The SBA FAQ PUBLISHED April 6, 2020, (https://home.treasury.gov/system/files/136/Paycheck-Protection-Program-Frequenty-Asked-Questions.pdf) clarifies several issues for which many small businesses and their advisors have been seeking guidance.
1. Alternative Size Test Available
We know applicants with less than 500 employees qualify for a PPP Loan, as do other businesses that meet the size test based on their NAICS Code, even if they employ greater than 500 employees; however, a “small business concern” can also qualify for the Paycheck Protection Program if it meets both tests in SBA’s “alternative size standard” as of March 27, 2020. Those tests are: (i) maximum tangible net worth of the business is not more than $15 million; and (ii) 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. A business that qualifies as a small business concern under Section 3 of the Small Business Act, 15 U.S.C. 632, may truthfully attest to its eligibility for PPP Loans on the Borrower Application Form, unless otherwise ineligible.
The exclusion of compensation in excess of $100,000 annually applies only to cash compensation, not to non-cash benefits, including: (i) employer contributions to defined-benefit or defined-contribution retirement plans; (ii) payment for the provision of employee benefits consisting of group health care coverage, including insurance premiums; and (iii) payment of state and local taxes assessed on compensation of employees.
3. Payroll Calculation Period – Either 12- Month or 2019 Calendar Year
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. 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).
4. Employer-side Payroll Costs Excluded from Calculation of Loan Amount
“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, 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” for calculating the maximum amount of borrowing under the program.
5. Independent Contractors Do Not Count as Employees for Purposes of the PPP Loan
Independent contractors have the ability to apply for a PPP Loan on their own. As a result, they do not count for purposes of a borrower’s “payroll costs” and, therefore, determining the maximum amount of the loan.
6. Only One PPP Loan Application
No eligible borrower may receive more than one PPP Loan, which means an applicant for a PPP Loan should apply for the maximum amount because the applicant cannot file a second time.
7. Loan Forgiveness
The amount of loan forgiveness can be up to the full principal amount of the loan and the accrued interest, provided the borrower uses all of the loan proceeds for forgivable purposes and the employee compensation levels are maintained. Not more than 25% of the loan forgiveness may be attributable to the non-payroll cost (i.e., rent, utilities and interest on other debt in existence as of February 15, 2020).
The SBA has clarified that the allowable uses for a PPP Loan are: (i) payroll costs related to the continuation of group health care benefits during the subject periods of paid sick, medical, or family leave; (ii) insurance premiums; (iii) mortgage interest payments in existence as of February 15, 2020, but not mortgage prepayments or principal payments; (iv) rent payments; (v) utility payments; (vi) interest on any other debt obligations incurred before February 15, 2020; and/or (vii) refinancing an SBA EIDL (economic injury disaster loan) made between January 31, 2020 and April 3, 2020. If a borrower’s EIDL loan was not used for payroll costs, it does not affect the borrower’s eligibility for a PPP Loan. If a borrower’s EIDL loan was used for payroll costs, the EIDL must be refinanced as part of the PPP Loan.
9. Misuse of PPP Loan Funds
If a borrower uses the funds for unauthorized purposes, the borrower can be subject to additional liability, such as charges for fraud. If one of the borrower’s shareholders, members, or partners uses PPP funds for unauthorized purposes, the SBA will have recourse against that person for the unauthorized use.
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Disclaimer: The information you obtain at this site is not, nor is it intended to be, legal advice. You should consult an attorney for advice regarding your individual situation. We invite you to contact us and welcome your calls, letters and electronic mail.