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Daily Update: Paycheck Protection Program Rules, Guidance, and FAQs


Updated April 27, 2020 at 5:00 p.m. 

The Coronavirus Aid, Relief, and Economic Security Act (the CARES Act), signed by President Trump on March 27, 2020, is a sweeping $2 trillion stimulus bill intended to provide individuals, businesses, healthcare providers, nonprofits, and state and local governments with economic and other relief from the ravages of COVID-19. Among the most notable provisions in the CARES Act is the creation of a new Small Business Administration (SBA) loan program – the Paycheck Protection Program (PPP), to which the federal government has allocated $349 billion.

Many prospective borrowers are already familiar with the general terms of the program – loan amounts equal to 2.5x payroll costs, principal forgiveness for amounts used for eligible purposes, and waiver of collateral and personal guaranty requirements. However, new rules and guidance are being released at a rapid pace. Through this daily legal update, MMM will be answering our clients frequently asked questions regarding the PPP. If you would like to get up to speed on the CARES Act’s PPP program, please refer to our white paper or our FAQ on general eligibility for PPP loans.

[NEW] Is a borrower eligible for a PPP loan even if it doesn’t “need” the funds?

No. Applicants are required to certify as part of their loan application that “current economic uncertainty makes this loan request necessary to support the ongoing operations of the [a]pplicant.” The SBA has stated that a borrower must make this certification “in good faith, taking into account their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business.” While the inability to obtain credit elsewhere is not a prerequisite for eligibility under the PPP, public companies with substantial market value and access to capital markets, or businesses owned by large companies with adequate sources of liquidity, are likely ineligible. Notably, the SBA has extended a “safe harbor” option to borrowers that have obtained PPP loan proceeds and now believe they do not need them. Any borrower that applied for a PPP loan prior to April 23, 2020 that repays the loan in full by May 7, 2020 will be deemed by the SBA to have made the required need certification in good faith, thus exempting the borrower from liability under the False Claims Act or other applicable laws.

[NEW] Is a borrower eligible under the PPP if it has more than 500 employees but otherwise qualifies as a “small business concern” under the Small Business Act?

Yes. In addition to the expanded eligibility criteria established by the CARES Act (i.e., 500 employee threshold), borrowers may avail themselves of traditional tests for eligibility under the SBA’s Section 7(a) lending program, including industry-specific employee and revenue tests (see here). A borrower may also qualify if it meets both tests in the SBA’s “alternative size standard” as of March 27, 2020: (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 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.  The SBA’s affiliation rules continue to apply to all size tests.

Are self-employed individuals eligible for PPP loans? 

Yes. An individual with self-employment income, such as an independent contractor or sole proprietor, is eligible if he or she has a principal place of residence in the U.S. and filed or will file a Form 1040 Schedule C for 2019.  However, partners in partnerships (including LLCs taxed as partnerships) may not file separately for a PPP loan. Self-employed individuals should calculate their maximum loan amount by taking the net profit amount listed on their 2019 IRS Form 1040 Schedule C line 31 (up to a maximum of $100,000), dividing that amount by 12, and then multiplying the result by 2.5x. Individuals should then add the outstanding amount of any Economic Injury Disaster Loan (EIDL) secured between January 31, 2020, and April 3, 2020, that they seek to refinance, less the amount of any advance under an EIDL COVID-19 loan. Further information regarding the calculation of PPP loan amounts and loan forgiveness with respect to self-employment income can be found here.

How are partners in partnerships treated under the PPP?

Partners in partnerships (including LLCs taxed as partnerships) are prohibited from filing separately for PPP loans. However, the self-employment income of general active partners may be reported as a payroll cost, up to $100,000 annualized, on a PPP loan application filed by or on behalf of the partnership.  It is currently unclear whether such partner income must be reported as a payroll cost by the partnership and whether such partners should be counted as employees for purposes of complying with the PPP’s size standards for eligibility.

How should a borrower calculate employees to determine if they meet the standards set forth in the CARES Act?

The borrower must have under 500 employees whose principal place of residence is in the United States or meet the SBA employee-size standards for the industry in which it operations (if applicable). Borrowers are able to determine if their industry has a separate size standard here

In order for a borrower to determine if they meet the size standards they may use their average employment over the same time period they used to determine payroll costs. Alternatively, borrowers may use the SBA’s usual calculation which is the average number of employees per pay period in the 12 completed calendar months prior to the loan application (or the average number if employees for each of the pay periods that the business has been operational, if it has not been operational for 12 months).

Are borrowers that utilize professional employer organizations (PEOs) eligible under the PPP?

Yes. According to the newest SBA guidance, applicants that report wage and other data on the Employer Identification Number (EIN) of a PEO or other payroll provider may count those employees as their own for purposes of the PPP. The SBA has specified certain payroll data which must be provided to lenders in such cases.

Are faith-based non-profit organizations subject to the SBA’s affiliation rules?

Not necessarily. Further guidance can be found here.

If a borrower acquired employees in the last year through an M&A transaction, can the borrower count the pre-closing payroll of those employees in calculating its loan amount?

Where such transaction was structured as a merger or equity purchase, borrowers should face no issues. Where the transaction was structured as an asset acquisition and the borrower’s employees were previously employed by a separate legal entity, borrowers will need to consult with their lender for further guidance. 

Has the SBA modified its “affiliation” rules to allow companies with venture capital or private equity to participate in the PPP?

No. Subject to limited exceptions, the “affiliation” rules will be applied to all borrowers, including those that are financed by venture capital or private equity firms. It is the responsibility of borrowers, not lenders, to determine the identity of any affiliates and how those affiliates may affect the borrower’s eligibility under the program. Borrowers are required to disclose their affiliates and certify the same to their lender. Borrowers should carefully consult with legal counsel in this regard. Companies with venture capital investment representing less than 50% of their issued equity may be able to take steps to remove certain indicia of “affiliation” from their organizational documents, thus making them eligible for PPP loans. Please reach out to your MMM attorney if you would like to explore these options.

What time period should a borrower use for calculating its average monthly payroll costs?

According to the SBA’s most recent guidance, a typical borrower may calculate its average monthly payroll costs either for the 2019 calendar year or over the trailing 12-month period from the borrower’s application date. Seasonal businesses may instead use the period from February 15, 2019, through June 30, 2019. New businesses may use the period from January 1, 2020 to February 29, 2020.

Which employees are included in the calculation of “payroll costs”?

Both part-time and full-time employees may be included in calculating “payroll costs” for determining the amount of loan proceeds that a borrower will be eligible for, as well as which employee’s payroll costs may be paid as part of the forgivable portion of the loan. The costs of independent contractors may not be included in the calculation of payroll costs.

Where can I find the application and the SBA’s guidance?

The SBA’s updated sample application form can be found here. The SBA has also released a “Fact Sheet” for borrowers, an Interim Final Rule, guidance for faith-based organizations, and, most recently, answers to several "Frequently Asked Questions."

Can employees who are not U.S. citizens be included in the calculation of payroll costs?

No. The SBA’s Interim Final Rule states that payroll costs may only include employees whose “principal place of residence” is in the United States.

Are companies with foreign ownership ineligible under the program?

Apparently not. While earlier guidance from the SBA suggested that ownership of 20% or more equity by a foreign person would disqualify a borrower, that limitation is not mentioned in the SBA’s interim final rule and has been removed from the updated application form.

Do individuals receiving K-1s, such as partners or LLC members, count as employees when determining a borrower’s eligibility based on size?

Presumably not. Though we have not found any express guidance on the issue, an employee is considered a full-time, part time or other employee who received a salary and for which the employer paid payroll taxes.”

Does a borrower need to disclose all owners on the PPP application form, or only those owning a 20% or greater equity stake?

The current application only requires listing owners of a 20% or greater equity stake. A subsequent question on the application requires disclosure of any owner of the borrower that owns any other business, which is generally believed to only apply to owners holding 20% or more of the borrower’s equity (as determined on a fully diluted basis). We suggest that borrowers consult with their lenders regarding how to best answer this question.

What is the loan term?

The SBA has issued guidance that all loans will mature after two years. This contrasts with the language of the CARES Act which provided that loans would have a maximum maturity of 10 years.

What is the interest rate? Is there an interest-free or interest-deferred period?

The SBA has issued guidance that all loans will bear interest at a rate of 1.00%. Interest will accrue from the date of origination but payment will be deferred for six months.

Are companies with financing from a Small Business Investment Company (SBIC) eligible for loans?

Yes. Under the CARES Act legislation, any business that receives financial assistance from a company licensed as an SBIC is exempt from the SBA’s affiliation rules.

Will a borrower’s principal be forgiven if the loan proceeds are used for purposes other than payroll costs?

A borrower’s principal will be forgiven to the extent that the principal is used for eligible purposes – generally, payroll costs, rent, utilities and mortgage interest. The SBA’s Interim Final Rule confirms that not more than 25% of the forgiven amount may be for non-payroll costs.

The information presented is for educational and informational purposes and is not intended to constitute legal advice. Readers should consult their professional advisor. Any opinions expressed within this update are solely the opinion of the featured author and not of Morris, Manning & Martin, LLP.