the business when it applies for loan forgiveness.
- If an employer makes a good-faith, written offer to rehire an employee (at the same pay and hours as before) and the offer is declined, it will not be held against the employer when determining the number of full-time equivalent employees for the loan forgiveness calculation.
- The employer must document the rejection and notify the applicable state unemployment office within 30 days.
How does a reduction in employee salaries/wages affect my loan forgiveness?
- The forgivable amount of the loan will be reduced by the amount of an employee’s salaries/wages the employer cuts during the covered period that is in excess of 25% of what that employee would have made for the same period of work during the January 1, 2020 – March 31, 2020 timeframe (excluding cuts to employees who were paid more than $100,000 on an annualized basis).
- An employer who had cut employee salaries/wages but restores them to previous levels by June 30, 2020 can still qualify for full forgiveness of the PPP loan.
- If an employee experiences a reduction in salary or wages as a result of having his or her hours cut (which may impact such employee’s full-time equivalency status), the employer will not be doubly penalized for the reduction in salary or wages provided that the reduction is only attributable to the reduction in hours (i.e., the employee is still being paid at the same hourly rate).
What if the eight-week period from when I received my PPP loan does not neatly align with my business’s payroll schedule?
- Businesses with a biweekly (or more frequent) payroll schedule may elect an alternate payroll covered period beginning on the first day of their first pay period after the PPP loan is disbursed.
Do costs have to be paid during the eight-week covered period or can I receive forgiveness for costs I merely incur?
- Generally speaking, payroll costs must be paid during the covered period in order to qualify for loan forgiveness. Payroll costs are considered paid on the day that paychecks are distributed or the employer originates an ACH credit transaction.
- Payroll costs incurred but not paid during the last pay period of the covered period are eligible for forgiveness if paid on or before the next regular payroll date. Payroll costs are considered incurred on the day that the employee’s pay is earned.
- Non-payroll costs are eligible for forgiveness if they are paid during the covered period or incurred during the covered period and paid on or before the next regular billing date, even if the billing date is after the covered period.
How does loan forgiveness work for the self-employed?
- The maximum amount of loan forgiveness an owner-employee or self-employed individual may request is capped at the lesser of eight weeks (8/52) of 2019 compensation and $15,385 per individual (i.e., the $100,000 compensation cap prorated for eight weeks) in total across all businesses.
- Owner-employees can include employer retirement and health care contributions made on their behalf, but self-employed individuals (Schedule C filers and general partners) are not eligible for additional forgiveness for retirement or health insurance contributions, as such expenses are paid out of their net self-employment income.
- Additional details for owner-employees, Schedule C filers, and general partners can be found in the Interim Final Rule on Loan Forgiveness on the Treasury website.
How do I request forgiveness for my PPP loan?
- Borrowers request forgiveness by submitting the Loan Forgiveness Application (SBA Form 3508 or lender equivalent) to their respective lenders.
- Lenders have 60 days from the date of receipt to review the application and issue a decision as to whether or not the borrower is eligible for forgiveness to the SBA.
- Lender’s decision may take the form of an approval (in whole or in part); denial; or (if directed by the SBA) a denial without prejudice due to a pending SBA review of the loan for which forgiveness is sought.
- If approved, the lender will request payment from the SBA for the forgiven amount.
- If denied, the lender is required to notify you in addition to the SBA of its decision and within 30 days of notice, you can request the SBA review the lender’s decision.
- The SBA has indicated that it will audit the forgiveness requests of all businesses that received PPP loans in excess of $2 million; however, the SBA reserves the right to audit any PPP loan of any size at any time.
- If your loan is already under review by the SBA, the lender cannot approve your forgiveness application until the SBA notifies them in writing that they have completed the review.
What documentation will I need to provide with my Loan Forgiveness Application?
- As proof of eligible cash compensation and non-cash benefit payments, the SBA has requested:
- Bank account statements or third-party payroll service provider reports documenting the amount of cash compensation paid to employees;
- Tax forms (or equivalent third-party payroll service provider reports) for federal payroll taxes and state and local wage reporting and unemployment insurance taxes; and
- Payment receipts, cancelled checks, or account statements documenting the amount of any employer contributions to employee health insurance and retirement plans included in the forgiveness amount.
- As proof of the number of full-time equivalent employees, a business may submit federal payroll tax filings and state/local quarterly business and individual employee wage reporting and unemployment insurance tax filings.
- In addition to proving that eligible non-payroll (mortgage interest, rent, and utilities) payments were incurred, a business must also prove that loan, lease, or service contract was outstanding from before February 15 ,2020. Details can be found on the Loan Forgiveness Application Form.
Paycheck Protection Program Loan Review Process
Will the SBA review individual PPP loans?
- Yes. The SBA may review any PPP loan, as the Administrator deems appropriate.
What will the SBA review?
- The SBA is authorized to review borrower eligibility, loan amounts and use of proceeds, and/or loan forgiveness amounts.
When will the SBA undertake a loan review?
- The SBA may undertake a review for a PPP loan of any size at any time in the SBA’s discretion.
- For example, the SBA may review a loan if the loan documentation submitted to the SBA by the lender or any other information indicates that the borrower may be ineligible for a PPP loan, or may be ineligible to receive the loan amount or the loan forgiveness amount claimed by the borrower.
- Borrower must retain documentation for six years after the date the loan is forgiven or repaid in full and permit authorized representatives of SBA to access such files upon request.
- Lenders must also comply with applicable SBA requirements for records retention.
How will I know if the SBA is reviewing my loan?
- If the SBA undertakes a review, the SBA will notify the lender in writing, and the lender must notify the borrower in writing within five business days of receipt.
- Within five business days of receipt of such notice, the lender will transmit to the SBA electronic copies of all applications and supporting documentation, a signed and certified transcript of account, a copy of the executed note evidencing the PPP loan, and any other documents requested by the SBA.
How do I respond to the SBA’s questions in a review?
- If more information is needed to satisfy a review, the SBA will either (i) require the lender to contact the borrower in writing to request additional information; or (ii) request information directly from the borrower.
- Failure to respond to the SBA’s inquiry may result in a determination that the borrower was ineligible for a PPP loan or ineligible to receive the loan amount or loan forgiveness amount claimed by borrower.
What happens if the SBA determines a borrower is ineligible for a PPP loan?
- If the SBA determines a borrower is ineligible, the SBA will direct the lender to deny the loan forgiveness application.
- If the SBA determines the borrower is ineligible for the loan amount or loan forgiveness amount, the SBA will direct the lender to deny the loan forgiveness application in whole or in part.
- The SBA may also seek repayment of the outstanding PPP loan balance or pursue other available remedies.
- The SBA’s recourse is limited against individual shareholders, members or partners of a PPP borrower for nonpayment of a PPP loan only if the borrower is an eligible recipient of the loan.
Can a borrower appeal the SBA’s determination of ineligibility?
- Yes. The SBA will issue a separate interim final rule addressing the appeal process.
Can I have both a PPP loan and an Economic Injury Disaster Loan from the SBA?
- A business may borrow an additional amount (but not in excess of $10 million total) to refinance an EIDL it received from the SBA between January 31, 2020, and April 3, 2020. A business may not receive a PPP loan and an EIDL for the same purpose.
What impact does a PPP loan have on my ability to qualify for other forms of relief under the CARES Act?
- The CARES Act creates a special payroll tax credit to encourage businesses affected by COVID-19 to keep staff on payroll.
- The CARES Act also allows businesses to defer the payment of employer payroll taxes they incur between March 27, 2020, and December 31, 2020.
- A business that receives a PPP loan is not permitted to claim the employee retention credit, and a business that receives a PPP loan and has a part of it forgiven is not eligible for the payroll tax deferral.
- Clients should discuss with their accountants and tax advisors which of these forms of relief make the most sense for their businesses.
If a business applies for a loan under the PPP, will it have issues getting additional loans/grants from other programs?
- There is no guidance in the CARES Act on this issue; this will likely depend on the terms and conditions of the outside loans and grants.
Do I need to pay my mortgage? Rent? Utilities? Credit card?
- Yes. The loan is meant to help small business owners cover their expenses. However, check with your lender/landlord to see if any federally or state-mandated debt/rent relief applies to you.
How will this impact my credit?
- There are no personal guarantees or collateral required for a PPP loan, so participation in this program generally should not adversely impact your credit.
Will my information be disclosed in any way?
- As a federal agency, the SBA is subject to the Freedom of Information Act which requires it, subject to certain exceptions, to disclose records upon receipt of a written request.
- Information about approved loans that will be automatically released includes, among other things, the borrower’s name (and the names of its officers, directors, stockholders or partners), the amount of the loan, its purpose in general terms and the maturity.
- Proprietary data on a borrower would not routinely be made available to third parties.
The information above is based on the Coronavirus Aid, Relief, and Economic Security Act (P.L. 116-136) and is believed to be accurate as of 3:30 p.m., May 26, 2020.
2 The federal government uses the North American Industry Classification System (NAICS) to classify businesses by the type of economic activity in which they engage. Different government agencies may use different NAICS codes with respect to the same business, and businesses that carry out activities across multiple industries may need to determine the appropriate NAICS code based on such factors as the contribution of each activity to revenue. Clients should consult their accountants and tax advisors.
3 For these purposes “full-time equivalent” means 40 hours per week. Part-time employees may each be counted as 0.5 full-time equivalent employees or the employer may calculate part-time employees’ full-time equivalency based on the ratio of the number of hours worked per week relative to 40 hours (e.g., an employee who typically works 30 hours per week would count as 0.75 full-time equivalent employees).
4 The covered period refers to the 8 week period following loan disbursement. The reference period is, at the borrower’s election, either  February 15, 2019 to June 30, 2019,  January 1, 2020 to February 29, 2020, or  in the case of seasonal employers, either of the preceding periods or a consecutive 12-week period between May 1, 2019 and September 15, 2019.