Congress's coronavirus financial relief package, the Coronavirus Aid, Relief, and Economic Security (CARES) Act is the largest economic relief bill in United States history and will support individuals and businesses affected by the pandemic. This piece addresses the Paycheck Protection Program (PPP), the Economic Injury Disaster Loans (EIDL) and Emergency Economic Injury Grants (EIDL Grants) and has been updated in light of the Paycheck Protection Program Flexibility Act of 2020, which was passed on June 5, 2020. Additional guidance and a new forgiveness application are expected soon, and this post will be updated accordingly once such information is released.
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Paycheck Protection Program
Eligibility and Affiliations
Q: Who is eligible to receive PPP loans?
- Generally, any business, 501(c)(3) nonprofit organization, 501(c)(19) veterans organization, or Tribal business with not more than 500 employees whose principal place of residence is in the United States;
- Any business, 501(c)(3) nonprofit organization, 501(c)(19) veterans organization, or Tribal business that meets the SBA employee-based size standards for the industry in which it operates (if applicable);
- Any business that is a “small business concern” as defined in section 3 of the Small Business Act, 15 U.S.C. 632, and meets the SBA employee-based or revenue-based size standards corresponding to its primary industry; or
- Any business that is a “small business concern” under the SBA’s “alternative size standard” as of March 27, 2020, which standard is met if the business has not more than (1) a maximum tangible net worth of $15 million and (2) an average net income of $5 million (after Federal income taxes, excluding any carry-over losses) for 2 full fiscal years before the date of application.
Sole proprietors, independent contractors, and “eligible self-employed individuals” (as defined in the Families First Coronavirus Response Act) are also eligible, so long as they submit documentation evidencing eligibility (including payroll tax filings reported to the IRS, Forms 1099-MISC, and income and expenses).
An important exception has been made for a business that, at the time of loan disbursal, is assigned an NAICS code beginning with 72 (accommodation and food services). Such a business can have more than 500 employees, so long as that business employs not more than 500 employees per physical location.
In order to qualify for the PPP, a business must count all domestic and foreign employees of all of its affiliates in determining the 500-person limit unless:
- Business, at the time of loan disbursal, is assigned an NAICS code beginning with 72 (accommodation and food services); or
- Business is operating as a franchise that is assigned a franchise identifier code by the SBA; or
- Business receives financial assistance from a small business investment company (SBIC).
Additionally, in evaluating eligibility, a lender is required to consider whether the business was in operation on February 15, 2020 and had employees for whom the business paid salaries and payroll taxes.
If a business meets the eligibility requirements set forth above, it will NOT be eligible for a PPP loan if it is a business identified in 13 C.F.R. 120.110 and described further in the SBA’s SOP 50 10 5, Subpart B, Chapter 2 (with the exception that specific nonprofit organizations authorized under the CARES Act are eligible). Further, a recent SBA Interim Final Rule provides that hedge funds and private equity firms are ineligible, debtors in bankruptcy proceedings are not eligible, and portfolio companies of private equity funds are potentially ineligible. The Interim Final Rule can be found here.
Q: As of what date do businesses calculate their headcount?
A: As indicated in the SBA and Treasury’s April 6, 2020 Frequently Asked Questions (FAQs), Borrowers may choose to calculate their headcount using (1) their average employment from the previous 12 months, (2) from calendar year 2019 or (3) 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 in operation, if it has not been in operation for 12 months).
Q: How does a business determine its “affiliates”?
A: “Affiliate” status is determined under current SBA regulations, which provide generally for a broad definition based on control. Concerns and entities are affiliates of each other when one controls or has power to control the other, or a third party or parties controls or has power to control both. It does not matter whether control is exercised, so long as the power to control exists. Control/affiliation is a facts and circumstances test that includes both affirmative and negative control. Parties with significant equity, negative covenants, board seats, blocking rights, and other shareholder/contractual rights are generally considered affiliates, even when they don’t have a majority voting control or control of the board. Additional guidance from the SBA and Treasury on affiliate status was issued on April 3, 2020. Such guidance can be found here.
Q: If a business has financing available elsewhere is it still eligible for a PPP loan?
A: Maybe. Although the SBA has waived its “credit-elsewhere” test, the SBA and Treasury issued guidance on April 23, 2020, April 28, 2020 and May 5, 2020 that borrowers (public and private) must still certify in good faith that their PPP loan request was necessary, “taking into account their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business.”
The SBA did, however, create two safe harbors for certain borrowers: (1) any business that applied for a PPP loan prior to April 24, 2020 and repays the loan in full by May 18, 2020 will be deemed by the SBA to have made the required certification in good faith and (2) any business that, together with its affiliates, received PPP loans with an original principal 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.
Q: How does a PPP loan coordinate with the SBA’s existing loans?
A: Businesses can apply for PPP loans and other SBA financial assistance, including Economic Injury Disaster Loans (EIDLs), traditional 7(a) loans, 504 loans, and microloans, and can also receive investment capital from Small Business Investment Corporation (SBIC). However, the business cannot use the PPP loan for the same purpose as its other SBA loan(s). For example, if a business uses its PPP loan to cover payroll for the 8-week covered period, it cannot use a different SBA loan product for payroll for those same costs in that period, although it could use it for payroll not during that period or for different workers.
Further, per an Interim Final Rule from the SBA, 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 PPP. If your EIDL loan was used for payroll costs, your PPP loan must be used to refinance your EIDL loan.
Q: How does the PPP loan work with the temporary Emergency Economic Injury Grants (up to $10,000 each) awarded under the EIDL Program?
A: EIDL Grant (up to $10,000 each) and EIDL loan recipients may apply for and take out a PPP loan as long as there is no duplication in the uses of funds. Proceeds from an EIDL Grant will be deducted from the loan forgiveness amount on the PPP loan.
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PPP Loan Amounts and Use of Proceeds
Q: What is the maximum amount of a PPP loan?
A: Businesses are eligible for the lesser of:
- $10,000,000, and
- 2.5 times the average monthly payroll costs (see below for definition) determined during the one-year period before the date on which the loan is made.
Please note that for seasonal employers, as determined by the SBA, the measurement period is either the 12-week period beginning February 15, 2019 or March 1, 2019 to June 30, 2019, at the election of the borrower. Per an Interim Final Rule from the SBA, a seasonal employer may alternatively elect to determine its maximum loan amount as the average total monthly payments for payroll during any consecutive 12-week period between May 1, 2019 and September 15, 2019.
If the business was not operating during the period from February 15, 2019 until June 30, 2019, the relevant measurement period is January 1, 2020 through February 29, 2020.
If the business obtained an EIDL loan that was used for payroll costs, then the PPP loan must be used to refinance the EIDL loan.
Q: What is included in “payroll costs”?
A: “Payroll costs” include:
The sum of any payments of any compensation with respect to an employee that is:
- salary, wages, commission, or similar compensation;
- bonuses and hazard pay;
- payroll taxes imposed on an employee and required to be withheld by an employer;
- payments of cash tips or the equivalent;
- payment for vacation, parental, family, medical or sick leave;
- allowance for dismissal or separation;
- payments required for the provision of group health care benefits, including insurance premiums;
- payment of any retirement benefit; and
- payment of state or local tax assessed on the employee.
Q: What is not included in “payroll costs”?
A: “Payroll costs” may not include:
- cash compensation of an individual employee in excess of an annual salary of $100,000 in one year, pro-rated during the Applicable Covered Period;
- an employer's share of payroll taxes;
- any compensation of an employee whose principal place of residence is outside of the United States;
- qualified sick leave wages or family leave wages for which a credit is allowed under sections 7001 or 7003 of the Families First Coronavirus Response Act; or
- amounts paid to independent contractors.
The exclusion of compensation in excess of $100,000 annually applies only to cash compensation, not to non-cash benefits, such as payment for provision of employee benefits consisting of group health care coverage, payment of taxes assessed on compensation, and employer contributions to defined-benefit or defined-contribution retirement plans.
“Applicable Covered Period” as used in these FAQs for new and existing loans means (A) the period (i) beginning on the origination date of the loan and (ii) ending the earlier of (1) the date that is 24 weeks after the loan origination date or (2) December 31, 2020, and (B) only for borrowers that received loans before June 5, 2020, at their election, the original measuring period under the CARES Act, which is the 8 weeks beginning on the origination date of the loan.
Q: May a PPP borrower deduct, for Federal income tax purposes, those expenses incurred in its business for which the borrower received a covered PPP loan and for which expenses the borrower received forgiveness of such covered loan?
A: No. The IRS issued a notice on April 30, 2020 stating that no deduction is allowed under the Internal Revenue Code for an expense that is otherwise deductible if the payment of the expense results in forgiveness of a covered loan pursuant to section 1106(b) of the CARES Act and the income associated with the forgiveness is excluded from gross income for purposes of the Code pursuant to Section 1106(i) of the CARES Act.
Q: May a taxpayer delay its portion of social security taxes if it received debt forgiveness under the CARES Act?
A: Yes, a taxpayer may delay these taxes if it had certain indebtedness forgiven under the CARES Act.
Q: Can the loan proceeds be used to pay any expenses in the borrower’s discretion?
A: No. Proceeds can only be used for the following:
- payroll costs (as noted above);
- payments of interest on any business mortgage obligation on real or personal property (which shall not include any prepayment of or payment of principal on a mortgage obligation) incurred before February 15, 2020;
- payments on business rent or lease payments pursuant to lease agreements for real or personal property in force before February 15, 2020; and
- utilities, including electricity, gas, water, transportation, telephone or internet access for which service began before February 15, 2020.
Additionally, as part of the loan process, the business will need to acknowledge that the funds will be used to retain workers and maintain payroll or make mortgage payments, lease payments and utility payments as specified under the CARES Act.
Further, 75% of the loan proceeds must be used to pay payroll costs.
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PPP Lending Criteria and Loan Forgiveness
Q: What will the banks require to make the loan?
A: The CARES Act requires a lender to confirm the following:
- the borrower was in operation on February 15, 2020;
- the borrower had employees for whom it paid salaries and payroll taxes; and
- with respect to loan deferrals, the borrower was adversely impacted by COVID-19 (although this requirement is presumed).
The borrower must also submit a loan application and payroll documentation, acceptable to its lender. Lenders must also submit an SBA form Lender’s Application and maintain the forms and supporting documentation in its files.
Q: Are PPP loans eligible for loan forgiveness?
A: Yes. Under Section 1106 of the CARES Act, a borrower is eligible for forgiveness of part or all of the loan balance, subject to the adjustments and limitations described below, if the proceeds are used for eligible purposes (see below) and the borrower can provide required supporting documentation to demonstrate that it qualifies for forgiveness. The SBA has released the PPP Loan Forgiveness Application, which can be accessed here. For more information on loan forgiveness, see our separate FAQ available here.
Q: What will be the terms of that forgiveness?
A: The SBA’s Loan Forgiveness Application can be found here and we have prepared a separate FAQ relating to loan forgiveness. The CARES Act states that the loan obligations eligible for forgiveness include amounts expended for those obligations and services listed below that are either incurred or paid during the Applicable Covered Period (as defined previously), but only where such obligation or service (in the case of mortgage obligations, rent and utilities) was an existing obligation as of February 15, 2020:
- all payroll costs expended (see definition above) excluding cash compensation for any individual employee over $100,000; plus
- any payment of interest on any mortgage incurred by borrower on real or personal property (not including any prepayment or payment of principal); plus
- any payment of rent obligated under a leasing agreement; plus
- any utility payment (electricity, gas, water, transportation, telephone, or internet access) (collectively, the “Covered Period Costs”).
The limitations and adjustments to forgiveness of the Covered Period Costs are as follows:
- The amount of forgiveness cannot exceed the principal balance of the loan.
- The amount of forgiveness will be reduced based on the reduction in number of employees (as measured by the formula described below).
- The amount of forgiveness will also be reduced by the amount by which there is a reduction in total salary or wages for any employee that is in excess of 25% of the total salary or wages of such employee during the most recent full quarter during which the employee was employed prior to the Applicable Covered Period (excluding, subject to further review of the SBA regulations, reductions for employees making in excess of $100,000).
- Increased wages paid to tipped workers are eligible for forgiveness.
- The CARES Act also includes exemptions for rehires to encourage companies to hire workers that have been laid off due to COVID-19. In particular, reductions in employees and in salaries that occur between February 15, 2020 and April 26, 2020 are excluded from the reductions described in subsection (2) and (3) above, so long as the borrower re-hires or restores pay (as applicable) for the affected workers before December 31, 2020.
- The amount of forgiveness of the PPP loan shall also be reduced by any EIDL Grant amount (discussed below) received by borrower.
- Persuant to the Paycheck Protection Program Flexibility Act, in order to receive loan forgiveness, at least 60% of the loan must be used for payroll costs, while 40% may be attributable to eligible expenses other than payroll costs.
- The SBA plans to audit loans over $2 million (this includes borrowers that, together with their affiliates, received PPP loans with an original principal amount in excess of $2 million) before making a determination of forgiveness, and the SBA has reserved the right to review any PPP loan of any size at any time in its discretion.
Q: How do I calculate the amount by which forgiveness of the Covered Period Costs will be reduced (under subsection (2), above) if I do not fully maintain my workforce?
A: The Covered Period Costs shall be reduced by multiplying the amount of the Covered Period Costs by the Reduction in Number of Employees. The “Reduction in Number of Employees” shall be calculated by dividing the (i) average number of full-time equivalent employees per month employed by borrower during the Applicable Covered Period by (ii) at the election of borrower (not including seasonal employers, as determined by the SBA): (y) the average number of full-time equivalent employees per month employed by the borrower during the period beginning on February 15, 2019 and ending on June 30, 2019 or (z) the average number of full-time equivalent employees per month employed by borrower during the period beginning on January 1, 2020 and ending on February 29, 2020. Seasonal employers must use either of the preceding periods or a consecutive 12-week period between May 1, 2019 and September 15, 2019. The same reference period must be used for each employee.
Further, a safe harbor may exempt certain borrowers from the loan forgiveness reduction based on FTE employee levels. Specifically, the Forgiveness Application provides that Borrower is exempt from the reduction in loan forgiveness based on FTE employees described above if both of the following conditions are met: (1) the Borrower reduced its FTE employee levels in the period beginning February 15, 2020, and ending April 26, 2020; and (2) the Borrower then restored its FTE employee levels by not later than December 31, 2020 to its FTE employee levels in the Borrower’s pay period that included February 15, 2020.
Q: How does the borrower receive forgiveness on its PPP loan?
A: The CARES Act requires that the borrower must apply to the lender by submitting:
- The SBA’s Loan Forgiveness Application, which may be accessed here.
- Documentation verifying the number of employees on payroll and pay rates, including IRS payroll tax filings and State income, payroll and unemployment insurance filings.
- For forgiveness of non-payroll costs, documentation including (1) the mortgage amortization schedule (and receipts or cancelled checks) or lender account statements from February 2020 and the covered months, (2) the current lease agreement (and receipts or cancelled checks) or lessor account statements from February 2020 and the covered months, and (3) the utility invoices from February 2020 and those paid during the covered period (and receipts, canceled checks or account statements).
- Certification from a representative of the business or organization that is authorized to certify that the documentation provided is true and that the amount that is being forgiven was used in accordance with the PPP guidelines for use.
Borrower must retain all records relating to its PPP loan application, PPP loan, and loan forgiveness application for 6 years after the date the loan is forgiven or repaid in full.
On May 22, 2020, the SBA issued its loan review procedures, which can be found here.
Q: What happens after the forgiveness period?
A: Any loan amounts not forgiven are carried forward as an ongoing five-year loan (or a two-year term for borrowers that obtained PPP loans prior to June 5, 2020) at an interest rate of 1.0%. Borrowers that obtained PPP loans prior to June 5, 2020 may negotiate longer terms with their PPP lenders. Payments of principal, interest and fees will be deferred until the lender receives payment of the forgiven portion of the borrower’s loan from the SBA, or, if the borrower did not request forgiveness, until not earlier than the date that is ten months after the last day of the borrower’s Applicable Covered Period.
Q: Will a borrower’s PPP loan forgiveness amount be reduced if the borrower laid off an employee, offered to rehire the same employee, but the employee declined the offer?
A: No. Employees whom the borrower offered to rehire are generally exempt from the CARES Act loan forgiveness reduction calculation. This exemption is also available if a borrower previously reduced the hours of an employee and offered to restore the employee’s hours at the same salary or wages. Specifically, in calculating the loan forgiveness amount, a borrower may exclude any reduction in full-time equivalent employee headcount that is attributable to an individual employee if:
- the borrower made a good faith, written offer to rehire such employee (or, if applicable, restore the reduced hours of such employee) during the covered period or alternative payroll covered period;
- the offer was for the same salary or wages and same number of hours as earned by such employee in the last pay period prior to the separation or reduction in hours;
- the offer was rejected by such employee;
- the borrower has maintained records documenting the offer and its rejection; and
- the borrower informed the applicable state unemployment insurance office of such employee’s rejected offer of reemployment within 30 days of the employees’ rejection of the offer.
On June 5, 2020, the PPP Flexibility Act was enacted, providing additional relief in the form of exemptions. A borrower’s loan forgiveness amount will not be proportionately reduced for a decrease in full-time equivalency employees if the borrower, in good faith, can provide documentation of its inability to (a) rehire employees who were employed on February 15, 2020 and (b) hire “similarly qualified employees” for unfilled positions on or before December 31, 2020. Loan forgiveness will similarly not be proportionally reduced if the borrower can provide documentation of its inability to return to the same level of business activity such borrower was operating at before February 15, 2020 due to compliance with requirements established or guidance issued by HHS, the CDC or OSHA during the period beginning on March 1, 2020 and ending December 31, 2020, related to maintenance of standards for sanitation, social distancing or any other worker or customer service requirement related to COVID-19. Additional information regarding PPP loan forgiveness can be found on our separate FAQ, which can be accessed here.
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PPP Application Process
Q: How do small businesses apply for a PPP loan?
A: PPP loans are made through an SBA-approved lender and are guaranteed by the SBA. If the business has a relationship with a lender, it should immediately contact that lender to see if that lender is making PPP loans. The business should immediately begin working with an SBA-approved lender to confirm eligibility and to start the application process. Lenders began taking applications on April 3, 2020 for the first round of PPP loan funds. That money was exhausted quickly. Lenders began processing applications again on April 27, 2020 for the second round of PPP loan funds.
Economic Injury Disaster Loans (EIDL) and Emergency Economic Injury Grants (EIDL Grants)
*As of April 29, 2020, the SBA’s website indicates that it is currently only processing EIDL loan and EIDL Grant applications that are already in queue, and that it will provide further information on the availability of the EIDL portal to receive new applications as soon as possible.
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Q: What is an Economic Injury Disaster Loan?
A: The SBA’s EIDL program provides small businesses with working capital loans of up to $2 million to help overcome the temporary loss of revenue as the result of a declared disaster. The CARES Act sets out new rules that make it easier for small businesses that were damaged by closures, or had other losses, due to the coronavirus to apply for and receive loans quickly. As part of the initial round of funding, $30 billion was added to the EIDL loan fun, and $10 billion more was added for the EIDL Grants connected to the EIDL loans. As part of the second round of funding, an additional $50 billion was added to the EIDL loan fund, and an additional $10 billion was added for EIDL Grants.
EIDLs are available from January 31, 2020 – September 30, 2020. The EIDL Grants are backdated to January 31, 2020 to allow those who have already applied for EIDLs to be eligible to also receive an EIDL Grant.
While the original cap was $2 million, recent SBA communications indicate that, due to the large volume of applications, the initial EIDL loan disbursements will be limited to 2 months of working capital up to a maximum of $15,000 per applicant.
Q: If a business needs funds immediately, can the EIDL loan help?
A: Possibly. A borrower can apply for an EIDL loan and receive up to $10,000 (SBA calculation is $1,000 per employee up to $10,000) as an advance in the form of an EIDL Grant within 3 days, if an advance is requested. The borrower will not be required to pay back the Grant funds, even if the EIDL loan is later denied. The borrower will be required to certify to the SBA, under penalty of perjury, that it is eligible to apply. The EIDL Grant funds can be used for maintaining payroll, providing sick leave to employees, rent or mortgages payments, and paying other obligations that cannot be paid due to lost revenue.
Q: Are there other special provisions that make it easier to get an EIDL loan based on the coronavirus?
A: The CARES Act has simplified the process for EIDL applications for coronavirus loans made before September 30, 2020. For example:
- The SBA will waive personal guarantees on advances and loans below $200,000.
- The SBA will waive the test as to whether you can get credit elsewhere.
- The SBA will waive the usual requirement that you needed to be in business for a year before the declaration.
- The SBA will rely on your credit score instead of the usual “determination of ability to repay.” If you have trouble with a credit score, the SBA has authority to determine if a reasonable alternative can be used.
Q: What kinds of businesses can qualify and what proof do they need that they qualify?
A: Sole proprietors (with or without employees), independent contractors, cooperatives and employee owned businesses, and Tribal small businesses with 500 or fewer employees are eligible for EIDLs.
Also, small business concerns and small agricultural cooperatives that meet the applicable size standard for the SBA are also eligible, as well as most private non-profits of any size.
In advance of disbursing the EIDL Grant, the SBA must verify that the entity is an eligible applicant for an EIDL. To do this, applicants must certify with the SBA, under penalty of perjury, that they are eligible.
Q: If a business receives an EIDL and/or an EIDL Grant, can it also get a PPP loan?
A: Yes. Whether the business has already received an EIDL unrelated to Coronavirus or a Coronavirus-related EIDL and/or an EIDL Grant between January 31, 2020 and December 31, 2020, it may also apply for a PPP loan. Per an Interim Final Rule from the SBA, 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 PPP. If your EIDL loan was used for payroll costs, your PPP loan must be used to refinance your EIDL loan.
If the business also receives a PPP loan, or refinances an EIDL into a PPP loan, any EIDL Grant amount will be subtracted from the amount forgiven in the PPP loan.
Also, a business cannot use the EIDL for the same purpose as its PPP loan. For example, if the business used the EIDL to cover payroll for certain workers in April, it cannot use a PPP loan for payroll for those same workers in April, although it could use it for payroll in March or for different workers in April.
 Employee-based size standards can be found on the SBA website.
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 Employee-based and revenue-based size standards can be found on the SBA website.