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SBA Answers More Key PPP Questions – Many Remain

UPDATE 4/4/20:  The SBA has Issued a Second Round of Guidance – 13 CFR Part 121.  This guidance primarily focuses on affiliation rules for businesses, not-for-profits and faith-based organizations.  See updated information below.

Despite not being ready on April 3rd as originally anticipated, many banks are now starting to accept applications. Check with your bank for when you can begin to apply and application process.  Visit www.sba.gov for a list of SBA lenders. Time is of the essence as the SBA Guidance indicates that loans will be on a first come, first served basis.


The Small Business Administration has now issued two rounds of Paycheck Protection Program (PPP) rules, with more expected. The Guidance provides additional implementation guidelines and requirements for PPP to aid small businesses, not-for-profits and others hit hard by the COVID-19 crisis.

In the new guidance, SBA makes significant changes from its original plan, including raising the fixed interest rate on loans made under the program from 0.5% to 1% in response to feedback that the terms could prevent community banks from participating in the program.

“Now that SBA and Treasury have shared key implementation details and made important changes to the program, I expect banks of all sizes will participate and provide this important financial lifeline to small business customers,” said ABA President and CEO Rob Nichols. “America’s banks are already assisting their small business customers across the country, and they stand ready to work in partnership with the federal government to get these new funds to small businesses in need as quickly as possible.”

Check With Your Bank For When You Can Begin to Apply and Application Process.  Visit www.sba.gov for a list of SBA lenders.


Clarification of criteria and certifications required of lenders.  Effective on issuance, the SBA provided critical guidance to lenders so that the PPP program can be implemented quickly.

Additional Eligibility Guidelines.    In addition to previously communicated eligibility criteria, the SBA defined additional items that disqualify organizations and individuals from participating including household employers, businesses and individuals engaging in illegal activities, owner with 20% of more equity in a business having current and prior felonies, incarceration, criminal indictments, etc. and having a currently delinquent SBA or federally guaranteed loan or defaulted on such within the last seven years and caused a loss to the government.

Payroll Calculation Clarification

The SBA guidance provided further payroll calculation clarification and examples.

  1. Step 1: Aggregate payroll costs from the last twelve months for employees whose principal place of residence is the United States.
  2. 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. (NOTE: Since Independent contractors and sole proprietors may apply on their own, business applicants may NOT include payments to independent contractors in PPP payroll calculation.  See below.)
  3. Step 3: Calculate average monthly payroll costs (divide the amount from Step 2 by 12).
  4. Step 4: Multiply the average monthly payroll costs from Step 3 by 2.5.
  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).

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

Example 4

Some employees make more than $100,000, outstanding EIDL loan of $10,000
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
Add EIDL loan of $10,000 = $260,000
Maximum loan amount is $260,000

Answers for What Qualifies as Payroll Costs

Payroll costs consist of:

  • compensation to employees (whose principal place of residence is the United States) in the form of salary, wages, commissions, or similar compensation (not defined);
  • 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 health care coverage, including insurance premiums, and retirement;
  • payment of state and local taxes assessed on compensation of employees;
  • and for an independent contractor, wages, commissions, income, or net earnings from self-employment.

Specifically excluded is:

  • Any compensation of an employee whose principal place of residence is outside of the United States;
  • The compensation of an individual employee in excess of an annual salary of $100,000, prorated as necessary;
  • Independent Contractors DO NOT count as employees for purposes of PPP loan calculations.  The SBA Guidance specifically states that since 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 calculation.
  • Federal employment taxes imposed or withheld between February 15, 2020 and June 30, 2020, including the employee’s and employer’s share of FICA (Federal Insurance Contributions Act) and Railroad Retirement Act taxes, and income taxes required to be withheld from employees;
  • Qualified sick and family leave wages for which a credit is allowed under the Families First Coronavirus Response Act

What the SBA has NOT answered:

  • 12-month period for PPP payroll calculation.  The interim final rule does not clarify the discrepancy between the CARES Act language stating that payroll costs are based on the 12-month period preceding the loan date and the SBA form application’s instruction providing that borrowers should use the average monthly payroll for 2019.
  • What is included in $100K compensation limit.  The interim final rule does not clarify whether the $100,000 limit applies to the defined term “payroll costs” or to only the wage/salary component of payroll costs. However, the Treasury Department’s information sheet for borrowers implies that it has interpreted the $100,000 limit to apply to total “payroll costs,” including health care benefits.
  • What constitutes “similar compensation” for Partnerships and others.  
  • Organizational challenges hotels, real estate and others face. The SBA guidance did not address some of the real estate specific issues relating to PPP loans, including whether real estate borrowers can access and use loans to pay employees supplied by third-party management companies. Although SBA has stated informally that it is aware of these issues, the rule does not say whether additional guidance on that subject will be forthcoming.

Can I Apply for More than One PPP Loan

  • No, This means that if you apply for a PPP loan you should consider applying for the maximum amount.  While the Act does not expressly provide that each eligible borrower may only receive one PPP loan, the SBA has determined in consultation with the US Treasury, that because all PPP loans must be made on or before June 30, 2020, a one loan per borrower limitation is necessary to help ensure that as many eligible borrowers as possible may obtain a PPP loan. This limitation will also help advance Congress’ goal of keeping workers paid and employed across the United States.

Affiliation Rules – What about Businesses with Multiple Entities?

NOTE: As of 4/5, even with the latest SBA Guidance, some of our clients’ banks are still recommending separate loan applications for each related company separately (unless the companies are all owned together by a holding company.)  BE SURE TO CHECK WITH YOUR BANK. 

SBA Guidance 4/4 states:

  • The SBA has clarified that In most cases, a borrower will be considered together with its affiliates for purposes of determining eligibility for the PPP.  Under SBA rules, entities may be considered affiliates based on factors including stock ownership, overlapping management and identity of interest. 
  • An entity generally is eligible for the PPP if it, combined with its affiliates:
    •  is a small business as defined in section 3 of the Small Business Act (15 U.S.C. 632), or (1) has 500 or fewer employees whose principal place of residence is in the United States
    • or is a business that operates in a certain industry and meets applicable SBA employee-based size standards for that industry,
    • is a tax-exempt nonprofit organization described in section 501(c)(3) of the Internal Revenue Code (IRC)
    • a tax-exempt veterans organization described in section 501(c)(19) of the IRC
    • a Tribal business concern described in section 31(b)(2)(C) of the Small Business Act, or any other business concern.
  • On the most current sample PPP application, a business and each 20%-or-greater owner must certify on its application that, among other things, it has not and will not receive another PPP loan.

The CARES Act made 501(c)(3) nonprofit organizations not only eligible for the PPP, but also subjected them to SBA’s affiliation rules. Specifically, section 1102 of the Act provides that the provisions applicable to affiliations under 13 CFR 121.103 apply with respect to nonprofit organizations and veterans organizations in the same manner as with respect to small business concerns.

Exemption for Faith-Based Organizations.  The SBA’s PPP affiliation guidance specifically exempts otherwise qualified faith-based organizations from the affiliation rules.  The SBA is aware of the existence of faith-based organizations that would qualify for relief under the CARES Act but for their affiliation with other entities as an aspect of their religious practice. The SBA accordingly must exempt faith-based organizations that would otherwise be disqualified from the PPP based on features of those organizations’ affiliations that
are a matter of religious exercise.

What About Foreign Owned Businesses?

Generally, to be eligible for a 7(a) loan, an applicant must have its place of business located in the US and operate primarily within the US or make a significant contribution to the US economy through payment of taxes or use of US products, materials, or labor. Once that threshold is met, the applicant’s domestic and foreign employees (including the domestic and foreign employees of the applicant’s affiliates) count toward the number of employees considered for size determinations.

  • Internationally owned organizations located in the US are eligible, if they meet small business and other criteria.
  • NOTE: Under the CARES Act, a borrower may not use the proceeds of a PPP loan for compensation of employees whose principal place of residence is outside the US.

What About Loan Forgiveness?

Yes.  The amount of loan forgiveness can be up to the full principal amount of the loan and any accrued interest if the borrower uses all of the loan proceeds for forgivable purposes described below and employee and compensation levels are maintained. The actual amount of loan forgiveness will depend, in part, on the total amount of:

  • payroll costs
  • payments of interest on mortgage obligations incurred before February 15, 2020
  • rent payments on leases dated before February 15, 2020
  • utility payments under service agreements dated before February 15, 2020, over the eight-week period following the date of the loan.

IMPORTANT NOTE: the SBA  and US Treasury have determined that the non-payroll portion of the forgivable loan amount is limited to 25%.    This is to ensure purpose of PPP and that finite program resources are devoted primarily to payroll. The SBA and US Treasury determined that 75 percent is an appropriate percentage in light of the CARES’ overarching focus on keeping workers paid and employed.  The SBA has indicated they will issue additional guidance regarding loan forgiveness.  This e-Alert will be updated once issued. 

Is a Business Eligible for PPP Forgiveness if it Has Already Laid Off Workers and/or Reduced Salaries?

The CARES Act does not disqualify a business from loans under the PPP if it has already conducted reductions in force, furloughed, or otherwise laid off employees or reduced employee salaries. However, in instances other than seasonal employers, the SBA calculates the number of employees based on the average number of employees over the preceding 12 months. Also, as discussed above, the amount of the loan that is eligible for forgiveness is based on the number and salaries of employees at the time of an application, taking into account any reductions that have recently been made.

Practically speaking, borrowers that lay off employees or reduce employee salaries between February 15, 2020 and April 26, 2020 should not be penalized with a reduction in loan forgiveness amount as long as they re-hire the employees that they previously laid off or eliminate the salary reductions by June 30, 2020. Otherwise, as discussed above, the amount of the 7(a) loan that is eligible for forgiveness is reduced as described above.

Is the PPP First Come, First Served?

Yes.  It is to your advantage to work with your current lender if they are participating in the PPP program.

Does Receiving One Type of Small Business Loan Make an Applicant Ineligible to Receive Another Type?

  • Under the PPP, a business and each 20%-or-greater owner must certify on its application that, among other things, it has not and will not receive another PPP loan.
  • A borrower that received an EIDL loan between January 31, 2020 and the date on which the PPP becomes available can still receive a PPP loan.
  • A borrower can also refinance an EIDL loan into a PPP loan for forgiveness purposes (see below for further details). We anticipate the SBA will provide further clarification regarding what it considers to be the same purpose with respect to loan eligibility.

Does Participation in the PPP Preclude a Borrower From Taking Advantage of CARES Act Tax Relief Programs and Vice Versa?

The CARES Act provides that borrowers that receive PPP loans are ineligible to receive the employee retention tax credit.

Additionally, the payroll tax deferral benefit is not available to a taxpayer that participates in the loan forgiveness program under the PPP.

I Don’t Have Any Payroll Costs.  What Help is Available for Me?

The Economic Injury Disaster Loan (EIDL) program is a pre-existing program available to certain small businesses located in areas subject to a presidential disaster declaration that have suffered a substantial economic injury as a result. Section 1107 of the CARES Act includes US $10 billion to expand the EIDL program to businesses beyond previous size limits to include those with up to 500 employees, with some relaxed eligibility requirements.

Additionally, an EIDL “grant” provision allows applicants to request that SBA provide an immediate advance of up to US$10,000 within three days of an application in an effort to get money into the hands of small businesses as soon as possible.

Economic Injury Disaster Loan applications are already being accepted

PPP Resources

  • The details: The Small Business Administration has a dedicated page where you can learn about loan eligibility and forgiveness details. Find it here.
  • Where to apply? Find the borrower application form here or here.
  • Where to find a lender? The SBA has a searchable tool for that here If your current bank is participating, we recommend you work with them as existing customers will be given priority.

We Are Here to Help

Please visit the Warady & Davis LLP COVID-19 Resource Center for a wealth of information on stimulus assistance, new legislation and much more.  This information is updated daily.  This is a rapidly evolving situation so please do not hesitate to reach out to us with any questions or concerns at 847-267-9600.


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