New Paycheck Protection Loan Guidance for Businesses and Lenders

The CARES Act was passed into law on March 27, 2020, and on April 2, 2020, the Small Business Administration ("SBA") published its guidance on the new legislation's Paycheck Protection Program ("PPP").

SBA's Interim Guidelines dated April 2, 2020, are available in full text here.

Ever since lenders across the country began accepting PPP loan applications on Friday, April 3, 2020, thousands of applications have been submitted via email and via lenders' online portals during a time when lenders are still waiting to receive further guidance from the SBA regarding applicant eligibility, appropriate documentation needed to supplement a borrower's application, and details surrounding the loan forgiveness aspect of the PPP. Many lenders have had to temporarily suspend their acceptance of new applications, with the intention of accepting additional applications as they catch up with demand and new information being provided by the SBA.

In the last few days, the SBA has published further guidance on the PPP loan program, which we attempt to summarize below. You can find all of the SBA's PPP related online postings here.  

Main Takeaways from SBA FAQs issued April 7, 2020

It is the borrower's obligation to certify as to its correct Payroll information. 

It is the sole responsibility of a loan applicant to accurately calculate its payroll costs, and the applicant will certify to the accuracy of those calculations on the Loan Application Form.

Applicants can calculate their payroll costs using either:

  • the previous 12 months' information; or
  • calendar year 2019; or
  • for seasonal businesses, the average monthly payroll for the period between February 15, 2019, through June 30, 2019, or, if the applicant was not yet in business during that time, the average monthly payroll costs from January 1, 2020, through February 29, 2020.

Again, 'payroll costs' are to be calculated on a gross basis, without accounting for federal taxes imposed or withheld on the employee's compensation. To use the SBA's example:

  • An employer pays Bob $4000 per month in gross wages;
  • Bob takes home $3500 per month and the employer withholds $500 to pay to the federal government for payment of federal taxes and employee's share of FICA.
  • The Employer additionally pays federal payroll taxes on Bob's gross compensation
  • The full $4000 per month paid to Bob in gross wages are countable towards the employer's payroll costs. The $4000 is not reduced by the $500 withheld from Bob. The payroll taxes paid by the employer over and above gross wages are not counted toward payroll in PPP.

The lender is to perform a good-faith review of the payroll calculations and supporting documentation provided and certainly should point out any errors it identifies in the applicant's calculations, but will ultimately be able to solely rely on the borrower's representations.

The accuracy of the loan applicant's determinations in these areas will be very important when the borrower is applying for any loan forgiveness at the end of the loan term.

Eligible loan applicants are clearly defined. They include

  • Businesses with 500 or less employees whose principal place of residence is within the U.S; and
  • Businesses with more than 500 employees if the business can satisfy SBA's definition of a "small business concern." Applicants with more than 500 employees can visit sba.gov/size to look at whether they fit within the industry size standards for the industry in which they operate, based either upon the number of employees or annual revenue; and
  • Businesses with a NAICS code prefix of "72" may have more than 500 employees as long as no single employer site has more than 500 employees.  "72" businesses are generally in the hospitality sector. 
  • Businesses who meet the SBA's "alternative size standard" which was put in place as of March 27, 2020, which requires that (1) maximum tangible net worth of the business is not more than $15 Million; and (2) the average net income after Federal income taxes (excluding carry-over losses) for the two (2) full fiscal years before the date of the loan application is not more than $5 Million; and
  • Qualifying tax-exempt nonprofit organizations (501(c)(3)); and
  • Tax-exempt veterans organizations (501(c)(19)); 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 business is in the U.S, or who meet the SBA employee-based size standards for the industry in which they operate.

We go over affiliation rule details in greater detail here; however, generally speaking, when a loan applicant certifies on its Loan Application that it is an eligible borrower, it implies that borrower is aware of the SBA's affiliation rules under 13 C.F.R. 121.301(f) and 13 C.F.R. 121.103(b)(2), and that the borrower is certifying that the business fits into one of the categories listed above after application of the affiliation rules, if applicable.

It is the sole responsibility of the loan applicant to verify which entities (if any) are "affiliates" and to accurately determine the employee headcount of the loan applicant and its affiliates, if any. Lenders may rely solely on borrower's certifications. See our client bulletin on affiliation issues here and here

How do I address the $100,000 compensation threshold?

An employer does not have to include employer-paid contributions to defined-benefit or defined-contribution retirement plans, group health care coverage or premiums, or payment of state and local taxes assessed on an employee's compensation. In other words, if an employee makes $100,000 or less in annual cash compensation, and an employer pays an additional $5000 per year towards that employee's health insurance premium and $3000 per year towards that employee's retirement plan, the employee's $100,000 or less in cash compensation can be included in the borrower's calculation of payroll costs for purposes of determining the maximum loan amount, despite the fact that the employer is spending more than $100,000 on the employee based upon non-wage related benefit costs.

What types of leave are covered by PPP loans?

PPP loans cover paid sick leave, medical leave, family leave, parental leave, and employee vacation leave, though exclusions apply for qualified sick and family leave wages for which a credit is allowed under the Families First Coronavirus Response Act

Are seasonal employers eligible?

Seasonal employers are eligible to apply for a PPP loan based upon payroll costs if: (a) they were in operation on February 15, 2020, OR (b) for at least an eight week period sometime between February 15, 2019, and June 30, 2019.

What if a loan applicant uses a payroll provider?

Businesses that use Professional Employer Organizations ("POE"s) or other payroll providers can submit payroll documentation provided by the payroll provider indicating wages and payroll taxes reported to the IRS for the borrower's employees. However, if available, Form 941 Schedule R, Allocation Schedules for Aggregate Form 941 Filers, and the employer's Quarterly Federal Tax Return should be used.

Employees of the loan applicant will not be considered employees of the loan applicant's payroll provider or POE.

What are acceptable signatures on loan documentation?

An authorized representative of the business seeking a loan may sign the loan documentation on behalf of the business applicant. When an individual signs the loan documentation, he or she is certifying to the lender and to the US government that he or she is duly authorized to sign, based upon the business's organizational documentation and agreements between any members or shareholders of the entity. Lenders may rely solely on that representation and accept a single individual's signature on that basis.

What crimes that make business applicants ineligible to apply for a PPP?

An applicant is only ineligible if an owner of 20% or more of the applicant/business: 

  • is presently incarcerated, on probation, or parole; or
  • has been convicted, pleaded guilty, or pleaded nolo contendere for any felony in the last five years; or
  • has been placed on pretrial diversion

Can applicants consider revenue paid to Independent Contractors in their payroll amounts?

Applicants cannot and should not include any amounts paid to an Independent Contractor or Sole Proprietor when calculating payroll costs.  Again, SBA is emphasizing that Independent Contractors and Sole Proprietors will themselves be potentially eligible to apply for their own PPP loans.

I already applied! Do I need to amend my application based on this new information?

Loan Applications filed or approved based upon the SBA's April 2, 2020, Interim Guidelines do not have to be updated based upon the new FAQs released after April 2. Borrowers and lenders may rely on the laws, rules, and guidance available at the time the application was submitted. However, Borrowers may update their loan applications if they were previously submitted but have not yet been processed, based upon any clarifications reflected in the April 7, 2020 FAQs.

New Clarification for Lenders

Lenders are not required to collect, certify, or re-verify beneficial ownership information in accordance with FinCEN Rule CDD for existing customers who are applying for a PPP loan, where the necessary information was previously verified.  Additionally, if federally insured depository institutions and federally insured credit unions eligible to participate in the PPP program have not yet collected beneficial ownership information for their existing customers applying for new PPP loans, they do not need to do so unless otherwise indicated by the lender's risk-based approach to Bank Secrecy Act ("BSA") compliance.

This would indicate that lenders issuing PPP loans to applicants who were not previously existing customers of the lender should collect and verify beneficial ownership information in accordance with FinCEN Rule CDD for purposes of the PPP loan.

Conclusion

We hope this was helpful information. As always, we will continue to update you as we learn more from our borrower, lender, and legislative contacts.

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© 2020 Ward and Smith, P.A. For further information regarding the issues described above, please contact Joanne Badr Morgan.

This article is not intended to give, and should not be relied upon for, legal advice in any particular circumstance or fact situation. No action should be taken in reliance upon the information contained in this article without obtaining the advice of an attorney.

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