By Demetri Economou and Emily Green
Q1. What is the CARES Act Paycheck Protection Program?
A1. The CARES Act (Act) Paycheck Protection Program (PPP) is part of a new Small Business Administration (SBA) lending program designed to provide small businesses with funds to pay up to 8 weeks of payroll costs including benefits. Funds can also be used to pay interest on mortgages, rent, and utilities, or to repay or refinance any outstanding amount owed under an SBA Economic Injury Disaster Loan (EIDL) received between January 31, 2020 and the date the PPP loans are made available.
Q2. Who is eligible for a PPP loan?
A2. The following businesses or organizations that were operational as of February 15, 2020 may be eligible for a PPP Loan:
- any business, 501(c)(3) non-profit organization, 501(c)(19) veterans organization, or tribal entity that employs no more than the greater of (i) 500 employees; or (ii) the employee size standard in number of employees under the applicable NAICS code;
- Sole proprietors, independent contractors, and self-employed individuals who regularly carry on any trade or business; and
- a hospitality or food service business (those with an NAICS code beginning with 72) if it has fewer than 500 employees per physical location.
It should be noted that the SBA’s “size standard” is usually expressed in number of employees or in millions of dollars. Since the Act specifically states businesses and organizations employing “not more than the greater of 500 employees” or “the size standard in number of employees established by the [SBA]” are eligible to apply, we believe that businesses expressed in millions of dollars that do not exceed their size standard for their applicable NAICS code are still eligible to apply, so long as the business does not exceed 500 employees together with its affiliates. However, we anticipate that the SBA will issue guidance regarding this issue, and we will keep you apprised of any updates.
Businesses are encouraged to consult the SBA’s Table of Small Business Size Standard, available here, to determine their size standard.
Q3. Who qualifies as an employee under the Act?
A3. Under the Act, the term “employee” includes individuals employed on a full-time, part-time, or other basis. Based on the U.S. Department of Labor’s recent guidance regarding the Families First Coronavirus Response Act (FFCRA), it is safe to assume that employees currently on leave should be included. In addition, the FFCRA guidance includes in the definition any temporary employees jointly employed and day laborers supplied by a temp agency, but does not include independent contractors as employees. By contrast, the CARES Act is less clear.
Applying the presumption that the legislature included all included terms for a purpose, and likewise omitted all omitted terms for a purpose, we do not believe that temporary employees jointly employed or day laborers supplied by a temporary agency fall within the meaning of an “employee” under the Act. The SBA has recently clarified that independent contractors do not count for purposes of loan calculations and loan forgiveness. We anticipate more guidance from the SBA regarding this issue, and we will keep you apprised of any updates.
Q4. How do I count employees for purposes of the 500-employee threshold under the Act?
A4. Employee counting under the Act is determined by aggregating the head counts of all “affiliated” entities. However, we are awaiting guidance from the SBA about what “affiliated” means and details for counting employees.
Q5. Am I eligible under the Act if I am a small business with more than one physical location and have fewer than 500 employees at each, but I am not in the hospitality or food-service industry?
A5. It depends. When determining whether a business or organization is “small,” the SBA generally requires a business to aggregate all of its parent companies, affiliates, and subsidiaries. These requirements still apply under the PPP, except that they are waived for:
- a hospitality or food service business classified under an NAICS code beginning with 72;
- a business operating as a franchise that is an SBA assigned franchise identifier code;
- any entity that receives financial assistance from a company licensed under Section 301 of the Small Business Investment Act of 1958, as amended.
So, if you are a small business with more than one physical location and have fewer than 500 employees at each, but you are not in the hospitality or food-service industry, you may still be eligible for a PPA loan if you are operating as a franchise with a SBA-assigned franchise identifier code, or if you receive financial assistance from a company licensed under Section 301 of the Small Business Investment Act of 1958, as amended. Otherwise, the employees at each location would likely be aggregated, and if you exceed 500 employees, then you would not be eligible. Again, we are awaiting guidance from the SBA about what “affiliated” means and details for counting employees and will keep you apprised of any updates.
Q6. Am I eligible under the Act if I am a service company, such as a law firm or an accounting firm, with more than $10 million in revenue?
A6. Probably so, if you do not exceed the SBA’s size-standard in terms of millions of dollars and do not exceed 500 employees together with your affiliates. As mentioned in A2, the SBA’s “size standard” is usually expressed in number of employees or in millions of dollars. Since the Act specifically states businesses and organizations employing “not more than the greater of 500 employees” or “the size standard in number of employees established by the [SBA]” are eligible to apply, we believe that businesses expressed in millions of dollars that do not exceed their size standard for their applicable NAICS code are still eligible to apply, so long as the business does not exceed 500 employees together with its affiliates. However, we anticipate that the SBA will issue guidance regarding this issue, and we will keep you apprised of any updates.
Q7. Are there any other eligibility requirements?
A7. Yes, you are ineligible for a PPP loan if:
- you are engaged in any activity that is illegal under federal, state, or local law;
- you are a household employer (individuals who employ household employees such as nannies and housekeepers);
- the applicant or any owner of the applicant is presently suspended, debarred, proposed for debarment, declared ineligible, or voluntarily excluded from participation in this program by any Federal department or agency, or is presently involved in any bankruptcy;
- the applicant, any owner of the applicant, or any business owned or controlled by any of them, is currently in default on any direct or guaranteed SBA loan or has defaulted in the last 7 years and caused a loss to the government;
- the applicant or any 20% or greater owner of the applicant is subject to an indictment, criminal information, arraignment, or other means by which formal criminal charges are brought in any jurisdiction, or is presently incarcerated, or on probation or parole; or
- the applicant or any 20% or greater owner of the applicant has been convicted, pleaded guilty, pleaded nolo contendere, been placed on pretrial diversion, or has been placed on any form of parole or probation within the last 5 years.
Q8. How much can I borrow?
A8. Qualified entities seeking a PPP loan can borrow up to the lesser of:
- $10 million; or
- 2.5 times its pre-loan 12-month gross payroll costs + any outstanding amount owed under an SBA Economic Injury Disaster Loan (EIDL) received between January 31, 2020 and the date the PPP loans are made available.
Note that there are special rules relating to the calculation of “payroll costs” for businesses that have been in operation less than 12 months and for seasonal businesses.
Q9. How do I calculate the maximum amount I can borrow?
A9. According to the SBA’s Interim Final Rule regarding PPP loans, the following methodology should be used to determine the maximum amount you can borrow:
Step 1: Aggregate payroll costs (defined in detail below in A11) from the last twelve months for employees whose principal place of residence is the United States.
Step 2: Subtract any compensation paid to an employee in excess of an annual salary of $100,000 and/or any amounts paid to an independent contractor or sole proprietor in excess of $100,000 per year.
Step 3: Calculate average monthly payroll costs (divide the amount from Step 2 by 12).
Step 4: Multiply the average monthly payroll costs from Step 3 by 2.5.
Step 5: Add the outstanding amount of an Economic Injury Disaster Loan (EIDL) made between January 31, 2020 and April 3, 2020, less the amount of any “advance” under an EIDL COVID-19 loan (because it does not have to be repaid).
Q10. Can you provide examples demonstrating this methodology?
A10. Yes, the examples below, taken from the SBA’s Interim Final Rule, demonstrates this methodology:
- Example 1 – No employees make more than $100,000
Annual payroll: $120,000
Average monthly payroll: $10,000
Multiply by 2.5 = $25,000
Maximum loan amount is $25,000
- Example 2 – Some employees make more than $100,000
Annual payroll: $1,500,000
Subtract compensation amounts in excess of an annual salary of $100,000: $1,200,000
Average monthly qualifying payroll: $100,000
Multiply by 2.5 = $250,000
Maximum loan amount is $250,000
- Example 3 – No employees make more than $100,000, outstanding EIDL loan of $10,000
Annual payroll: $120,000
Average monthly payroll: $10,000
Multiply by 2.5 = $25,000
Add EIDL loan of $10,000 = $35,000
Maximum loan amount is $35,000
Q11. What costs are included in “payroll costs”?
A11. “Payroll costs” for small businesses and similar entities are defined as the borrower’s average monthly payroll for the 12 months before a PPP loan is made and include:
- compensation to employees (whose principal place of residence in the United States) in the form of salaries (up to $100,000 as prorated for the covered period), wages, commissions, or similar compensation. To the extent an individual employee makes more than $100,000 in annual salary, the first $100,000 counts but any excess amount is excluded. While an argument could be made under the statute that this $100,000 cap only applies to base salary (as opposed to bonuses or other forms of compensation), we believe it is best to cap total compensation per individual employee at this number unless otherwise advised by the SBA;
- cash tips or the equivalent (based on employer records of past tips or, in the absence of such records, a reasonable, good-faith employer estimate of such tips;
- payment for vacation, parental, family, medical, or sick leave;
- allowance for separation or dismissal;
- payment for the provision of employee benefits consisting of group healthcare coverage, including insurance premiums and retirement; and
- payment of state and local taxes assessed on compensation of employees.
“Payroll costs” for sole proprietors and independent contractors are similarly defined and include wages, commissions, income or similar payments (not to exceed $100,000 per sole proprietor or independent contractor in one year) prorated for the covered period, February 15, 2020 to June 30, 2020.
Q12. What costs are not included in “payroll costs”?
A12. “Payroll costs” do not include:
- compensation of an employee whose principal place of residence is outside of the United States;
- compensation paid to individual employees in excess of an annual salary of $100,000 (prorated for the covered period, February 15, 2020 to June 30, 2020);
- federal employment taxes imposed or withheld between February 15, 2020 and June 30, 2020, including the employee’s and employer’s share of Federal Insurance Contributions Act and Railroad Act taxes, and taxes to be withheld from employees;
- compensation of an employee whose principal place of residence is outside of the United States;
- qualified sick and family leave wages for which a credit is allowed under the FFCRA.
Q13. Can I use the PPP loan proceeds for any other reason than payroll costs?
A13. Yes, the following are allowable uses of PPP loans, other than payroll costs:
- payments of interest on any mortgage obligation (which shall not include any prepayment of or payment of principal on a mortgage obligation);
- rent (including rent under a lease agreement);
- interest on any other debt obligations that were incurred before February 15, 2020; and
- refinancing an SBA EIDL loan made between January 31, 2020 and April 3, 2020.
However, the SBA requires that at least 75% of the PPP loan proceeds must be used for payroll costs. Note there are also special rules regarding which of these categories can be forgiven under the PPP loan forgiveness program (discussed in greater detail in Q&A 25).
Q14. What happens if I misuse the PPP loan funds?
A14. If you use PPP funds for unauthorized purposes, SBA will direct you to repay those amounts. If you knowingly use the funds for unauthorized purposes, you will be subject to additional liability such as charges for fraud. If one of your shareholders, members, or partners uses PPP funds for unauthorized purposes, SBA will have recourse against the shareholder, member, or partner for the unauthorized use.
Q15. Do independent contractors count as employees for purposes of PPP loan calculations?
A15. No, independent contractors have the ability to apply for a PPP loan on their own, so they do not count for purposes of a borrower’s PPP loan calculations.
Q16. What are the terms of a PPL loan?
- As noted above in A8, an eligible borrower may receive the lesser of 10 million or 2.5 times its pre-loan 12-month gross payroll costs + any outstanding amount owed under an EIDL received between January 31, 2020 and the date the PPP loans are made available.
- The Act waives any requirements regarding pledges of collateral, personal guarantees, and other traditional SBA loan requirements, such as a certification that credit is unavailable elsewhere, prepayment penalties, and borrower and lender fees.
- PPA loans are non-recourse to the borrower and are 100% guaranteed by the SBA, unless the loan proceeds are not used for an allowable purpose (see Q&A 11).
- PPP loans may be deferred, and in some cases, forgiven. All principal, interest, and other payments will be deferred for a minimum of six (6) months.
- If the full principal balance of a loan in forgiven, borrowers are not responsible for interest accrued during the eight week covered period. But, any portion of the loan that is not forgiven will have a maximum maturity of 2 years (with no prepayment penalties) and a maximum interest rate of 100 basis points or 1%.
Q17. How do I apply for a PPP loan?
A17. You can apply through any existing SBA 7(a) lender or through any federally insured depository institution, federally insured credit union, or Farm Credit System institution that is participating. Other regulated lenders will be available to make these loans once they are approved and enrolled in the program. Those interested in applying for a PPP loan should contact their local bank or find SBA-approved lenders in your area by contacting your local Small Business Development Center.
Q18. When can I apply for a PPP loan?
A18. Approved lenders may begin processing loan applications as soon as April 3, 2020 for small businesses and sole proprietorships, and as soon as April 10, 2020 for independent contractors and those self-employed. Check with your local bank or SBA-approved lender to determine when they will begin accepting applications.
Q19. Is there a deadline to apply?
A19. Yes. Those interested in a PPP loan must apply by June 30, 2020.
Q20. Are PPP loans provided on a first-come, first-serve basis?
A20. Yes. Additionally, the Act encourages lenders to process and disburse PPP loans that prioritize small businesses and entities:
- in underserved and rural markets, including veterans and the military community;
- owned and controlled by socially and economically disadvantaged individuals and women; and
- in operation for less than two (2) years.
Q21. What documents are needed to apply for the PPP loan?
A21. Applicants must submit SBA Form 2483 (Paycheck Protection Application Form) along with:
- documents showing the business was in operation on February 15, 2020;
- documents showing the business had employees for whom the business paid salaries and payroll taxes; and
- documentation confirming the dollar amount of average monthly payroll costs of the preceding calendar year.
Self-employed individuals, independent contractors, or sole proprietors must also submit supporting documentation, such as payroll tax filings, Form 1099-MISC, and income expenses from the sole proprietorship.
Additional documentation may be required by the SBA and/or individual lenders. Check with your local bank or SBA-approved lender to determine exactly what documentation they will require.
Q22. Are there any other requirements to apply?
A22. Yes. Those applying for a PPP loan must make the following good-faith certifications:
- the uncertainty of current economic conditions makes the loan necessary to support ongoing operations;
- the funds will be used to retain workers and maintain payroll or make mortgage payments, lease payments, and utility payments;
- it has not applied for or received any other Section 7(a) loan that is duplicative, in amount or purpose, of the PPP loan.
Q23. If I take out a PPP loan, when does repayment begin?
A23. You will not have to make any payments for six months following the date of the disbursement of the loan. However, interest will continue to accrue during this six-month deferment. The SBA is required to provide guidance on such deferments no later than April 26, 2020.
Q24. Can the PPP loan be forgiven?
A24. Generally, yes. As an incentive to retain employees or rehire laid off employees, the Act provides that certain portions of a PPP loan be forgiven. As described in greater detail below, the loan forgiveness amount cannot exceed the loan principal and may be reduced in the event the business has laid off employees or decreased their compensation during the covered period (8 week period beginning on the loan-origination date).
Q25. What portions of the PPP loan can be forgiven?
A25. The following costs incurred and payments made during the covered period are eligible for loan forgiveness:
- Payroll costs;
- Interest on mortgage obligations incurred before February 15, 2020;
- Rent payment for leases in force before February 15, 2020; and
- utility payments for service that began before February 15, 2020.
However, not more than 25% of the loan forgiveness amount may be attributable to non-payroll costs, and the total amount of loan forgiveness cannot exceed the principal amount of the loan.
Q26. Do independent contractors count as employees for purposes of PPP loan forgiveness?
A26. No. Independent contractors have the ability to apply for a PPP loan on their own so they do not count for purposes of a borrower’s PPP loan forgiveness.
Q27. How do reductions in staffing affect the amount of loan forgiveness I receive?
A.27 The amount of loan forgiveness shall be reduced by totaling up the amounts described above then by multiplying that number by the quotient of:
- the average number of full-time equivalent employees per month employed by the eligible recipient during the covered period (8 weeks after loan origination), divided by one of the following two (2) options at the election of the borrower;
- the average number of full-time equivalent employees per month employed by the eligible recipient during the period beginning on February 15, 2019 and ending on June 30, 2019; or
- the average number of full-time equivalent employees per month employed by the eligible recipient during the period beginning on January 1, 2020 and ending on February 29, 2020
- Note that a seasonal employer, as determined by the SBA, must divide by the first option.
Here is some example math with round numbers:
Here is some example math with round numbers:
(a) Payroll costs = $40,000
(b) Mortgage = $8,000
(c) Rent = $0
(d) Utilities = $2,000
Total (a) through (d) = $50,000
(a) Full-time equivalent employees per month, covered period = 10
(b) Average full-time equivalent employees per month, 2/15/19-6/30/19 = 40
(c) Average full-time equivalent employees per month, 1/1/20-2/29/20 = 20
Employer will elect the most favorable number, choosing (c).
(a) divided by (c) = 0.5.
$50,000 x 0.5 = $25,000 forgiveness, or 50%, after reductions.
There are two lessons here.
First, the overarching goal is to employ as many people as possible.
Second, the employer will always choose the most favorable time period to divide by (unless they are a seasonal employer). If, in this example, the employer had 20 full-time equivalent employees per month in the covered period, debt forgiveness would have been 100%.
Q28. How do reductions in compensation affect the amount of loan forgiveness I receive?
A28. If salary or wage in the covered period is reduced by greater than 25% of the total salary or wages of the most recent full quarter, then forgiveness is reduced dollar for dollar by the amount that is in excess of 25%. Employees examined for this reduction are those who did not receive, during any pay period in 2019, the equivalent of an annualized salary or wages of more than $100,000. For biweekly paycheck employees, that is a maximum gross paycheck of $3,846.15; for semimonthly paychecks employees, that is a maximum gross paycheck of $4,166.66.
Q29. Can I reduce headcount and still have debt forgiveness?
A29. Yes, however, per the mathematical equation discussed in A27, a reduction in headcount from one of the two electable prior periods will result in a less than 100% debt forgiveness.
Q30. Am I required under the Act to rehire laid-off employees?
A30. No, the Act does not require you to rehire laid-off employees. But, it does incentivize you for doing so. For example, if you reduced the number of your employees between February 15, 2020 and April 26, 2020, those reductions will not decrease the amount of loan forgiveness you receive, if you rehire those employees by June 30, 2020.
Q31. Can I reduce pay and still have debt forgiveness?
A31. Yes. In circumstances where salaries or wages are reduced only for employees with an annualized salary of more than $100,000, there will be no salary or wage deduction, since those employees are not examined for salary reductions. Where salaries or wages are reduced for other employees, but by less than 25%, there will also be no salary or wage deduction. Note that if you reduce the salary levels between February 15, 2020 and April 26, 2020, those reductions will not decrease the amount of loan forgiveness you receive, if you restore the salary levels by June 30, 2020.
Q32. Will the loan forgiveness amount be treated as gross income for federal income tax purposes?
A32. No. The Act specifically states that loan forgiveness amounts are excluded from gross income.
Q33. What documents do I need to apply for loan forgiveness?
A33. Those seeking loan forgiveness must submit an application with its lender along with the following:
- documentation (including payroll tax filing and state income, payroll, and unemployment insurance filings) verifying the number of full-time employees you employ and employed during the relevant periods and the compensation that you paid them;
- documentation (including cancelled checks, payment receipts, transcript of accounts, or other documents) verifying payments of mortgage obligations incurred before February 15, 2020; rent payment for leases in force before February 15, 2020; and utility payments for service that began before February 15, 2020;
- a certification representing that the documentation is true and correct and that the amount of forgiveness requested was used for authorized purposes; and
- any additional information that the SBA requires.
Q34. When will I learn if the loan has been forgiven?
A34. Lenders are required to issue a decision on loan-forgiveness applications within 60 days of receiving the completed application.