The U.S. Small Business Administration (“SBA”) issued an Interim Final Rule on April 2, 2020, providing borrowers and lenders further guidance on the terms and conditions of Paycheck Protection Program (“PPP”) loans available to small businesses as part of the CARES Act. Subsequent to this, the SBA started posting responses to Frequently Asked Questions (“FAQs”) for PPP loans on the U.S. Treasury Department’s website.
The Interim Final Rule issued on April 2, 2020 provides important information for borrowers with respect to the following PPP loan terms:
The interest rate will be 100 basis points or one percent (1%)
The maturity date is two (2) years
No payments are required for the first six (6) months following the date of disbursement of the loan; however, interest will accrue during the six-month deferment.
The SBA in consultation with the Department of the Treasury, has published FAQs to provide timely additional guidance to address borrower and lender questions concerning the implementation of the PPP. This document is being updated on a regular basis (as of April 24, 2020) and has provided answers to many questions that borrowers and lenders have sought clarification on:
Employee-Based Size Standard
The answers to Questions #2 and #3 of the FAQs published by the SBA (as of April 24, 2020) provide guidance about which types of businesses are eligible for PPP loans.
- A business is eligible for a PPP loan if the business has 500 or fewer employees whose principal place of residence is in the United States or they meet the SBA employee-based size standards for the industry in which they operate.
- Similarly, PPP loans are also 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, or they meet the SBA employee-based size standards for the industry in which they operate.
- A business with 500 or more employees is also eligible for a PPP loan, as long as they can satisfy the existing statutory and regulatory definition of a “small business concern” under Section 3 of the Small Business Act, 15 U.S.C. 632. A business can qualify if it meets the SBA employee-based or revenue-based size standards corresponding to their primary industry.
- Additionally, a business can qualify for a PPP loan as a “small business concern” if it meets both of the SBA’s “alternative size standard” tests, as of March 27, 2020, which are: (1) maximum tangible net worth of the business is not more than $15 million; and (2) the average net income after Federal income taxes (excluding any carry-over losses) of the business for the two full fiscal years before the date of the application is not more than $5 million.
Employee Compensation in excess of $100,000
The answer to Question #7 of the FAQs published by the SBA (as of April 24, 2020) indicates that the exclusion of “payroll costs” for any employee in excess of an annual salary of $100,000 applies only to cash compensation. The exclusion does not require a limitation on benefits such as :
- Employer contributions to defined-benefit or defined-contribution retirement plans;
- Payment for the provision of employee benefits consisting of group health care coverage, including insurance premiums; and
- Payment of state and local taxes assessed on compensation of employee
Period of Measurement for Average Monthly Payroll Costs
The Interim Final Rule indicates that average monthly payroll is calculated based upon the last twelve (12) months prior to the PPP loan application; however, the FAQs published by the SBA (as of April 24, 2020) indicate that borrowers may elect to use either the last twelve (12) months or calendar year 2019 to calculate the average monthly payroll. Additionally, the FAQ’s indicate that seasonal businesses may calculate their average monthly payroll using the period between February 15, 2019 (or March 1, 2019) and June 30, 2019. An applicant that was not in business from February 15, 2019 to June 30, 2019 may use the average monthly payroll costs for the period January 1, 2020 through February 29, 2020 (see FAQ #14)
The answer to Question #14 of the FAQs states that 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).
Payroll Costs Exclude Independent Contractors and/or Sole Proprietors
Independent contractors and sole proprietors do not count as employees for the purposes of the loan calculations because independent contractors have the ability to apply for a loan on their own. Certain sections of the Interim Final Rule provided contradictory information; however, the FAQs published by the SBA (as of April 24, 2020) confirm that independent contractors / sole proprietors should be excluded from payroll costs (see FAQ #15).
Federal Payroll Taxes
The Interim Final Rule indicates that federal employment taxes imposed or withheld between February 15, 2020 – June 30, 2020, including the employee’s and employer’s share of FICA (social security tax) and Railroad Retirement Act taxes and income taxes that are required to be withheld from employees, should be excluded from the definition of payroll costs. This guidance was not entirely clear; however, the FAQs published by the SBA (as of April 24, 2020) confirm that for the purposes of the PPP loan amount, allowable uses of the PPP loan, and the amount of a PPP loan that may be forgiven, payroll costs should be calculated on a gross basis (i.e. not including subtractions or additions based on) federal taxes imposed or withheld from employees. The employer’s share of payroll tax should not be included in payroll costs (see FAQ #16).
Uses of Loan Proceeds
Interest payments on any other debt obligations (non-mortgage) entered into before February 15, 2020 were included among the appropriate uses of loan proceeds; however the Interim Final Rule was inconclusive as to whether such interest costs were included in the loan forgiveness determination. However, more recent guidance issued by the SBA indicates that interest on other debt obligations is included among the appropriate uses of loan proceeds.
Beginning of Eight-Week Measurement Period
The eight-week period begins on the date the lender makes the first disbursement of the PPP loan to the borrower. The lender is required to make the first disbursement of the loan no later than ten (10) calendar days from the date of loan approval (see FAQ #20).
Questions/Answers for Lenders
Frequently Asked Questions (FAQs) #21 through #30 (as of April 24, 2020) primarily address questions posed by lenders, as well as specific questions related to loan amounts and affiliation rules for franchises and hotels and restaurants.
Housing Stipend or Allowance
The cost of a housing stipend or allowance provided to an employee as part of their compensation is included in payroll costs, as payroll costs include all cash compensation paid to employees, subject to the $100,000 annual compensation per employee limitation.
For additional information on the Paycheck Protection Program and other Federal, state and local relief measures, please visit our COVID-19 Resource Center at https://www.tsacpa.com/coronavirus-covid-19-resource-center/ and refer to the “Small Business Loans” section featured under our CARES Act section of the website. If you have any questions, please contact your Tronconi Segarra & Associates advisor or a member of our response team at