SBA Issues PPP Frequently Asked Questions; Gives Favorable Answers
As banks start accepting and processing applications, and businesses and their advisors race to apply, all have struggled with limited PPP guidance and unanswered questions. Late Monday night, April 6, 2020, the US Treasury and the SBA released FAQs on the Paycheck Protection Program (PPP), the $349 billion small business relief program that is a key part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act.
Many of our clients, banks, the W&D team and other advisors’ unanswered questions are addressed in this FAQ – particularly numbers 14, 15 and 16 below. These FAQs are critically important to help banks facilitate the funding of small businesses and to provide consistency and clarity in the application process for everyone.
IMPORTANT NOTE: If you have already submitted your application but it has not yet been processed, while it is not required that you update it based on this new guidance, it may be to your benefit to do so.
- Lenders are not required to thoroughly review the calculation of the payroll costs provided by the borrower. It is the responsibility of the borrower to accurately complete that calculation. However, if the lender identifies errors, they will work with the borrower to fix the application. The SBA will likely review the loan amount at some point in time.
- Can a borrower have more than 500 employees? The answer is yes as long as they meet the definition of a “small business concern”. You can have up to 1,500 employees based on some industries. Also, it appears you could have an unlimited number of employees if (1) the tangible net worth of the company is less than $15 million and (2) your average net income for the previous two years is not more than $5 million.
- Does a business have to qualify as a small business concern? The answer is no. Any business with fewer than 501 employees automatically qualifies. This eliminates the “Small Business Concern” requirements. Businesses with fewer than 501 employees automatically regardless of revenue. Also, the Q&A states that you do not include any non-US employees in your count.
- Are the banks required to verify the affiliates of the applicant? The answer is no. The applicant is required to verify all of the affiliates and how it affects their application. The affiliate rules prevent closely-related entities from spreading the employee count out. All employees of the affiliated group will be counted to see if they meet the 500/industry employee limit.
- Are applicants required to apply the SBA affiliation rules? Answer is yes. As discussed in #4, these rules prevent groups of multiple companies from getting around the 500/industry group limit. However, if you think you are over 500 employees based on affiliation, make sure to review the industry size limits for each applicant. For example, you may have an agricultural based business with 400 employees and a manufacturing company with 800 employees. As an affiliated group, you are over 500, but the agricultural is under 500 and the manufacturing industry is allowed to have 1,250 employees.
- Can a minority shareholder give up their rights to control the business under the affiliation rules? The answer is yes and this would no longer require affiliation.
- What does compensation in excess of $100,000 mean? The answer to this question is great news for all borrowers. Only compensation in the form of wages, salaries, etc. is excluded. All other payroll related costs such as group insurance, retirement pay and state and local taxes are allowed. For example, suppose you have an employee who earns $125,000, has group insurance of $10,000, retirement payments of $6,000 and state and local taxes of $4,000. The limit is not $100,000 but $120,000 for the payroll costs calculation.
- Does the PPP cover paid sick leave? The answer is yes for purposes of calculating your loan amount. However, paid Sick or Family leave under provided under the Family First Coronavirus Response Act is not allowed to be included as part of payroll costs when you determine your loan forgiveness amount.
- What time period should season employers used for their payroll calculation? Lenders may consider whether a seasonal borrower was in operation on February 15, 2020 or for an 8-week period between February 15, 2019 and June 30, 2019.
- Can applicants use a third-party payer for payroll or a Professional Employer Organization (PEO)? SBA recognizes that many companies use these entities and will respect the labor costs reported. If these payers are related parties, however, there may be additional documentation required to verify which entity had which employees and the amount paid. This can become very important both for the loan application process and for the forgiveness calculation.
- Who can sign the application? Only one person is required to sign but needs to be an Authorized Representative of the applicant.
- What if you have a felony conviction in the past? Generally only counts if convicted in last five years.
- Can lenders use their own online portals? Yes.
- What time period is used to calculate the maximum loan amount? Answer is EITHER 2019 calendar year OR previous 12 months.
- Can payments to independent contractors be included in PPP payroll calculation. The April 6th Q&A Confirms you CANNOT use any payments to independent contractors. The FAQ does not address how self-employment income of partners (through guaranteed payments or pass-through income) affects the partnership’s maximum loan amount.
- How should a borrower account for federal taxes when determining its payroll costs for purposes of the maximum loan amount, allowable uses of a PPP loan,
and the amount of a loan that may be forgiven? The Q&A answer provided is really good news. You will use gross payroll and will not have to reduce your payroll costs by any federal payroll taxes imposed or withheld such as the employee’s and employer’s share of Federal Insurance Contributions Act (FICA) and income taxes required to be withheld from employees. The wording in the original law was unclear. This FAQ simply states you don’t really do anything with them. You don’t include any of those taxes and you don’t subtract any of those taxes. Use gross wages.
- What if I already filed my loan application? Do I need to take updated action based on this guidance? No. Borrowers and lenders may rely on the laws, rules, and guidance available at the time of the relevant application. However, borrowers whose previously submitted loan applications have not yet been processed may revise their applications based on clarifications reflected in these FAQs. This may be in your best interests.
- Are PPP loans for existing customers considered new accounts for FinCEN Rule CDD purposes? If the PPP loan is being made to an existing bank customer and the necessary information was previously verified, you do not need to re-verify the information.
These clarifications are going to have a significant impact on the total eligible funding amount available to small businesses and help minimize confusion for PPP applicants, their advisors and to provide consistency with lenders.
The effectiveness of the PPP depends on the quick distribution of funds, so it’s crucial we answer lender questions and minimize complexity for small businesses that need support now.
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