On June 28, the Office of Management and Budget repealed the requirement that Paycheck Protection Program (PPP) borrowers with loans of $2 million or more must complete a Loan Necessity Questionnaire as part of their PPP loan forgiveness application.

On July 2, the Small Business Administration (SBA) officially advised PPP lenders that they would no longer be required to obtain Loan Necessity Questionnaires (SBA Forms 3509 and 3510) from borrowers with PPP loans over $2 million.

However, the safest course is for borrowers is to maintain detailed documentation regarding your PPP loan eligibility and necessity. We also recommend documenting all of your expenses covered with PPP funds in the event of a possible loan audit. Should there be a future audit it will be much easier to make a compelling presentation if the analysis and documentation was completed and retained. [1]

Reminder that you can apply for PPP forgiveness any time up to the maturity date of the loan. As of June 2020, Congress granted all borrowers the option of a 24-week covered period. After your covered period ends, you have 10 months before payments on the loan are required. If you do not apply for forgiveness within 10 months after the last day of the covered period, then you must begin making loan payments to your PPP lender.

If you have any questions, please do not hesitate to reach out to our Wendel team.

[1] The Treasury and SBA have created a “safe harbor” for borrowers that received less than $2 million in PPP funds. However, the SBA may still review any borrower’s PPP loan at any time.

On June 5^th, President Trump signed the Paycheck Protection Program Flexibility Act of 2020 (PPPFA), which made significant changes to the Paycheck Protection Program (PPP). A summary of the PPPFA is available here. On June 10^th, the Treasury Department and the SBA issued a new Interim Final Rule (IFR) and a new PPP Borrower Application that takes into account the new law. On June 16^th, the SBA filed another IFR, this will be the 19^th IFR to date, which is scheduled to be published on Friday June 19^th. The unpublished version of the newest IFR confirms that self-employed, freelancers and independent contractors who took the maximum loan amount based on their 2019 monthly income are eligible for full forgiveness.

This article summarizes the new IFRs and the new Borrower Application. Remember that any guidance from the Treasury or SBA do not carry the force and effect of law.

Covered Period

The covered period governing the PPP loan usage, eligibility and forgiveness is extended from June 30, 2020 to December 31, 2020. Borrowers who received their PPP loans before June 5^th can elect to use either an 8-week period or a 24-week period. However, according to the new Borrower Application, those who are applying for a PPP loan after June 5^th must use the 24-week covered period.

Although a 24-week covered period provides borrower with more time to spend the PPP funds and satisfy the 60% payroll expense test, the 8-week covered period is advantageous for employers who had to reduce their Full-Time Equivalent employees and/or employee wages and salaries since it is easier to keep the FTE count and wages and salaries for 8 weeks rather than to maintain them throughout the new 24-week period.

Now, for those borrowers whose covered period is 24 weeks, their maximum forgiveness cap is $46,154 ($100,000/52 *24) per individual employee instead of $15,385 ($100,000/52 * 8) per individual employee.

For PPP borrowers who are self-employed, freelancers and independent contractors, the new IFR shows new methods to calculate owner compensation. The calculations depend on whether your loan is under an 8-week or a 24-week covered period. For an 8-week covered period, the owner compensation is 8 weeks’ worth (8/52) of 2019 net profit (up to $15,385). For a 24-week covered period, the owner compensation is 2.5 months’ worth (2.5/12) of 2019 net profit (up to $20,833). These calculations exclude any qualified sick leave equivalent amount for which a credit is claimed under section 7002 of the Families First Coronavirus Response Act (FFCRA).

Maturity Date

The PPPFA extended the maturity date for PPP loans to 5 years for loans made on or after June 5, 2020.[1] The maturity date remains 2 years for those borrowers who received their loans prior to June 5, 2020. The IFR confirms that borrowers and lenders can mutually agree to extend the maturity to 5 years. However, I doubt that lenders will jump at the opportunity to continuing servicing these loans for another 3 years, and so the “mutual agreement” may be a problem for some borrowers.

Deferral Period

Previously, the deferral period was 6 months from the date a PPP loan was received. The new law allows borrowers who apply for forgiveness within 10 months after their forgiveness covered period ends, to extend their deferral period through the date on which the SBA remits the loan forgiveness amount to the lender.  Borrowers who do not apply for forgiveness within 10 months must begin paying principal and interest after that period.

Loan Forgiveness – What Do You Have to Spend on Payroll?

The Treasury and the SBA confirmed that spending 60% of your PPP funds on payroll expenses is not a minimum threshold to be eligible for loan forgiveness, despite the language in the PPPFA. Borrowers who spend less than 60% of their PPP funds on payroll expenses during the forgiveness-covered period will continue to be eligible for partial loan forgiveness. This means that to be eligible for full loan forgiveness borrowers must spend at least 60% on payroll expenses and the other 40% on permitted non-payroll expenses.

Last Day to Apply

The IFR confirms that the last day a lender can obtain an SBA loan number for a PPP loan is June 30, 2020.

The New Application

The new PPP Borrower Application is identical to the previous application except for revisions to the borrower certifications on page 2.  The new certifications change the 8-week covered period to the new 24-week covered period, and reflect the revised 60% payroll cost requirement instead of the original 75% requirement.

[1] A PPP loan is made on the date the SBA assigns a loan number. Hence, in order to find out whether you are considered “a borrower before June 5, 2020” you must contact your lender. Note that this date is important to determine whether the 8-week or the 24-week covered period applies to you, and whether you get a 2 or 5 year loan maturity.

Note: This article was originally published on 6/5/2020 and was last updated on 6/8/2020.

On June 3, 2020, the Senate passed H.R. 7010 entitled the Paycheck Protection Program Flexibility Act of 2020 (the “PPPFA”). On June 5, 2020, President Trump signed the PPPFA into law. The PPPFA significantly changes a number of provisions in the Paycheck Protection Program (PPP) loan program enacted as part of the CARES Act.

Loan Maturity Changes

Even though the CARES Act provided for a maximum loan maturity of 10 years, the Small Business Administration (SBA) decided that PPP loans would have a 2-year maturity. The PPPFA extends the minimum maturity of PPP loans to 5 years. The new loan maturity period applies to any PPP loan made on or after the enactment of the PPPFA. Although lenders and borrowers are not required to modify PPP loans to provide for a longer payment period, they may mutually agree to modify the maturity terms of prior-disbursed PPP loans. In order for borrowers with an existing PPP loan to take advantage of the new law, their lenders have to agree to the 5-year maturity period. It seems unlikely that lenders will be thrilled to extend maturity of these low-interest loans.

Forgiveness Changes

Covered Period

Under the new law, the covered period for PPP loan forgiveness will extend from 8 weeks from the date of origination to the earlier of 24 weeks from the origination date or December 31, 2020. If you received a PPP loan before the enactment of the PPPFA, you may choose to continue using the 8-week covered period set forth in the CARES Act. The new law provides more time for borrowers to spend PPP funds, which means borrowers have more time to spend the loan on allowed payroll and non-payroll expenses.[1]

The new covered period also increases the amount of time a borrower has to hire or re-hire employees in order to avoid a reduction in loan forgiveness. By hiring employees back before the end of 2020, borrowers will be able to increase their loan forgiveness amount.

The PPPFA also makes it easier for borrowers to maintain their wages/salaries levels, and presumably avoid reduction in loan forgiveness. The PPP loan amount was calculated by multiplying one month of 2019 payroll by 2.5, which equaled approximately 10 weeks of payroll. With the increased covered period, borrowers now have the flexibility to spend 10 weeks of payroll until the end of 2020.[2] This will make receiving complete loan forgiveness more likely.

Reduction in FTEs

The PPPFA adds a new exemption regarding hiring or re-hiring full-time equivalent (FTE) employees to qualify for full loan forgiveness. The current PPP loan forgiveness rules contain a provision which reduces loan forgiveness in proportion to the reduction of a borrower’s employees during the 8-week period, provided that the borrower fails to hire or rehire the same number of employees by June 30th.

The PPPFA states that the amount of loan forgiveness will not be reduced due to a reduction in the number of FTE employees if a borrower, in good faith, documents (i) the inability to rehire individuals who were employees on February 15, 2020; and (ii) the inability to hire similarly qualified employees for unfilled positions on or before December 31, 2020.

Moreover, the amount of loan forgiveness will not be reduced due to a reduction in the number of FTE employees if a borrower, in good faith, documents the inability to return to the same level of business activity at which the borrower operated on or before February 15, 2020, due to compliance with federal governmental requirements or guidance (DHHS, CDC or OSHA) issued between March 1, 2020, and December 31, 2020, relating to standards of sanitation, social distancing, or other worker or customer safety requirements due to COVID-19.

Requirement to Spend 75% on Payroll

Currently, in order to be eligible for full loan forgiveness, the SBA requires that a borrower spend at least 75% of the PPP funds on payroll expenses.

Under the PPPFA, borrowers must use 60% of the PPP funds for payroll expenses, and may use up to 40% for permitted mortgage, rent, utilities, and interest on secured debt to receive loan forgiveness. As currently drafted, the PPPFA requires borrowers to spend at least 60% of PPP funds to receive any loan forgiveness. This means that if at least 60% of the PPP funds are not spent on payroll, borrowers will not be eligible for loan forgiveness. This is a major change from the 75%/25% rule created by the SBA, which reduced the amount of loan forgiveness if less than 75% of the PPP funds was used to cover payroll expenses.

Payment Deferral

The PPPFA replaced the 6-month deferral of payments due under PPP loans with deferral until the date on which the amount of forgiveness determined under the CARES Act is remitted to the lender. If a borrower does not apply for forgiveness, the borrower must begin making payments 10 months after the covered period ends (the new covered period is the earlier of 24 weeks from loan origination or December 31, 2020 for all current PPP borrowers).

Payroll Tax Deferral

Lastly, the PPPFA allows all employers to take advantage of the CARES Act deferral of the 6.2% employer portion of social security payroll taxes, regardless of whether they have had a PPP loan forgiven.[3]

[1] See https://www.wendel.com/news/covid-19-cares-act-guidance/ for a definition of allowed payroll and non-payroll expenses.

[2] Section 1106(d)(3)(A) of the CARES Act states that the amount of loan forgiveness will be reduced by the amount of any reduction in total employee salary/wages during the covered period, if that reduction exceeds 25% of the total salary/wages of the employee during the most recent full quarter during which the employee was employed before the covered period. The PPPFA amends the term “covered period.” Now, it should not be a problem for most borrowers to spend at least 75% of payroll of one quarter throughout the rest of this year. This may be an unintended consequence that will be rectified down the road, but at least for now, it is the law.

[3] CARES Act Section 2302(a)(3) required borrowers who received PPP loan forgiveness to cease the deferral of payment of employer old age, survivors and disability insurance (OASDI).

On May 22, 2020, the Treasury and Small Business Administration (SBA) released new guidance regarding the Paycheck Protection Program (PPP).[1] This guidance addresses PPP loan forgiveness, the SBA’s loan review procedures, as well as borrower and lender responsibilities under the PPP. Below is a summary of the new Interim Final Rules (IFR).

Loan Forgiveness

To obtain loan forgiveness, a borrower must complete and submit the Loan Forgiveness Application (SBA Form 3508 or lender equivalent) to the lender who approved its PPP loan. The lender then has 60 days to issue a decision to the SBA. Within the 90 days after the lender issues its decision to the SBA, the SBA will, subject to any SBA review of the loan or loan application, remit the appropriate forgiveness amount to the lender, plus any interest accrued through the date of payment.[2]

Payroll Costs

The IFR reaffirms that, in general, payroll costs paid or incurred during the covered period, which is the eight weeks following disbursement of the PPP funds, are eligible for forgiveness. Borrowers may also use an “alternative payroll covered period” as described in the instructions to the Loan Forgiveness Application, in which the borrower may opt to use a covered period beginning on the first day of the borrower’s first payroll cycle.

The IFR also confirms that payroll costs are incurred on the day the employee’s pay is earned. If employees are not performing work and are still on a borrower’s payroll, payroll costs are incurred based on the schedule established by the borrower (i.e. each day the employee would have performed work).

The new guidance clarifies that employee bonuses and hazard pay are eligible for payroll costs, as long as the employee’s total compensation does not exceed $100,000/ year. Moreover, wages paid to furloughed employees during the covered period are eligible for forgiveness.

The guidance reaffirms the caps on the amount of loan forgiveness available for owner-employees and self-employed individuals’ own payroll compensation. Owner-employees and self-employed individuals are limited to “payroll compensation” no greater than the lesser of 8/52 of 2019 compensation or $15,385 per individual. Owner-employees are further capped by the amount of their 2019 employee cash compensation and retirement and health care contributions made by the employer. Schedule C filers are capped by the amount of their owner compensation requirement, calculated based on 2019 net profit. General partners are capped by the amount of their 2019 net earnings from self-employment, subject to certain reductions.

Nonpayroll Costs

The IFR reaffirms that eligible nonpayroll costs cannot exceed 25% of the loan forgiveness amount (where the remaining 75% must be used for payroll expenses).[3]

The guidance reiterates that nonpayroll costs must be paid during the covered period or incurred during the covered period and paid on or before the next regular billing date, even if the billing date is after the covered period. If a borrower’s nonpayroll expenses include the covered and noncovered period and are paid after the covered period, the borrower may seek partial forgiveness of the expenses incurred during the covered period but paid on the next regular billing date. For example, if a borrower’s “covered period” ends on July 26 and its electricity expenses for July are not paid until August 10, the borrower’s electricity expenses for July 1-26 are forgivable.

Lastly, the IFR states that advance payments of interest on mortgage obligations are not eligible for loan forgiveness.

Reductions to Loan Forgiveness Amount

Head Count Reductions

The IFR confirms that borrowers will not be penalized for voluntary resignations and schedule reductions or for-cause terminations that occur during the covered period or the alternative payroll covered period. Moreover, borrowers will not be penalized if they offer to re-hire an employee for the same salary and same number of hours and the employee declines the offer. In this case the borrower must document the request and denial in writing and the borrower must inform the applicable state unemployment insurance office within 30 days of the employee’s rejection of the offer.

Salary/Wage Reductions

The IFR confirms that the 25% salary/wage reduction calculation (for employees who were not paid more than the annualized equivalent of $100,000 during any 2019 pay period) is performed on a per-employee basis. The salary/wage reduction applies only to the decline in employee salary and wages, it is not attributable to the FTE reduction.

Remedies for Reductions in Head Count and Salary/Wage

The restoration benefit applies only to eliminating, before June 30, 2020, FTE and only those salary reductions that occurred between February 15, 2020 and April 26, 2020.

Loan Review

The SBA may review any PPP loans, at any time in its discretion. In that review, the SBA may consider whether a borrower correctly calculated the loan amount, properly used the loan proceeds, and/or is entitled to the loan forgiveness amount sought.

Previously, in its FAQ #46, the SBA created a safe harbor for PPP loans under $2 million. The new guidance clearly state that the SBA may undertake a review of any loan at any time in SBA’s discretion. Therefore, it is imperative that all borrowers retain PPP documentation for at least six years after the date the loan is forgiven or paid in full. The SBA and SBA Inspector General may request to view this documentation.

If loan documentation submitted to the SBA by the lender indicates that the borrower may be ineligible for a PPP loan or may be ineligible to receive the loan amount or loan forgiveness amount claimed by the borrower, the SBA will require the lender to contact the borrower in writing to request additional information. SBA may also request information directly from the borrower. Failure to respond to the SBA’s request for information may result in a determination that the borrower is ineligible for forgiveness or for the loan itself.

If the SBA determines that a borrower is ineligible for the PPP loan, the SBA will direct the lender to deny loan forgiveness. If the SBA determines that the borrower is ineligible for the loan amount or loan forgiveness amount claimed by the borrower, the SBA will direct the lender to deny the loan forgiveness application in whole or in part. Furthermore, the SBA may seek repayment of the outstanding PPP loan balance or pursue other available remedies.

A borrower may appeal the SBA’s determination that the borrower is ineligible for a PPP loan or ineligible for the loan amount or the loan forgiveness amount claimed by the borrower.[4]

Loan Forgiveness Process for Lenders

The IFR states that lenders must confirm receipt of required documentation to verify payroll and nonpayroll costs. Lenders must also confirm the loan forgiveness calculations performed by borrowers, although the calculation’s accuracy remains the borrower’s responsibility. Lenders are only expected to provide a “good faith review, in a reasonable time, of the borrower’s calculations and supporting documents.”

The level of scrutiny applied to these calculations will depend on the reliability of the payroll records. For instance, payroll reported by a recognized payroll provider will require minimal review, as compared to a more extensive review that will be required for payroll from an unrecognized source.

If a lender issues a decision approving the Loan Forgiveness Application, it must submit to the SBA the borrower’s: (1) PPP Loan Forgiveness Calculation form; (2) PPP Schedule A; and (3) the PPP Borrower Demographic Information Form (if submitted by the borrower). If the lender determines the borrower is not entitled to forgiveness in any amount, the lender must provide a reason for the denial and submit the above-mentioned forms to the SBA.[5] The lender must also notify the borrower in writing that the denial has been issued to the SBA. A borrower may request the SBA to review the lender’s decision, this must be done within 90 days of receiving a notice from lender.

If the SBA denied the Loan Forgiveness Application, the borrower may request that the lender reconsider the borrower’s Loan Forgiveness Application, unless the SBA has determined the borrower is ineligible for a loan in general.

Finally, the SBA may begin a review of “any PPP loan of any size at any time in SBA’s discretion.” If the SBA decides to review a PPP loan, it will notify the lender in writing and the lender must notify the borrower in writing within five business days of receipt.

[1] See new Interim Final Rules (IFR) here and here.

[2] The general loan forgiveness process described in this paragraph applies only to loan forgiveness applications that are not reviewed by SBA prior to the lender’s decision on the forgiveness application.

[3] The U.S. House approved legislation Thursday making it easier for borrowers to qualify for forgiveness of the loans. The House bill, called the Paycheck Protection Flexibility Act, H.R. 7010, extends from eight weeks to 24 weeks the time PPP recipients have to spend their funds, and lowers to 60% from 75% the portion of PPP funds borrowers must spend on payroll costs to qualify for full loan forgiveness.

[4] The SBA intends to issue a separate interim final rule on this process.

[5] SBA reserves the right to review the lender’s decision in its sole discretion.

Note: This article was originally published on 04/01/2020 and was last updated on 5/29/2020.

There has been a flurry of media articles, blog posts, webinars, and social media posts on the new Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) which is designed to make funds immediately available to small businesses adversely impacted by COVID-19.  This Wendel Rosen Alert and accompanying Comparison Chart describe the CARES Act loan programs.  Guidelines for the Paycheck Protection Program – Section 7(a) Loans were just released on March 31. These will be available beginning on April 3.

On March 27, 2020 the President signed into law the CARES Act to address the unprecedented public health and economic crisis related to COVID-19.  The CARES Act provides $349 billion for Small Business Administration (“SBA”) loan guarantees and subsidies. Applicants should apply as soon as possible to get their application in the queue.

While the CARES Act has numerous provisions, there are two main loans/grants that are of particular interest to small businesses:

1. Section 7(a) loans under the Paycheck Protection Program (“PPP Loans”) which will be available very soon and which may be forgivable;
2. Section 7(b) Economic Injury Disaster Loans (“EIDL Loan”) which are currently available; and Emergency Grants of $10,000 that are provided to Section 7(b) EIDL Loan applicants within three days of applying for an EIDL Loan.

Applicants should carefully document expenditures to maximize the debt forgiveness component under the PPP Loans. Only amounts used for qualifying expenses will be forgiven.

Applicants who apply for an EIDL Loan and the Emergency Grant, can still apply for a PPP Loan.  However the amount forgiven under the PPP Loan will be decreased by the $10,000 Emergency Grant. Applicant can apply for the EIDL Loan immediately, and then roll over into the Section 7(a) loans once those applications become available. If applying for both, borrowers will not want to use the EIDL loans to pay Section 7(a) Loans qualifying expenses.

Section 7(A) Loans (Paycheck Protection Program)

For the new PPP Loans, the CARES Act authorizes businesses with not more than 500 employees or, if applicable, the size standard in number of employees established by the SBA for a specific industry, to obtain PPP Loans from SBA-approved lenders, with the ability to get a significant portion of the loan forgiven. In addition, personal guarantees and collateral requirements are waived for PPP Loans.

Small businesses and sole proprietorships can apply for a PPP Loan starting April 3, 2020 through existing SBA lenders. Starting April 10, 2020, PPP Loan applications will be available to independent contractors and self-employed individuals. A list of participating lenders can be found at www.sba.gov. Note that even though the PPP Loan program is open until June 30, 2020, applicants should apply as soon as possible because there is a funding cap and lenders need time to process these loan applications. The applications can be found on the U.S. Department of Treasury website.

The amount of the PPP Loan is based on not more than 2.5 times the average total monthly payroll costs incurred in the one-year period before the loan is made. That amount is subject to a $10 million cap. The CARES Act provides for a different applicable time period to calculate the maximum amount for seasonal and new businesses. Payroll costs will be capped at $100,000 annualized for each employee.

Eligibility

All small businesses, including nonprofits, veterans organizations, Tribal business concerns, sole proprietorships, self-employed individuals, and independent contractors, with not more than 500 employees can apply. Businesses in certain industries can have more than 500 employees if they meet applicable SBA employee-based size standards for those industries.

The borrower will have to show that the business was (i) in operation on February 15, 2020 and (ii) had employees for whom the borrower paid salaries and payroll taxes.

Permitted Use

In addition to uses already allowed under the SBA’s Business Loan Program, permitted uses for the PPP Loans are:

(a) Payroll costs (as defined below);

(b) Interest on mortgage obligations;

(c) Rent;

(d) Utilities; and

(e) Interest on any other debt obligations incurred before the covered period.

Payroll costs mean the sum of any compensation, including: (a) compensation to employees, such as salary, wage, commissions, cash (capped at $100,000 on an annualized basis for each employee); (b) paid leave; (c) severance payments; (d) payment for group health benefits, including insurance premiums; (e) retirement benefits; (f) state and local payroll taxes; or (g) compensation to sole proprietors or independent contractors (including commission-based compensation) capped at $100,000 in one year, prorated for the covered period.

Payment Deferral/Loan Forgiveness

The key benefits of the PPP Loans are: 1) loan payments may deferred for six months to a years, and 2) the loan may be forgivable, effectively turning much of the loan into a grant.

The CARES Act provides that businesses that were operating on February 15, 2020 and that have a pending or approved loan application under this program are presumed to qualify for complete payment deferment relief (of principal, interest, and fees) for six months to one year.

The PPP Loan will be forgiven if the borrower used it solely to cover payroll costs, mortgage interest, rent, and utilities payments over the eight weeks after getting the loan. Loan forgiveness will be reduced if a borrower decreased its full-time employee headcount. Loan forgiveness will also be reduced if a borrower decreased salaries and wages by more than 25% for any employee that made less than $100,000 annualized in 2019.  For any changes made between February 15, 2020 and April 26, 2020, a borrower has until June 30, 2020 to restore its full-time employment and salary levels to qualify for forgiveness.

EIDL Loans (Emergency Economic Injury Disaster Loan)

The CARES Act expands the EIDL Loans. The EIDL Loans program operates pursuant to Section 7(b) of the Small Business Act and provides low-interest (3.75% for small businesses and 2.75% for private nonprofit organizations) long-term loans to small businesses located in areas that SBA has declared to be geographic disaster zones, California has been declared a disaster zone. The maximum amount of these loans is $2,000,000 and they may have a term of up to 30 years.

In general, EIDL loans may be used to pay fixed debts, payroll, accounts payable and other costs, but are not intended to replace lost sales or profits and cannot be used for certain purposes, including to refinance debt, make payments on loans owed by another federal agency, to pay tax penalty obligations, repair physical damages, or to pay dividends to stockholders.

The CARES Act provides for $10 billion of funding for EIDL Loans, and the ability for borrowers to roll over the debt under EIDL into the new Section 7(a) Loan. The EIDL Loans will be available from January 31, 2020 until December 31, 2020 (the “covered period”). Note that the covered period for the PPP Loans described above, in contrast, runs only until June 30, 2020.

Applicants who have applied or who are applying for EIDL Loans may also apply for Emergency Grants (advances which may be forgiven) of up to $10,000 to provide immediate relief for small businesses. There is a check box at the end of the EIDL application where the applicant must indicate that it wishes to receive the $10,000 grant in addition to the EIDL Loan. These grants will be provided within three days of submitting an application, and are intended to be used for payroll to retain employees during business disruption, rent or mortgage payments.

It should be noted that while an EIDL loan provides for the $10,000 grant, the EIDL loan must be repaid and furthermore, if a business requires a loan of more than $200,000 that would trigger a personal guarantee provision.

Related Articles

COVID-19 CARES Act Guidance: Update to Paycheck Protection Program

COVID-19 CARES Act: Summary of PPP Lenders

Note: This article was originally published on 04/03/2020 and was last updated on 5/29/2020. For more information on the CARES Act, visit COVID-19 CARES Act Guidance.

The SBA Section 7(a) Loan program, also known as the Paycheck Protection Program (PPP), which promises $349 billion to small businesses affected by COVID-19, began today, with a loan application form already live on the U.S. Treasury’s website. The program is being overseen by the Small Business Administration (“SBA”), but banks are the ones who handle the application process.

Over the past week, SBA and the U.S. Department of the Treasury have issued additional guidance. The Paycheck Protection Program provisions of the CARES Act were further interpreted by the SBA in an interim final rule (the “Interim Rule”) issued on April 2, 2020.

How and When to Apply

Funds are limited and subject to availability from the SBA. The Interim Rule makes it clear that the PPP Loans will be made on a first-come, first-served basis. Some of the SBA-approved lenders are indicating that these loans will be available to their existing business clients only, while others state that existing business clients will have priority.

Applicants must submit SBA Form 2483 (Paycheck Protection Program Application Form) and payroll documentation. Applicants must also submit such documentation as is necessary to establish eligibility such as payroll processor records, payroll tax filings, Form 1099-MISC, or income and expenses from a sole proprietorship. For applicants that do not have any such documentation, the applicant must provide other supporting documentation, such as bank records, sufficient to demonstrate the qualifying payroll amount.

Lenders are also asking for a Good Standing Certificate from the Secretary of State (“SOS“). As of April 2, 2020, the SOS is running with a lag time of around three weeks, with no expediting option.  We recommend that borrowers submit the application with a copy of the information available on the SOS website, showing that the company “Active”, and a note that the actual Good Standing Certificate will follow.

PPP Application Fees

There are no fees associated with a PPP Loan applications for borrowers. Agents may not collect fees from the borrower or be paid out of the PPP Loan proceeds.

PPP Application Form

Number of Employees: Number of employees on the PPP Loan application, should be the total number of employees on the applicant’s payroll (this is not limited to full-time employees).

Applicant Ownership: The PPP application requires the applicant to list all of the owners who have 20% or more of the equity of the applicant. If the applicant has several owners and all of those owners have less than 20% equity in the business, the applicant must list all of those owners on a separate page and submit it along with the application.

Terms of the Loan

The Interim Rule clarifies that the PPP Loans, to the extent not forgiven, will have:

• A 2-year term (decreased from the maximum maturity of 10 years under the Act);
• An interest rate of 1% (increased from prior US Treasury guidance that set the interest rate at 0.5%);
• Principal and interest deferred for 6 months (decreased from the 6 months to one year under the Act); and
• No interest charged on forgiven amounts.

Amount of the PPP Loan

The CARES Act and Interim Rule provide that average monthly payroll costs should be calculated over the 12-month period preceding the application, but the application form itself states that monthly payroll costs will be calculated using 2019 payroll costs for most applicants.

The SBA published the following methodology, which will be useful to most applicants, to determine the maximum amount of the PPP Loan:

Step 1: Aggregate payroll costs 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 in Step 2 by 12).

Step 4: Multiply the average monthly payroll costs 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 (for those borrowers who have received the $10,000 grant through the EIDL).

Take the average payroll between January 2019 – December 2019 because most banks will ask for documentation to prove that payroll.

Independent Contractors

Independent contractors do not count as “employees” for purposes of a borrower’s PPP Loan calculation. Moreover, independent contractors do not count as “employees” for purposes of a borrower’s PPP Loans forgiveness. This is due to the fact that independent contractors have the ability to apply for a PPP Loans on their own. Note that independent contractors will not be able to apply for the PPP Loans until April 10, 2010.[1]

Affiliation Rules 

In most cases, a borrower will be considered together with its affiliates for purposes of determining eligibility for the PPP Loan. Under SBA rules, entities may be considered affiliates based on several factors including stock ownership, overlapping management, and identity of interest. Since the new CARES Act made 501(c)(3) non-profits and 501(c)(19) veterans organizations eligible for the PPP Loan, the affiliation rules apply with respect to these nonprofit organizations and veterans organizations in the same manner as with respect to small business concerns.[2]

The SBA has indicated that the normal affiliation standards for PPP Loans, as set out in 13 C.F.R. § 121.301(f), apply to PPP loans, other than as expressly waived by the CARES Act and/or SBA guidance for the Accommodation and Food Services industry, certain franchise companies, companies receiving financial assistance from Small Business Investment Companies, and faith-based organizations.

Loan Forgiveness

Loan proceeds used for permissible uses during the 8-week period after loan origination (the “covered period”) is forgivable, subject to certain requirements.[3]  This means that to be assured of maximum forgiveness, borrowers should plan to spend 100% of the PPP funds before the end of the 8-week period. The Interim Rule states that no more than 25% of the Section 7(a) Loans forgiveness amount may be attributable to nonpayroll costs.

The Headcount Reduction

The amount a borrower manages to spend on permissible uses for the 8-week period determines the borrower’s maximum forgiveness. Forgiveness amount can be reduced due to declines in headcount. Whether the PPP Loan will be forgiven will depend, in part, on the number of employees a borrower employs throughout the covered period.

The amount of the loan forgiven is calculated by multiplying the loan amount by a quotient equal to the average number of full-time equivalent employees (“FTEs”)[4] per month employed by borrower during the covered period divided by either (i) the average number of FTEs per month from February 15, 2019 to June 30, 2019 or (ii) the average number of FTEs per month from January 1, 2020 to February 29, 2020. The employer-borrower can choose either (i) or (ii). The employees employed at the end of the eight week period do not have to be the same employees.

The Salary/Wage Reduction

The PPP Loan forgiveness amount may be further reduced for any employee that has a wage reduction greater than 25% compared to such employee’s most recent full quarter. For purposes of this calculation businesses only need to consider employees who makes $100,000 or less per year. The dollar amount of the wage/salary reduction beyond 25% reduces, dollar-for-dollar, the amount of PPP loan forgiveness.

Remedying the Headcount/salary/Wage Reduction

If by June 30, 2020, the borrower eliminates any reductions in employees or compensation that occurred from February 15, 2020 and ending April 26, 2020 (30 days after enactment of the CARES Act), such reductions will not count against the PPP Loan amount forgiven.[5]

Forgiveness under this program is not treated as taxable gross income for income tax purposes.

The loan forgiveness features of the PPP are complex and will require detailed planning and meticulous documentation. If a business is unable to achieve full forgiveness of the PPP Loan, the amount of the PPP that is not forgiven becomes a 1% loan with a two-year payback period with no collateral and no personal guarantee.

Misuse of PPP Funds

If borrowers use Section 7(a) Loans funds for unauthorized purposes, the amounts used for unauthorized purposes will have to be repaid. Borrowers who knowingly use the funds for unauthorized purposes will be subject to additional liability for fraud.

EIDL and PPP Loans

As of April 5, 2020, borrowers can apply for both EIDL and PPP Loans.

PPP Loans may be used for refinancing an EIDL loan made between January 31, 2020 and April 3, 2020. If a borrower received an EIDL loan from January 31, 2020 through April 3, 2020, the borrower may also apply for a PPP Loan to refinance the EIDL loan.

If a borrower used funds from an EIDL for payroll costs, the PPP Loan must be used to refinance the existing EIDL loan. Proceeds from any advance on the EIDL loan will be deducted from the loan forgiveness amount on the PPP Loan. If a borrower did not use an EIDL loan for payroll costs, the EIDL does not affect the borrower’s eligibility for a PPP Loan.

The Interim Rule requires borrowers to use 75% of PPP Loan proceeds to cover payroll costs. For purposes of determining the percentage of use of PPP Loan proceeds for payroll costs, the amount of any EIDL to be refinanced will be included. For purposes of loan forgiveness, however, the borrower will have to document the proceeds used for payroll costs in order to determine the amount of forgiveness.

EIDL $10,000 Advances

A borrower applying for the EIDL may apply for an advance of up to $10,000. The $10,000 is an advance against an EIDL loan approval. If the borrower does not get an EIDL loan approved, the $10,000 advance turns into a grant. The amount of the advance may depend on the amount of employees the borrower has. If the borrower has 10 employees or more, the borrower will receive $10,000.

[1] For independent contractors, it does not matter whether or not their income comes from a US company.

[2] This rule exempts otherwise qualified faith-based organizations from the SBA’s affiliation rules where the application of the affiliation rules would substantially burden those organizations’ religious exercise.

[3] Permissible uses are; (i) payroll costs, (ii) interest payments on mortgages incurred before February 15, 2020, (iii) rent payments on leases in effect before February 15, 2020, and (iv) utility payments for which service began before February 15, 2020.

[4] According the SBA’s PPP Forgiveness Application, FTE is equivalent to 40 hours per week.

[5] The CARES Act wording is that the employer by June 30 “has eliminated” the reduction in the number of FTEs. There has been no guidance from the SBA on precisely what this means.

Note: This article was originally published on 04/17/2020 and was last updated on 5/29/2020. For more information on the CARES Act, visit COVID-19 CARES Act Guidance.

The Small Business Administration (SBA) issued a second interim final rule interpreting the Paycheck Protection Program (PPP) of the CARES Act on April 14, 2020 (the “Second Interim Final Rule”), supplementing the first Interim Rule issued on April 2, 2020 with guidance for sole proprietors and independent contractors. This rule also addresses eligibility issues for particular business concerns and requirements for individual pledges of PPP loans.

On April 16, 2020, the PPP hit its $349 billion cap and is out of money. According to Neil Bradley, executive vice president and chief policy officer at the U.S. Chamber of Commerce, more funding for the PPP program will come soon. The SBA announced on April 17, 2020 that it is no longer accepting applications PPP from lenders[1]. Some of the banks continue to take PPP applications and plan to process them when the PPP re-opens.

This update is an overview of the Second Interim Final Rule.

Individuals with Self-Employment Income who File a Form 1040, Schedule C

The PPP applies to individuals with self-employment income who had business operations on February 15, 2020, had self-employment income, whose principal place of residence is in the United States and who filed or will file a Form 1040 Schedule C for 2019.[2]

Partnerships

Partnerships are eligible for a PPP Loan. However, a sole proprietor who is a partner in a partnership may not submit a separate PPP loan application as a self-employed individual. Instead, 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.

Maximum Loan Amount

The maximum loan amount depends upon whether or not the self-employed applicant employs other individuals.

If the applicant does not have any employees, the applicant should follow the following methodology to calculate the maximum PPP loan amount:

Step 1: Find your 2019 IRS Form 1040 Schedule C line 31 net profit amount (if you have not yet filed a 2019 return, fill it out, and compute the value). If this amount is over $100,000, reduce it to $100,000. If this amount is zero or less, you are not eligible for a PPP loan.

Step 2: Calculate the average monthly net profit amount (divide the amount from Step 1 by 12).

Step 3: Multiply the average monthly net profit amount from Step 2 by 2.5.

Step 4: Add the outstanding amount of any Economic Injury Disaster Loan (“EIDL”) made between January 31, 2020, and April 3, 2020, that you seek to refinance, less the amount of any advance under an EIDL COVID-19 loan (because it does not have to be repaid).

If the applicant has employees, the applicant should follow the following methodology to calculate the maximum PPP loan amount:

Step 1: Compute 2019 payroll by adding the following:

• Your 2019 Form 1040 Schedule C line 31 net profit amount (if you have not yet filed a 2019 return, fill it out and compute the value), up to $100,000 annualized, if this amount is over $100,000, reduce it to $100,000 if this amount is less than zero, set this amount at zero
• Gross wages and tips (2019) paid to your employees whose principal place of residence is in the United States computed using 2019 IRS Form 941 Taxable Medicare wages & tips from each quarter plus any pre-tax employee contributions for health insurance or other fringe benefits excluded from Taxable Medicare wages & tips; subtract any amounts paid to any individual employee over $100,000 (annualized) and any amounts paid to any employee whose principal place of residence is outside the United States
• Employer (2019) health insurance contributions (health insurance component of Form 1040 Schedule C, line 14), retirement contributions (Form 1040 Schedule C, line 19), and state and local taxes assessed on employee compensation (primarily under state laws commonly referred to as the State Unemployment Tax Act or SUTA from state quarterly wage reporting forms).

Step 2: Calculate the average monthly amount (divide the amount from Step 1 by 12).

Step 3: Multiply the average monthly amount from Step 2 by 2.5.

Step 4: Add the outstanding amount of any EIDL made between January 31, 2020, and April 3, 2020, that you seek to refinance, less the amount of any advance under an EIDL COVID-19 loan (because it does not have to be repaid).

Required Documentation

The applicant must provide the 2019 Form 1040 Schedule C along with the PPP loan application amount and a 2019 IRS Form 1099-MISC, invoice, bank statement or book of record to show that the applicant is self-employed. The applicant must provide a 2020 invoice, bank statement or publication of record to show that the business was in operation on February 15, 2020.

Self-employed applicants with employees must provide the 2019 Form 1040 Schedule C, Form 941 (or other tax forms or equivalent payroll processor records containing similar information) and state quarterly wage unemployment insurance tax reporting forms from each quarter in 2019 or equivalent payroll processor records, along with evidence of any retirement and health insurance contributions, if applicable. A payroll statement or similar documentation from the pay period that covered February 15, 2020, must be provided to show that the business was in operation on February 15, 2020.

Qualified Expenses

The proceeds of the PPP loan are to be used for:

• Owner’s compensation up to $100,000, annualized as calculated by net profit (Schedule C, line 31)
• Employee payroll costs (as discussed in previous SBA guidance)
• Mortgage interest payments on business obligations related to real or personal property
• Business rent payments and business utility payments
• Refinancing an SBA EIDL loan made between January 31, 2020, and April 3, 2020 (maturity will be reset to PPP’s maturity of two years).[3]

To use the PPP loan on an expense, the borrower must have claimed a deduction or be entitled to claim a deduction on the expense on the 2019 Schedule C. This restriction means in order to use the PPP loan for a utility bill, the borrower must have claimed a deduction in 2019 for this similar expense.

Loan Forgiveness

Wages, up to $100,000 annualized, are eligible for forgiveness. This is calculated on a weekly basis, so a maximum of $15,385 per employee (8 weeks out of 52 weeks) will be eligible for forgiveness.

The other eligible expenses for forgiveness are retirement contributions, health insurance premiums, rent, utilities and interest. The Second Interim Final Rule indicates that sole proprietors and independent contractors are only eligible to receive forgiveness of a maximum of $100,000 of Schedule C for their own compensation. This means the $100,000 maximum is inclusive of retirement contributions and health insurance for owners only.

Moreover, an expense will only be eligible if such expense was incurred in 2019. This limits the ability of the borrower to add new expenses to qualify for PPP loan forgiveness.

Clarification Regarding Eligible Businesses

Owners/Directors of PPP Lenders

The Second Interim Rule clarified that an entity that is otherwise eligible for the PPP Loan will not be considered ineligible if it is owned (in whole or part) by an outside director or holder of a less than 30% equity interest in a PPP lender. Such entity may apply for a PPP loan from the PPP lender on whose board the director serves or in which the equity owner holds an interest, provided that the eligible business owned by the director or equity holder follows the same process as any similarly situated customer or account holder of the lender.

Favoritism by the lender in processing time or prioritization of the director’s or equity holder’s PPP application is prohibited. The lenders should comply with all other applicable state and federal regulations concerning loans to associates of the lender. Lenders should also consult their internal policies concerning lending to individuals or entities associated with the lender.

Legal Gambling

An entity that is otherwise eligible for the PPP will not be considered ineligible due to legal gambling revenue as long as (a) the business’s legal gaming revenue (net of payouts but not other expenses) did not exceed $1 million in 2019; and (b) legal gaming revenue (net of payouts but not other expenses) comprised less than 50% of the business’s total revenue in 2019. Businesses that received illegal gaming revenue are categorically ineligible.

[1] SBA has also stated that the EIDL program also ran out of money and the SBA is no longer taking EIDL applications.

[2] SBA stated that it will issue additional guidance for those self-employed individuals in operation on February 15, 2020, but not in operation in 2019, to apply for PPP Loans.

[3] If you received an SBA EIDL loan from January 31, 2020, through April 3, 2020, you can apply for a PPP loan. If your EIDL loan was not used for payroll costs, it does not affect your eligibility for a PPP loan. If your EIDL loan was used for payroll costs, your PPP loan must be used to refinance your EIDL loan. Proceeds from any advance up to $10,000 on the EIDL loan will be deducted from the loan forgiveness amount on the PPP loan.

On May 15, 2020, the Small Business Administration (SBA) published its Paycheck Protection Program (PPP) Loan Forgiveness Application (Application) along with instructions for completing the Application. Borrowers must use this Application to determine the amount of the PPP loan that may be “forgiven” by their lender. The Application and its instructions address some administrative questions regarding loan forgiveness; however, some questions remain unanswered.

Key takeaways from the PPP loan forgiveness application include:

• Expenses paid OR incurred. Borrowers may include eligible payroll and non-payroll expenses paid OR incurred during the 8-week period after receiving their PPP loan (“covered period”).
• Alternative Payroll Covered Period. A new Alternative Payroll Covered Period allows borrowers to align the covered period with their own payroll period.
• Average FTE. A relatively simple interpretation to calculate the number of full-time equivalent (FTE) employees.
• Wage/Salary Reduction. Instructions to calculate wage/salary reduction.
• Bonuses to Owners/General Partners. Owner employees and general partners are barred from issuing bonuses to themselves to fill shortfalls in eligible expenses used to apply for loan forgiveness.
• Covered Rent. Covered rent obligations include leases on both real and personal property.

Covered Period

The Application permits borrowers to include eligible payroll and non-payroll expenses paid OR incurred during the covered period.

Payroll expenses are paid on the day the paychecks are distributed or the borrower originates an ACH credit transaction. Payroll expenses are incurred on the day they are earned. The Application states that payroll expenses incurred but not paid during the last pay period of the 8-week covered period are eligible for forgiveness as long as they are paid on or before the next regular pay period. Therefore, even though these funds are paid to employees after the covered period, they are still eligible for forgiveness. How far in arrears a borrower may pay wages with PPP funds and continue to count those wages towards loan forgiveness remains unclear.

Non-payroll expenses (mortgage, rent, and utilities) that are incurred during the 8-week covered period, and paid after the covered period, must be paid by the next billing cycle.

Alternative Payroll Covered Period

The PPP Loan Forgiveness Application allows borrowers to select an “alternative payroll covered period.” The alternative payroll covered period is the 8-week (56 day) period beginning on the first day of the first pay period following the PPP loan disbursement date. Borrowers now have an option to calculate payroll expenses using an “alternative payroll covered period” that aligns with their regular payroll cycles.

Number of Full-time Equivalent Employees

Part of the PPP loan forgiveness calculation is determining the number of FTEs employed by the borrowers. [See previous discussion on calculating loan forgiveness]. The Application states that a borrower must, for each employee, enter the average number of hours paid per week, divide by 40 and round the total to the nearest tenth. No one may be counted as more than 1 FTE. A borrower may elect to use a simplified method and  ascribe a 1.0 for each employee who works 40 hours or more per week and a 0.5 for each employee who works less than 40 hours per week.

It seems that the Application (line 10) includes another safe harbor for reducing FTEs. Even if FTEs have been reduced relative to the look-back period elected by the borrower, loan forgiveness will not be reduced if the number of FTEs is the same at the end of the covered period as they were on January 1, 2020. It is unclear whether this is a second safe harbor rule, in addition to the existing rehiring-before-June 30, 2020 safe harbor rule.

Wage/Salary Reduction

The amount of PPP loan forgiveness will be reduced by the amount of any reduction in total average wages or annual salary of any employee during the 8-week covered. To determine the amount of forgiveness reduction, you must review the wages or salary of each employee.

The forgiveness amount will be reduced if the reduction in wages/salary over the 8-week period is in excess of 25% of the total wages or salary of an employee from January 1, 2020 through March 31, 2020. Employees with annualized wages or salary of more than $100,000 are not included in this calculation, which means that if you reduce wages or salary of an employee who makes over $100,000, your PPP loan forgiveness amount will not be affected.

Bonuses to Owners/General Partners

The Application states that the total amount paid to owner-employees, self-employed individuals and general partners is capped at $15,384 ($100,000/year) OR the 8-week equivalent of their applicable compensation for 2019, whichever is lower. This prevents owners, self-employed individuals, and general partners from increasing their compensation during the covered period to maximize forgiveness.

Covered Rent

The Application explicitly states that the amount of business rent or lease payments for real or personal property during the covered period, pursuant to lease agreements in force before February 15, 2020, are included in the non-payroll expenses.

The SBA plans to release additional regulations and guidance to assist borrowers as they complete their PPP Loan Forgiveness Applications. Stay tuned.

On May 13, 2020, the SBA published an update to its Frequently Asked Questions [FAQ 46] regarding how it will review borrowers’ Payroll Protection Program (PPP) loan good faith certifications.

The new FAQ states that borrowers that receive PPP loans in the amount of less than $2 million will be deemed to have made the required certification concerning the necessity of the loan request in good faith. The new SBA guidance extends an automatic safe harbor to borrowers receiving less than $2 million in PPP funds.

Borrowers that received PPP loans for over $2 million will be subject to review by the SBA for compliance with all of the PPP requirements, including the certification of economic need. The certification of economic need is based on a borrower’s individual circumstances “in light of the language of the certification and SBA guidance.”

If during the course of its review the SBA determines that a borrower failed to meet the good faith certification (determining that the PPP loan was not a necessity), the SBA will notify the lender that the borrower is not eligible for loan forgiveness and the borrower will be required to repay the outstanding PPP loan.

Unfortunately the new SBA guidance fails to provide direction on what constitutes “necessity,” “liquidity” or when the use of such liquidity would be “significantly detrimental” [See https://www.wendel.com/news/ppp-loans-the-good-faith-certification/ for a discussion on those elements], leaving those with a PPP loan of over $2 million without clear guidance.

On April 28, 2020 the Small Business Administration (SBA) issued an Interim Final Rule on Paycheck Protection Program (PPP) disbursement requirements. The Interim Final Rule stated that: (i) the borrower cannot take multiple draws from a PPP loan and thereby delay the start date of the 8-week covered period; and (ii) lenders must electronically upload SBA Form 1502 indicating that PPP funds have been disbursed within 20 calendar days after a PPP loan is approved or, for PPP loans approved before the updated SBA Form 1502 reporting process, by May 22, 2020.[1]

On May 13, 2020, the SBA issued an Interim Final Rule on PPP loan increases.

The new rule allows a partnership that received a PPP loan that originally did not include any compensation for its partners, to apply for a loan increase to include partner compensation.[2] To apply for a loan increase, the partnership would have to notify its lender, and the lender would electronically submit a request to the SBA. In order to apply for a PPP loan increase, the partnership must provide its lender with required documentation to support the calculation of the requested increase. The SBA clarified that the lender may submit a request for a loan increase even if the PPP funds have been fully disbursed to the partnership. However, the application for an increase to the PPP loan must come before the lender submits a Form 1502 report to the SBA.

The new rule also states that seasonal employers who received a PPP loan before the SBA posted an alternative period to calculate the “maximum extent practical” for their loan amount may apply for a loan increase. That is if the seasonal employer would be eligible for a higher maximum loan amount under the alternative criterion.[3] The lender may submit a request for a loan increase even if the PPP funds have been fully disbursed to the seasonal employer. However, the application for an increase to the PPP loan must come before the lender submits a Form 1502 report to the SBA.

In both cases, the loan cannot be increased after the initial Form 1502 report has been submitted to SBA, or after the date the initial Form 1502 report was required to be submitted to SBA (May 22, 2020).

[1] On May 8, 2020, the May 18, 2020 deadline was extended to May 22, 2020.

[2] The Interim Final Rule posted on April 14, 2020 stated that self-employment income of general active partners could be reported as a payroll cost (up to $100,000 annualized).

[3] The Interim Final Rule on Additional Criterion for Seasonal Employers can be found at the SBA website.