Late on April 6, 2020, the Department of the Treasury and the Small Business Administration (SBA) jointly issued additional guidance in the form of FAQs addressing key points under the Paycheck Protection Program (Program). The guidance is especially important as many borrowers and lenders have already submitted or are submitting applications to SBA preferred lenders to secure Program loans. Of the many important points addressed, here are a few that borrowers should carefully consider as they work with lenders to process their applications or continue to process loan applications already submitted.
Point 1: Borrowers whose applications were already submitted and processed before this guidance DO NOT need to amend their applications or take any other action. Borrowers who have not yet submitted an application or whose applications have not been processed will, however, need to review their applications and be sure that they are accurately completed in light of the additional guidance provided.
Point 2: The FAQs clarify that borrowers bear the primary burden to properly compute numbers of employees, apply affiliation rules, and comply with governing requirements. Lenders are not required to validate or “audit” a borrower’s calculations and may rely on borrower certifications. Although lenders may assist borrowers in the process, borrowers must ultimately assure that their applications are accurate to the best of their knowledge.
Point 3: Potential borrowers should, when considering whether to obtain a loan, remember that even though they may employ more than 500 employees, they may otherwise qualify as eligible “small business concerns.” To do so, they must meet the SBA’s two-part alternative size standards, which establish the maximum tangible net worth and average net income size limits.
Point 4: Payroll costs are calculated on a gross basis without regard to federal taxes imposed or withheld (i.e., employee FICA and federal income taxes withheld from employee wages). The employer-paid portion of payroll taxes is not included in this calculation. Permissible uses of loan proceeds and potential loan forgiveness likewise are based on gross wages.
Point 5: The SBA and Treasury reaffirmed that the exclusion of compensation in excess of $100,000 for purposes of determining “payroll costs” applies only to “cash compensation.” Some lenders utilized applications that misconstrued this exclusion, which limited the maximum loan amount available to borrowers. If an applicant was so limited, it should consult with its lender about whether it has the ability to amend its application. The FAQs indicate that this may only be available if the loan has not yet been processed.
Point 6: An employer that contracts with a PEO or employee leasing vendor (Vendor) may include payments to the Vendor as “payroll costs.” Such employers must secure the Vendor’s payroll documentation, including the Vendor’s Form 941, Schedule R, to properly support its payroll cost calculation—or at the very least must obtain a statement from the Vendor documenting the amount of wages and payroll taxes. Importantly, it was also noted that if the employer sought a Program loan using leased employee costs, the Vendor could not separately apply for Program loan assistance using the same costs. This may require applicants to get assurances from their Vendors that the Vendor is not also applying for loans based on the same group of employees
Point 7: Borrowers that are not seasonal in nature can calculate their average employment and aggregate payroll costs using either a trailing 12 months or calendar year 2019. Borrowers may also use this same period to calculate the average number of employees for purposes of applying the employee-based size standard.
Point 8: Payments made to independent contractors may not be used to calculate payroll costs
