Published July 31, 2020

The Nuts and Bolts of Paycheck Protection Program Loans

Disclaimer: This article was prepared for general informational purposes only and does not constitute and cannot be relied or acted upon as legal, tax, accounting, banking, financial, or any other form of professional or other advice. To the best of PYA, P.C.’s (PYA) knowledge, the non-exhaustive information in this article was correct at the time of publication. Given the rapidly developing situation, and with the possibility of new guidance being issued at any time, be aware that some or all of this information is subject to change without notice. Please visit PYA’s COVID-19 hub frequently for the latest updates, as we are working diligently to put forth the most current information as it becomes available.

The Paycheck Protection Program (PPP) was enacted March 27, 2020, as part of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). Through several amendments, the PPP provided $650 billion in funding, in the form of loans, available to small business, nonprofit, and self-employed borrowers (Borrowers), along with specific guidance as to the use of proceeds for payroll and nonpayroll expenditures and provisions for forgiveness.

Who Is Eligible for a PPP Loan

The following types of businesses are eligible for PPP loans:

    1. Small business concerns as defined in the SBA Act;
    2. Any business concern which meets the PPP’s employee count limits (discussed below in the “Employee Count Limit For Eligible Applicants and Their Affiliates” section) and which is not excluded under the SBA Act or SBA regulations and rules;
    3. Nonprofit organizations—if described in Internal Revenue Code (IRC) Section 501(c)(3) and tax-exempt under IRC Section 501(a);
    4. Hospitals owned by a state or local government, provided they receive less than 50% of their funding from state or local government sources, exclusive of Medicaid, and are otherwise eligible to receive a PPP loan as a business concern or nonprofit organization—if described in IRC Section 501(c)(3) and tax-exempt under IRC Section 501(a);
    5. Veterans’ organizations—if described in IRC Section 501(c)(3) and tax-exempt under IRC Section 501(a); or
    6. Tribal business concerns—if described in SBA Act Section 31(b)(2)(C).

In addition to the above, PPP loans are available to any individual who: (a) has self-employment income for which a 2019 IRS Form 1040 Schedule C was filed, (b) has a principal place of residence in the United States, and (c) operates a business, which was in operation on February 15, 2020, as a sole proprietor or independent contractor.

Partners in a partnership may not submit a separate PPP loan application for themselves as self-employed individuals; rather, the self-employment income of general active partners must be reported as part of the payroll costs (as defined in the PPP and related SBA Interim Final Rules and other guidance—see further explanation within this article, “Payroll Costs”) of a PPP loan application filed by the partnership. On the other hand, independent contractors, sole proprietors, and self-employed individuals must submit a separate PPP loan application for themselves, and their Payroll Costs cannot be included in a PPP loan application filed by any business concern or other type of PPP applicant listed above.

PPP Borrowers that received an SBA Economic Injury Disaster Loan (EIDL) between January 31 and April 3, 2020, may also be eligible to apply for a PPP loan if they meet the EIDL requirements, and the EIDL proceeds were used for purposes different from those for which the PPP loan proceeds are used. If such an EIDL was not used for Payroll Costs, a Borrower may choose to either keep the EIDL or refinance it into a PPP loan; if used for Payroll Costs, it must be refinanced as part of the PPP loan.

Employee Count Limit For Eligible Applicants and Their Affiliates

In addition to being a PPP-eligible business type, each PPP loan applicant also must meet the following requirements, including a size limit based upon the applicant’s employee count, which must be determined by including the employees of all the applicant’s affiliates:

  • Must have no more than the greater of:
    • 500 employees, or
    • The size standard in number of employees set by the SBA for the industry in which the applicant operates, if more than 500;
  • Must have been in operation on February 15, 2020; and
  • Must have had employees for whom salaries and payroll taxes were paid.

A PPP loan applicant may use the 500-employee size standard, which provides for increased loan eligibility, regardless of whether the applicant qualifies or is disqualified as a small business under any other SBA size standards, including those based upon gross receipts.

A PPP loan applicant’s employee count is determined as of the date the Loan application is accepted for processing by the SBA. Under SBA rules, employee counts are determined by calculating the average number of all individuals employed by an applicant and its affiliates on a full-time, part-time, or other basis for each pay period in the preceding 12 calendar months.

Under the PPP, employees sourced through a certified Professional Employer Organization (PEO) are counted as the Borrower’s employees. The SBA will accept as proof of employment payments made as reflected on the PEO’s payroll and payroll tax documentation.

Exceptions to the Applicant and Affiliated Employee Count Limits

For businesses assigned a NAICS code beginning with 72 (e.g., the restaurant and lodging industries), the PPP’s 500-employee limit will be applied on a per-physical-location basis. Under this rule, PPP loan applicants with such an NAICS code number can receive a PPP loan notwithstanding that they have more than 500 employees and an aggregate amount in excess of the single location maximum of $10 million. Because of this, the SBA issued a rule limiting businesses that are part of a single corporate group (i.e., businesses that are majority owned, directly or indirectly, by a common parent) to a maximum aggregate PPP loan amount of $20 million.

What Is Affiliation, and What Are the Affiliation Rules Applicable to PPP Loans

Employee counts under the PPP must be determined using certain SBA affiliation rules. If applicable, the rules require that the Borrower’s employees be added together and counted along with those of its affiliates. The SBA has announced that four affiliation tests—all of which are based upon the existence of the “power to control” held by an individual, concern, or entity over another concern or entity—will apply to PPP applicants to determine employee counts for the purposes of PPP loan qualification. Affiliation will be found to exist if the power to control exists, even if unexercised.

Affiliation under any of the sometimes complex-to-apply rules listed below—as derived from rules found in 13 CFR §§121.301(f) and 121.103—is sufficient to establish affiliation for PPP Borrowers:

    1. Affiliation based on ownership;
    2. Affiliation arising under stock options, convertible securities, and agreements to merge;
    3. Affiliation based on management; and
    4. Affiliation based on identity of interest.

The SBA requires that Borrowers make their own affiliation determinations by applying the affiliation rules above to their specific facts and circumstances, the results of which must be submitted to the Borrower’s lender along with the PPP loan application. The Borrower’s PPP loan application also includes certifications applicable to its affiliation determinations.

If affiliation is found to exist, then the PPP loan applicant’s employees and those of its affiliates are considered collectively (i.e., the Borrower’s employees + each and every affiliate’s employees = total employees for the Borrower’s PPP loan application). This Treasury Department resource outlines the specifics of the above-listed affiliation rules and how they can impact your business’s PPP loan eligibility. The full text of the PPP loan affiliation interim final rule can be found here.

PPP Loan Amount Determination and Maximum

The maximum amount of a PPP loan will be the lesser of: (a) $10 million, or (b) the product obtained by multiplying by 2.5 the Borrower’s 2019 average monthly payments (as instructed in the PPP Loan Application Form) for Payroll Costs, plus (c) the amount of any outstanding SBA EIDL received by the Borrower between January 30 and April 3, 2020, less the amount of any COVID-19 EIDL “advance” received. Note that, concerning the above reference to 2019, SBA guidance states that Borrowers can calculate their Payroll Costs using data either from the previous 12 months (i.e., the 12 completed calendar months prior to the date the PPP loan application is submitted) or for calendar year (CY) 2019, even though the PPP loan application itself specifically references only CY 2019.

 PPP Loan Application Certifications

In addition to the forms and documentation Borrowers are required to submit to apply for PPP loans, they also must make certain certifications that include all of the following:

    1. PPP loan proceeds will be “used to retain workers and maintain payroll” or make other allowed payments.
    2. Information contained within the PPP loan application “and the information provided in all supporting documents and forms is true and accurate in all material respects.”
    3. Based on current economic uncertainty, the PPP loan is “necessary to support the ongoing operations of the Applicant.”

The PPP loan application, SBA Form 2483, lists potentially severe criminal and civil sanctions that can result from a false certification.

Payroll Costs as Defined in the PPP and SBA Rules

The following items are included in Payroll Costs under the PPP and related SBA rules:

    1. Compensation (salary, wage, commission, or similar compensation, including cash tips and all other cash compensation, such as housing stipends or allowances);
    2. Payments for vacation, parental, family, medical, or sick leave;
    3. Dismissal or separation payments;
    4. Payment required for the provision of group healthcare benefits, including insurance premiums;
    5. Payment of any retirement benefits; and
    6. Payment of state or local tax assessed on the compensation of employees.

Note that Payroll Cost items are included on a gross basis, with no reduction for federal taxes imposed on an employee and required to be withheld by the employer, and no reduction for the employer’s share of any federal payroll taxes. In addition, because independent contractors, sole proprietors, and self-employed individuals have the ability to apply for a PPP loan themselves, they are excluded from the Payroll Costs of Borrowers that are not independent contractors, sole proprietors, and self-employed individuals.

The following items are excluded from Payroll Costs under the PPP and related SBA rules:

    1. For any Borrower that is not an independent contractor, including small businesses, amounts paid to independent contractors;
    2. Cash compensation of over $100,000 for any individual (Note: Under SBA rules, the exclusion of compensation in excess of $100,000 annually for a non-owner employee does not apply to non-cash benefits, including employer contributions to defined-benefit or defined-contribution retirement plans; payments for the provision of employee benefits consisting of group healthcare coverage, including insurance premiums; and payment of state and local taxes assessed on compensation of employees);
    3. Federal taxes imposed or withheld under IRC Chapters 21, 22, and 24;
    4. Compensation of employees whose principal place of residence is outside the United States;
    5. Qualified sick and family leave for which a credit is allowed under Sections 7001 and 7003, respectively, of the Families First Coronavirus Response Act; and
    6. Federal employment taxes imposed or withheld at any time from February 15 through December 31, 2020, including the employee’s and employer’s share of FICA (Federal Insurance Contributions Act) and income taxes required to be withheld from employees.

Where to Get PPP Loans

PPP loans can be obtained through authorized SBA Act Section 7(a) lenders that “opt in” to the program; certain other lenders authorized by the SBA; and certain other financial institutions, not authorized in the PPP, that choose to make PPP loans.

 SBA Loan Fees for PPP Loans

The SBA will charge no fees for PPP loans.

 Collateral or Personal Guarantees for PPP Loans

There will be no SBA recourse for the Loans, which also require no collateral or personal guarantees.

Deadline for PPP Loan Application

A PPP loan application must be submitted on or before August 8, 2020. PPP loans are issued on a first-come, first-served basis.

 PPP Loan Proceeds Disbursement Date

PPP loan proceeds must be fully disbursed to the Borrower within 10 days of the date upon which the Loan was assigned an SBA loan number. In the case of an EIDL refinanced into a PPP loan, not all PPP loan proceeds will be disbursed to the PPP Borrower. SBA rules require that PPP lenders disburse directly to the SBA (and not to the Borrower) the full amount of any EIDL that was refinanced into a PPP loan.

 Allowable Use of PPP Loan Proceeds

Payroll Costs must comprise at least 60% of the Borrower’s use of the total PPP loan proceeds for which loan forgiveness is sought. Subject to that rule, PPP loan proceeds can be used on or before December 31, 2020, (or if loan forgiveness will be sought, on or before the last day of the Borrower’s loan forgiveness covered period [addressed below] if such date is earlier than December 31, 2020) for the following expenses:

    1. Payroll Costs and employee salaries, commissions, and similar compensation;
    2. Group healthcare benefits and insurance premiums;
    3. Mortgage interest payments (with no principal or prepayment allowed);
    4. Rent, including under a lease agreement;
    5. Utilities–including power, water, transportation, telephone, and internet access;
    6. Interest on any other debt obligations incurred before February 15, 2020, (which does not qualify for PPP loan forgiveness); and
    7. Other allowable uses for SBA Section 7(a) loans, including working capital, if and to the extent listed in a separate SBA loan authorization form (which does not qualify for PPP loan forgiveness unless included in items “a.” through “e.” of this list).

The loan forgiveness covered period is the period of time during which PPP loan proceeds can be used by Borrowers on forgiveness-eligible Payroll Costs and Nonpayroll Costs in order to qualify for loan forgiveness. The default loan forgiveness covered period is the 24-week (i.e., 168-day) period that starts on the date Loan proceeds are first disbursed to the Borrower, and it will apply unless a Borrower that received a PPP loan on or before June 5, 2020, elects an 8-week (i.e., 56-day) covered period, or any Borrower whose payroll frequency is biweekly (i.e., 26 pay periods per year), or more, elects an Alternative Payroll Covered Period (APCP). If elected, the APCP, which applies only to Payroll Costs, starts on the first day of the first pay period that begins after the date Loan proceeds are first disbursed to the Borrower, whether for a 24-week or 8-week period, whichever is applicable to the Borrower. All loan forgiveness covered periods will end on the earlier of the last day of their applicable 24-week loan forgiveness covered period, their 8-week loan forgiveness covered period or December 31, 2020.  Borrowers whose applicable 24-week or 8-week loan forgiveness covered period has ended can apply for forgiveness any time within 10 months of the end of such covered period.  Please note, borrowers that have fully expended all of their PPP loan funds can apply for PPP loan forgiveness even before the end of their appliable covered period.

The Consequences of Using PPP Loan Proceeds Other Than for Allowable Uses

For unauthorized use of Loan proceeds, the Borrower will be ordered by the SBA to repay amounts used for unauthorized purposes. If PPP loan funds are knowingly used for unauthorized purposes, additional forms of liability might apply, such as charges for fraud. If a Borrower’s shareholders, members, or partners use PPP funds for unauthorized purposes, the SBA will have recourse against them for the unauthorized use.

Automatic Repayment Deferral for PPP Loans

PPP loans have an automatic repayment deferral period during which no repayments will be due. For a Borrower that submits a loan forgiveness application to its lender on or before 10 months after the last day of its loan forgiveness covered period, the repayment deferral period will end on the date upon which the SBA remits the approved loan forgiveness amount to such lender. For a Borrower that does not submit a loan forgiveness application within the 10-month period, or at all, the repayment deferral period will end on the last day of that 10-month period. The maximum loan forgiveness amount available to be approved includes the Loan principal amount and all accrued interest.

PPP Loan Repayment, Interest Rate, and Term

After expiration of the repayment deferral period, the portion of a Borrower’s PPP loan not granted Forgiveness must be repaid, along with interest accrued at an annual rate of 1%. Loans originated on or after June 5, 2020, automatically will have a five-year repayment term. Loans originated before June 5, 2020, however, will have a two-year term-to-maturity, which can be extended to a five-year term if the lender and Borrower mutually agree. There is no prepayment penalty for Loan payments made prior to their scheduled due date.

 PYA will be helping our clients with the PPP loan and loan forgiveness application processes for small business PPP loans. If you need assistance or would like additional COVID-19 guidance, visit our COVID-19 hub, or contact one of our PYA executives below at (800) 270-9629.

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