The following bulletin updates the guidance Gravel & Shea PC issued on March 27, following the passage of the CARES Act. The Small Business Administration (the “SBA”) and the Department of the Treasury recently released answers to frequently asked questions about the new Paycheck Protection Program (the “PPP”). The responses clarify a variety of issues, including which businesses qualify for PPP loans, what counts as employee compensation for calculating payroll, what lenders must do to verify existing bank customers’ application information, and when the loan forgiveness period for each loan runs.
Initial program rules seemed to limit PPP loans to “small business concerns”; businesses, tribal businesses, or 501(c)(3) or 501(c)(19) nonprofits with 500 or fewer employees; or those with the maximum number of employees and revenue specified in the SBA size guide (available here). However, the FAQs reveal that some other businesses also qualify for PPP loans. Businesses that (1) have a maximum tangible net worth of $15 million or less and (2) which have average net income after federal income taxes (excluding carry-over losses) of less than $5 million for each of the last two full fiscal years also qualify as small businesses for purposes of the PPP.
The FAQs also clarify which payments employers should include in and exclude from their payroll costs calculation. Employers should count only the first $100,000 of each employee’s cash compensation (salaries, wages and tips), but should also include employer contributions to retirement plans, group health insurance premiums, other employee benefits, and employers’ state and local payroll tax obligations without regard to the $100,000 cap. Employers should exclude federal income taxes and FICA deductions from payroll calculations. Businesses’ payroll costs do not include costs paid to independent contractors (but sole proprietors or independent contractors who meet the PPP criteria may take out their own loans).
If a PPP applicant that submits an application through its existing lender experiences delays due to the lender verifying know your customer (“KYC”) information, the applicant should refer the lender to the FAQs. The FAQs state that lenders “do not need to re-verify the information” on beneficial ownership of a loan account if the loan is made to an existing customer for whom that information was previously verified.
Finally, the FAQs confirm that the eight-week period used for evaluating forgivable loan expenditures begins on the date when the lender first disburses PPP funds to a borrower. Lenders must fully disburse loans within ten calendar days of approving a PPP loan, so borrowers should be prepared to spend all loan proceeds they want forgiven within no more than 9.5 weeks of their loan approval date. The ten-day disbursal rule may change if the Treasury Department responds to a bipartisan effort to loosen that deadline.
For additional details on the PPP, which provides two-year, 1% interest loans of up to 2.5 times monthly payroll costs (up to $10 million) to small businesses and sole proprietors experiencing economic distress as a result of the coronavirus pandemic, visit https://home.treasury.gov/system/files/136/PPP–Fact-Sheet.pdf. Contact an SBA-approved lender or your attorney for questions about whether your business qualifies.
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FOR MORE INFORMATION
For more information about SBA emergency economic injury disaster loans, please contact your attorney at Gravel & Shea PC or any of the following attorneys at the firm:
Chip Mason (firstname.lastname@example.org), Cassandra LaRae-Perez (email@example.com), Oliver Goodenough (firstname.lastname@example.org), Keith Roberts (email@example.com), Pauline Law (firstname.lastname@example.org), or Catherine Burke (email@example.com)