Some key additional information related to the Payroll Protection Program loans has been provided by the Small Business Administration in the evening of April 6, 2020.  The agency posted an updated “Paycheck Protection Program Loans Frequently Asked Questions (FAQ)”[1] that addressed some questions that had been left unanswered by the original guidance.

This article looks at most of the items, but not all, contained in the FAQ.  Most notably, the article doesn’t look at the special rules that may apply to some businesses that may expand this program to cover an employer that otherwise would seem excluded either under the 500 employee test or more general qualifications for participation in SBA programs.  Those are found in the FAQ in questions 2 and 3.

Note: a clarifying change was made on April 7 on the guidance for lenders. See the Lender Documentation Review section below for details.

Gross or Net Payroll?

One of the biggest areas of confusion arose due to language in CARES Act §1102 that seemed to indicate that payments of federal withholding taxes on behalf of an employee would not be deemed part of payroll costs for the period from February 15, 2020 to June 30, 2020.  That would reduce expenditures that count for forgiveness of debt and would also have impacted the maximum loan amount if the maximum loan measuring period being used included the period after February 15, 2020.

The SBA has now clarified that there will be no such reduction in gross payroll by taxes withheld, effectively ignoring this provision of the law that it appears Congress now believes was added in error:

Question:  How should a borrower account for federal taxes when determining its payroll costs for purposes of the maximum loan amount, allowable uses of a PPP loan, and the amount of a loan that may be forgiven?

Answer:  Under the Act, payroll costs are calculated on a gross basis without regard to (i.e., not including subtractions or additions based on) federal taxes imposed or withheld, such as the employee’s and employer’s share of Federal Insurance Contributions Act (FICA) and income taxes required to be withheld from employees.  As a result, payroll costs are not reduced by taxes imposed on an employee and required to be withheld by the employer, but payroll costs do not include the employer’s share of payroll tax.  For example, an employee who earned $4,000 per month in gross wages, from which $500 in federal taxes was withheld, would count as $4,000 in payroll costs.  The employee would receive $3,500, and $500 would be paid to the federal government.  However, the employer-side federal payroll taxes imposed on the $4,000 in wages are excluded from payroll costs under the statute.[2]

Since federal agencies aren’t really allowed to ignore the text of the law, the SBA did come up with a formal justification for reading the law to come to this result which it put into a footnote in the FAQ.  The SBA is arguing that, effectively, this was just a poorly worded way of saying you don’t reduce the gross—which would then beg the question about why that February 15, 2020 to June 30, 2020 period is in there?  Well, that one they did just literally decide to ignore.

Here is the SBA’s justification for the position they took—which itself is unusual, since a detailed analysis of law provisions isn’t included for any other items.  That is, the SBA seems to be tacitly admitting they know this is a bit of a strained reading:

The definition of “payroll costs” in the CARES Act, 15 U.S.C. 636(a)(36)(A)(viii), excludes “taxes imposed or withheld under chapters 21, 22, or 24 of the Internal Revenue Code of 1986 during the covered period,” defined as February 15, 2020, to June 30, 2020.  As described above, the SBA interprets this statutory exclusion to mean that payroll costs are calculated on a gross basis, without subtracting federal taxes that are imposed on the employee or withheld from employee wages.  Unlike employer-side payroll taxes, such employee-side taxes are ordinarily expressed as a reduction in employee take-home pay; their exclusion from the definition of payroll costs means payroll costs should not be reduced based on taxes imposed on the employee or withheld from employee wages.  This interpretation is consistent with the text of the statute and advances the legislative purpose of ensuring workers remain paid and employed.  Further, because the reference period for determining a borrower’s maximum loan amount will largely or entirely precede the period from February 15, 2020, to June 30, 2020, and the period during which borrowers will be subject to the restrictions on allowable uses of the loans may extend beyond that period, for purposes of the determination of allowable uses of loans and the amount of loan forgiveness, this statutory exclusion will apply with respect to such taxes imposed or withheld at any time, not only during such period.[3]

Time Period to Determine Maximum Loan Amounts

One area that had led to much confusion in the previous guidance was what the appropriate time period was to determine the maximum borrowing amount, as some SBA guidance indicated it was calendar year 2019 while other guidance indicated April 1, 2019 to March 31, 2020.  The SBA, likely recognizing that borrowers had already picked one or the other to assemble information for decided to allow either option:

Question:  What time period should borrowers use to determine their number of employees and payroll costs to calculate their maximum loan amounts?

Answer:  In general, borrowers can calculate their aggregate payroll costs using data either from the previous 12 months or from calendar year 2019.  For seasonal businesses, the applicant may use average monthly payroll for 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.

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).[4]

Applying the $100,000  Compensation Limit

The FAQ has a borrower friendly interpretation of the $100,000 compensation limit under the PPP. Question and Answer 7 provide:

Question:  The CARES Act excludes from the definition of payroll costs any employee compensation in excess of an annual salary of $100,000.  Does that exclusion apply to all employee benefits of monetary value?

Answer:  No.  The exclusion of compensation in excess of $100,000 annually applies only to cash compensation, not to non-cash benefits, including:

• 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 employees.[5]

The law was somewhat unclear on this point, but this should increase both the maximum borrowing amount and the funds that can be used to meet the requirements to obtain forgiveness.

Payments By a Borrower to an Independent Contractor or Sole Proprietor

The FAQ clarifies that a business does not include payments to an independent contractor as part of its payroll costs in computing the maximum loan amount:

Question:  Should payments that an eligible borrower made to an independent contractor or sole proprietor be included in calculations of the eligible borrower’s payroll costs?

Answer:  No.  Any amounts that an eligible borrower has paid to an independent contractor or sole proprietor should be excluded from the eligible business’s payroll costs.  However, an independent contractor or sole proprietor will itself be eligible for a loan under the PPP, if it satisfies the applicable requirements.[6]

As of 5:00 am Mountain Standard Time on April 7, 2020, when this is being written, we did not yet have those standards.  The application process for those borrowers will open on Friday, April 10.

Use of a Professional Employer Organization (PEO)

The FAQ also clarifies that a business that is using a Professional Employer Organization (PEO) can qualify for the program, and provides the information that should be supplied to the lender to support the loan request.

Question:  What if an eligible borrower contracts with a third-party payer such as a payroll provider or a Professional Employer Organization (PEO) to process payroll and report payroll taxes?

Answer:  SBA recognizes that eligible borrowers that use PEOs or similar payroll providers are required under some state registration laws to report wage and other data on the Employer Identification Number (EIN) of the PEO or other payroll provider.  In these cases, payroll documentation provided by the payroll provider that indicates the amount of wages and payroll taxes reported to the IRS by the payroll provider for the borrower’s employees will be considered acceptable PPP loan payroll documentation.  Relevant information from a Schedule R (Form 941), Allocation Schedule for Aggregate Form 941 Filers, attached to the PEO’s or other payroll provider’s Form 941, Employer’s Quarterly Federal Tax Return, should be used if it is available; otherwise, the eligible borrower should obtain a statement from the payroll provider documenting the amount of wages and payroll taxes.  In addition, employees of the eligible borrower will not be considered employees of the eligible borrower’s payroll provider or PEO.[7]

Seasonal Business

The FAQ also has information for seasonal business that was not fully running on February 15, 2020, as that was outside of its season.

Question:  My small business is a seasonal business whose activity increases from April to June.  Considering activity from that period would be a more accurate reflection of my business’s operations.  However, my small business was not fully ramped up on February 15, 2020.  Am I still eligible?  

Answer:  In evaluating a borrower’s eligibility, a lender may consider whether a seasonal borrower was in operation on February 15, 2020 or for an 8-week period between February 15, 2019 and June 30, 2019.[8]

Lender Documentation Review

The document provides lenders with guidance about the level of documentation review they are expected to undertake.  The guidance initially provided:

Providing an accurate calculation of payroll costs is the responsibility of the borrower, and the borrower must attest to the accuracy of those calculations.  Lenders are expected to perform a good faith review, in a reasonable time, of the borrower’s calculations and supporting documents concerning average monthly payroll cost.  The level of diligence by a lender should be informed by the quality of supporting documents supplied by the borrower.  Minimal review of calculations based on a payroll report by a recognized third-party payroll processor, for example, would be reasonable. 

 If lenders identify errors in the borrower’s calculation or material lack of substantiation in the borrower’s supporting documents, the lender should work with the borrower to remedy the error.  [9]

But was modified somewhat in a revised April 7 version, with the changed portion underlined:

No. Providing an accurate calculation of payroll costs is the responsibility of the borrower, and the borrower attests to the accuracy of those calculations on the Borrower Application Form. Lenders are expected to perform a good faith review, in a reasonable time, of the borrower’s calculations and supporting documents concerning average monthly payroll cost. For example, minimal review of calculations based on a payroll report by a recognized third-party payroll processor would be reasonable. In addition, as the PPP Interim Final Rule indicates, lenders may rely on borrower representations, including with respect to amounts required to be excluded from payroll costs.

If the lender identifies errors in the borrower’s calculation or material lack of substantiation in the borrower’s supporting documents, the lender should work with the borrower to remedy the issue. [9]

Based on this guidance, if a borrower does use a payroll service, especially a large national one that the lender will be sure to recognize, submitting the reports those organizations generate to support claimed payroll will likely speed up processing.

New Customer FinCEN Issues

The FAQ also address the issues lenders had with accepting applications from new vs. existing customers regarding the application of FinCEN Rule CDD.

Question:  Are PPP loans for existing customers considered new accounts for FinCEN Rule CDD purposes?  Are lenders required to collect, certify, or verify beneficial ownership information in accordance with the rule requirements for existing customers?

Answer:  If the PPP loan is being made to an existing customer and the necessary information was previously verified, you do not need to re-verify the information. Furthermore, if federally insured depository institutions and federally insured credit unions eligible to participate in the PPP program have not yet collected beneficial ownership information on existing customers, such institutions do not need to collect and verify beneficial ownership information for those customers applying for new PPP loans, unless otherwise indicated by the lender’s risk-based approach to BSA compliance.[10]

Affiliation Rules

A number of questions (from Q&A 4 to 6) deal with the affiliation rule and the 500 employee limit.  The guidance makes it clear the borrower is responsible for applying the SBA’s affiliation rule, found at 13 C.F.R. 121.301(f), and must base its certification of having 500 or fewer employees after applying that rule.

The Cornell Legal Information Institute website maintains a relatively current copy of the Code of Federal regulations.  The cited regulation can be found at https://www.law.cornell.edu/cfr/text/13/121.301 .

Who Can Sign Documents for the Borrower?

The guidance provides information on who must sign documents, allowing a single authorized signer—every owner will not be required to sign the form.  But the authorized person signing will have full responsibility for all items on the application, including the certifications:

Question:  May lenders accept signatures from a single individual who is authorized to sign on behalf of the borrower?

Answer:  Yes.  However, the borrower should bear in mind that, as the Borrower Application Form indicates, only an authorized representative of the business seeking a loan may sign on behalf of the business.  An individual’s signature as an “Authorized Representative of Applicant” is a representation to the lender and to the U.S. government that the signer is authorized to make the certifications, including with respect to the applicant and each owner of 20% or more of the applicant’s equity, contained in the Borrower Application Form.  Lenders may rely on that representation and accept a single individual’s signature on that basis.[11]

Long-Ago Felony Convictions

There are restrictions under the Small Business Act for borrowings by those who have been convicted or indicted on criminal charges.  But the FAQ notes that this bar does not last forever:

Question:  I need to request a loan to support my small business operations in light of current economic uncertainty.  However, I pleaded guilty to a felony crime a very long time ago.  Am I still eligible for the PPP?

Answer:  Yes. Businesses are only ineligible if an owner of 20 percent or more of the equity of the applicant is presently incarcerated, on probation, on parole; subject to an indictment, criminal information, arraignment, or other means by which formal criminal charges are brought in any jurisdiction; or, within the last five years, for any felony, has been convicted; pleaded guilty; pleaded nolo contendere; been placed on pretrial diversion; or been placed on any form of parole or probation (including probation before judgment).[12]

Lenders Online Portals and Forms

Lenders are allowed to use their own online portals and forms to collect the data for PPP loans.

Question:  Are lenders permitted to use their own online portals and an electronic form that they create to collect the same information and certifications as in the Borrower Application Form, in order to complete implementation of their online portals?

Answer:  Yes.  Lenders may use their own online systems and a form they establish that asks for the same information (using the same language) as the Borrower Application Form.  Lenders are still required to send the data to SBA using SBA’s interface.[13]

What About Applications Made Before This FAQ Was Published?

Clearly a lot of applications were submitted before this FAQ was published, and only by a miracle would a lender or borrower have managed to come to the exact conclusions found in this FAQ for every uncertain item.  Does everyone have to start over and submit a new application based on this FAQ?  And if this FAQ is more favorable to the borrower, can they submit a revised application?

Here is the SBA’s answer:

Question:  I filed or approved a loan application based on the version of the PPP Interim Final Rule published on April 2, 2020.  Do I need to take any action based on the updated guidance in these FAQs?

Answer:  No.  Borrowers and lenders may rely on the laws, rules, and guidance available at the time of the relevant application.  However, borrowers whose previously submitted loan applications have not yet been processed may revise their applications based on clarifications reflected in these FAQs.[14]

[1] Paycheck Protection Program Loans Frequently Asked Questions (FAQ), As of April 6, 2020, https://home.treasury.gov/system/files/136/Paycheck-Protection-Program-Frequenty-Asked-Questions.pdf , retrieved April 7, 2020

[2] Paycheck Protection Program Loans Frequently Asked Questions (FAQ), Q&A 16

[3] Paycheck Protection Program Loans Frequently Asked Questions (FAQ), Q&A 16, Footnote 2

[4] Paycheck Protection Program Loans Frequently Asked Questions (FAQ), Q&A 14

[5] Paycheck Protection Program Loans Frequently Asked Questions (FAQ), Q&A 7

[6] Paycheck Protection Program Loans Frequently Asked Questions (FAQ), Q&A 15

[7] Paycheck Protection Program Loans Frequently Asked Questions (FAQ), Q&A 10

[8] Paycheck Protection Program Loans Frequently Asked Questions (FAQ), Q&A 9

[9] Paycheck Protection Program Loans Frequently Asked Questions (FAQ), Q&A 1

[10] Paycheck Protection Program Loans Frequently Asked Questions (FAQ), Q&A 18

[11] Paycheck Protection Program Loans Frequently Asked Questions (FAQ), Q&A 11

[12] Paycheck Protection Program Loans Frequently Asked Questions (FAQ), Q&A 12

[13] Paycheck Protection Program Loans Frequently Asked Questions (FAQ), Q&A 13

[14] Paycheck Protection Program Loans Frequently Asked Questions (FAQ), Q&A 17

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