7 FAQs on Updated Guidance to Paycheck Protection Program
April 24, 2020
By: Eric N. Fischer, Jason L. Giles
An additional $310 billion in funding has been added to the Paycheck Protection Program (PPP) established as part of the CARES Act. The Section 7(a) loan program under the Small Business Administration is designed to help eligible businesses stay open and retain employees by providing loans to pay operational costs during the COVID-19 emergency. Since the passage of the CARES Act and the initial Interim Final Rule issued by the SBA, additional guidance has resulted in confusion for many applicants. Following are answers to seven commonly asked questions about the PPP.
Question 1: I have more than 500 employees, but my business is small and needs help. Is there any way that I can still be eligible?
Small business concerns can be eligible borrowers even if they have more than 500 employees, as long as they 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 standard [hyperlink www.sba.gov/size] corresponding to its primary industry.
Additionally, a business can qualify for the Paycheck Protection Program as a small business concern if it met both tests in SBA’s “alternative size standard” as of March 27, 2020:
- Maximum tangible net worth of the business is not more than $15 million; and
- 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.
There is a special eligibility rule for businesses in the hospitality and dining industries. For these and other businesses assigned a North American Industry Classification System (NAICS) beginning with 72 (i.e., the “accommodation and food services” industry) with more than one physical location. Those businesses are eligible if they employ 500 or fewer employees per location.
Remember to be aware of the SBA Rules on Affiliation.
Question 2: I’m a member in an LLC. Can my distributions be included in payroll costs for the Payroll Protection Program loan made to my LLC?
Contrary to previous guidance from the SBA, its recent Interim Final Rule states that if you are a partner in a partnership, you may not submit a separate PPP loan application for yourself as a self-employed individual. Instead, the self-employment income of general partners actively participating in the business may be reported as a payroll cost, up to $100,000 annualized, on a PPP loan application filed by or on behalf of the partnership. Contrary to previous guidance, health benefits and retirement contributions paid by the partnership are included in the $100,000 annual cap on payroll costs.
Question 3: I’m self-employed and don’t have any employees. Can I still qualify for a Paycheck Protection Program Loan?
Yes. You are eligible for a Paycheck Protection Program loan if:
- You were in operation on February 15, 2020;
- You are an individual with self-employment income (such as an independent contractor or a sole proprietor);
- Your principal place of residence is in the United States; and
- You filed or will file a Form 1040 Schedule C for 2019.
Question 4: If I am the sole shareholder of an S Corporation can I include distributions in my application for a Paycheck Protection Program Loan?
No. Only the W2 wages paid by the S Corporation to you as a shareholder count as payroll costs for purposes of Payroll Protection Program loans. These wages are subject to the $100,000 annualized cap on cash compensation. Distributions from the Corporation to you as the shareholder are not subject to self-employment taxes and cannot be included in payroll costs for purposes of a Paycheck Protection Program loan.
Question 5: When calculating payroll costs for my employees, do I include retirement contributions and health benefits in the $100,000 annualized cap on payroll costs?
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, but not limited to, insurance premiums; and payment of state and local taxes assessed on compensation of employees (like unemployment insurance).
Question 6: I run a religious organization and I have heard that churches and other religious organizations are not eligible for SBA loans. Can we apply for a Paycheck Protection Program loan?
Yes, faith-based organizations are eligible to receive SBA loans regardless of whether they provide secular social services. That is, no otherwise eligible organization will be disqualified from receiving a loan because of the religious nature, religious identity or religious speech of the organization. The requirements in certain SBA regulations—13 C.F.R. §§ 120.110(k) and 123.301(g)—impermissibly exclude some religious entities. Because those regulations bar the participation of a class of potential recipients based solely on their religious status, SBA will decline to enforce those regulations and will propose amendments to conform those regulations to the Constitution.
SBA has issued Frequently Asked Questions concerning faith-based organizations. These FAQs provide an exception for certain religious organizations to the SBA Affiliation rules.
Question 7: I own other businesses and have investments. Do I need to get input from the SBA on whether these businesses are required to file a Paycheck Protection Program loan application together?
It is the responsibility of the borrower to determine which entities (if any) are its affiliates and determine the employee headcount of the borrower and its affiliates. Lenders are permitted to rely on borrowers’ certifications. Borrowers must apply the affiliation rules set forth in SBA’s Interim Final Rule on Affiliation. The SBA has provided specific guidance for applications on the SBA Affiliation rules and their application to the Paycheck Protection Program loans. A borrower must certify on the Borrower Application Form that the borrower is eligible to receive a PPP loan, and that certification means that the borrower is a small business concern as defined in section 3 of the Small Business Act (15 U.S.C. 632), meets the applicable SBA employee-based or revenue-based size standard, or meets the tests in SBA’s alternative size standard, after applying the affiliation rules, if applicable.
In the event you have follow up questions on these frequently asked questions or have other questions about the Paycheck Protection Program or other COVID-19 related relief, please contact your Nyemaster Goode attorney.
Additional CARES Act Coverage:
- CONGRESS INCREASES APPROPRIATIONS TO CARES ACT PROGRAMS
- CARES ACT ESTABLISHES PAYCHECK PROTECTION PROGRAM
- HOW TO APPLY FOR A PAYCHECK PROTECTION PROGRAM LOAN
- PPP LOAN FORGIVENESS: AN OVERVIEW
- BEST PRACTICES TO MAXIMIZE PAYCHECK PROTECTION PROGRAM LOAN FORGIVENESS
- FED LAUNCHES MAIN STREET LENDING PROGRAMS FOR SMALL AND MID-SIZED BUSINESSES
- EXPANSION OF OTHER LOANS PROGRAMS
- NEW AND MODIFIED TAX PROGRAMS UNDER CARES ACT
- CARES ACT: EMPLOYEE BENEFIT PROVISIONS
- WHAT CARES ACT MEANS FOR HIGHER EDUCATION INSTITUTIONS
- CARES ACT PROVIDER RELIEF FUND
- ADDITIONAL DISTRIBUTION FROM CARES ACT PROVIDER RELIEF FUND
- CARES ACT: MORE THAN STIMULUS MONEY
- CARES ACT PROVIDES INCREASED OPPORTUNITIES FOR INDIVIDUALS TO DEDUCT CHARITABLE CONTRIBUTIONS
- MEDICARE ACCELERATED AND ADVANCE PAYMENT PROGRAM
- FEDERAL RELIEF FOR HEALTHCARE PROVIDERS