The SBA has issued much awaited guidance on how employers can apply for and use PPP loan funding made available under the CARES Act.  Our prior updates on the PPP are available here and here.

The SBA’s “Interim Final Rule” and guidance is available here.

One of the biggest takeaways is that there is a cap on the amount of money available for PPP loans; The program is “first come, first served.”  Time is of the essence, so contact your lender immediately.

Below are other key takeaways:

A revised, final PPP loan application has been issued here.

The final application is largely identical to the draft application form issued March 31, with three minor changes: (i) the “affiliate” language has been removed from question 3; (ii)  only a representative of the applicant, and not all 20 percent owners, needs to sign; and (iii) the applicant bears the burden of certifying eligibility, not the lender.

Compensation paid to independent contractors cannot be included in “payroll costs” for purposes of calculating the loan amount and for purposes of using loan proceeds.

One of the key outstanding questions about the reach of the PPP was whether businesses could include costs paid to independent contractors in the category of “payroll costs” for purposes of calculating the loan amount and for use of loan proceeds.  Based on the SBA’s latest guidance, employers cannot include costs of independent contractors in calculation of “payroll costs.”  The SBA reasoned that this is unnecessary because independent contracts (and sole proprietors) can separately apply for PPP loans.  If your business regularly relies on independent contractors, you should consider reaching out to them and encouraging them to apply separately for PPP loans.

For loan forgiveness, the employer must use 75% of the loan proceeds on “payroll costs” and the remaining 25% on non-payroll expenses, such as rent and utilities.

This modification confirms the PPP’s goal of ensuring most of the relief goes to employees.  Moreover, this modification also appears to encourage employers to return as many employees to the payroll as quickly as possible, even though the law allows employers to hold off on rehiring and restoring wages and salary until June 30 without adversely affecting the loan forgiveness amount.

The Interim Final Rule clarifies that the PPP loan amount is calculated by looking at the applicant’s previous 12 months’ worth of payroll costs from the date of the loan application.  This appears consistent with the language of the CARES Act.  Despite this, however, the final application still states: “For purposes of calculating ‘Average Monthly Payroll,’ most Applicants will use the average monthly payroll for 2019, excluding costs over $100,000 on an annualized basis for each employee.”  Further clarification from the SBA may follow.

The Interim Final Rules provides a helpful, step-by-step methodology calculating “payroll costs,” along with examples.

Step-by-Step Methodology:

  • 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 from Step 2 by 12).
  • Step 4: Multiply the average monthly payroll costs from Step 3 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 (because it does not have to be repaid).

Examples illustrating this methodology:

  • 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

The maturity of any portion of a PPP loan that is not forgiven will be two years with a one-percent fixed interest rate.

The CARES Act provides that a PPP loan will have a ten-year maturity date and a fixed interest rate of no more than four percent.  This has been modified to a two-year maturity date and a fixed interest rate of one percent.  The SBA also confirmed that the payment deferral period will be six months, although the CARES Act would have allowed up to a year.

The Interim Final Rule clarifies that employers can apply for both a PPP loan after having applied for an Economic Injury Disaster Loan (“EIDL”), but specifies how the proceeds of each loan can be used.

Many employers have questioned whether applying for an EIDL disqualifies them from applying for a PPP loan.  The Interim Final Rule has clarified that the employer who has applied for an EIDL may also apply for a PPP loan, but there are some restrictions.  If you received an EIDL from January 31, 2020 through April 3, 2020 and the EIDL was not used for payroll costs, it does not affect your eligibility for a PPP loan. But if your EIDL was used for payroll costs, your PPP loan must be used to refinance your EIDL loan. Moreover, proceeds from any emergency advance up to $10,000 on the EIDL will be deducted from the “payroll costs” amount used to determine the amount of the loan and deducted from the loan forgiveness amount on the PPP loan.  It remains unclear, however, if an employer can apply for an EIDL after having applied for a PPP loan.

If an employer knowingly uses a PPP loan for unauthorized purposes, it will be subject to liability, including fraud charges.  This recourse also extends to the borrower’s shareholders, members or partners.  Therefore, it is important to restrict the use of PPP loan to payroll costs, rent, mortgage interest, and utilities.

Certain businesses will be ineligible for a PPP loan regardless of size.  These businesses include: financial entities primarily engaged in the business of lending; life insurance companies; businesses deriving more than one-third of gross annual revenues from legal gambling activities; and private clubs or businesses that limit the number of memberships for reasons other than capacity.

Further guidance is expected on outstanding issues, including:

  • Whether owner draws and distributions (such as those reported on a Schedule K-1) are included in “payroll costs”
  • Whether there will additional modifications to the SBA “affiliation” rules for this program
  • Whether there will be additional restrictions on loan forgiveness
  • Whether an employer is disqualified from applying for EIDL after applying for a PPP loan

We understand that this is a complicated area to navigate and that interpretation of the PPP is changing daily.  We are here to help you through this process and guidance as needed.  Please do not hesitate to contact us.

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