Answers to Frequently Asked Questions: Paycheck Protection Program

As Messerli Kramer recently reported in its overview Paycheck Protection Program (“PPP”) and guide to the PPP Application Process, there have been many questions on how to take advantage of this program.  Under the PPP, qualifying businesses can obtain 100% federally-backed loans for up to 2.5x their average monthly payroll and costs, like rent and utilities up to $10 million, with a total forgiveness option.

On April 6, the Small Business Administration (“SBA”) published answers to some of the most common questions for business concerning the Paycheck Protection Program.  Here’s what you need to know.

How do I apply for a PPP loan?

To apply for a Paycheck Protection Program loan:

1. Review the general application;

2. Collect the necessary information and supporting documents; and

3. Contact a participating lender near you.

Your current lender is your best option for moving forward with the process and likely has its own PPP application process and requirements.

Do I need to amend my prior application or re-apply after this new guidance?

If your application was completed on or after the April 2 PPP Interim Final Rule was published, you do not need to do anything new.

The U.S. government will not challenge CARES Act borrowing or lending actions taken in compliance with the rules and guidance available at the time of the action.  However, your lender may require you to amend your application or re-apply.

What time period should I use to calculate my PPP eligibility and maximum PPP loan amount?

Your PPP loan eligibility and maximum loan amount generally depend on your payroll costs and number of employees, with some exceptions noted below.  To calculate payroll costs, you can either count from the previous 12 months or from calendar year 2019.  Seasonal businesses, may use average monthly payroll for the period between either 1) February 15, 2019 or March 1, 2019, and June 30, 2019; or 2) January 1, 2020 through February 29, 2020 for business that were not operating in 2019.

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).

The PPP is for small businesses.  What if my business has over 500 employees?

There are a number of ways to qualify for a PPP loan besides having 500 or fewer employees.  Your business may still be eligible if:

• It is a “small business concern” under section 3 of the Small Business Act, 15 U.S.C. 632;

• It meets its industry size standards; or

• It meets the alternative size standard, having both:

  1. A maximum tangible net worth of the business is not more than $15 million; and

  2. An average net income after Federal income taxes (excluding any carry-over losses) for the two full fiscal years before the date of the application not more than $5 million.

Do independent contractors count as employees?

No.  Do not count them when evaluating your eligibility by size, and do not include payments made to them in your payroll costs.

Independent contractors can apply for PPP loans for themselves if they qualify.

How are benefits calculated against the $100,00 annual salary cap?

The new guidance clarifies that the PPP only covers salaries less than or equal to $100,000 not counting non-cash benefits.  This means you can qualify for a PPP loan to cover employee salaries up to $100,000 even if you offer certain benefits in addition to a salary that size.  Such excluded benefits include employer retirement contributions, group healthcare coverage and premiums, and payment of state and local taxes.

Can I include federal taxes in my payroll costs?

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.  A PPP loan cannot be used cover your business’s share of federal payroll taxes.

What about non-profits?

PPP loans are available for qualifying tax-exempt nonprofit organizations described in section 501(c)(3) of the Internal Revenue Code (IRC), tax-exempt veterans organization described in section 501(c)(19) of the IRC, 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 residence is in the United States.  Other exceptions may apply based on the size of your business. Please contact us if you have any questions.

What affiliate rules apply in calculating my business’s eligibility by size?

In determining your eligibility by number of employees, you may need to include the employees of your affiliates.  The “power to control” rules apply (13 C.F.R. 121.301(f)) as well as the rules set by the SBA in the Interim Final Rule. Contact us for more details if you have questions on this point.

Other, pre-existing affiliation rules, including the exceptions under 13 CFR 121.103(b)(2), also apply.

Who is responsible for calculating and verifying the program requirements?

The SBA is mindful of easing the strain on lenders and is increasingly allowing them to rely on borrower representations.

For example, each borrower must determine which entities (if any) are affiliates and determine the employee headcount of the borrower and its affiliates.  Each borrower must also provide an accurate calculation of payroll costs with supporting documentation.  Lenders should scrutinize borrowers’ applications only as warranted by the quality of the supporting documentation.  Reports by third-party payroll processors will receive little scrutiny.

The Paycheck Protection Program is evolving quickly.  Be sure to stay current with the U.S. Small Business Administration, the U.S. Department of the Treasury, and your lender. Check back on our website frequently for updates.

We at Messerli Kramer are dedicated to supporting you through the COVID-19 crisis.  Contact either of the authors with your questions.