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Paycheck Protection Program for Small Businesses
Published April 20, 2020

Fast Facts: Paycheck Protection Loan Program for “Small” Businesses

Updated April 20, 2020

Disclaimer: To the best of our knowledge, this information 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 may change. 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.


Events in the COVID-19 pandemic are developing quickly. As new legislation and information transpires, PYA is digging into the developments to pull out the most relevant actionable items you need to know now. The following are key takeaways related to the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) signed into law March 27, 2020, specifically the Small Business “Paycheck Protection Program” (PPP).

Overview of the Act/Loan Program – The CARES Act (Act) makes available PPP “Small” Business loans of up to $10 million—all, or a portion of which may be forgiven tax-free (Loans). The Loans are a type of U.S. Small Business Administration (SBA) Section 7(a) Loan and are available on a first-come, first-served basis, so speed matters.

Who Is Eligible for PPP Loans – Small business concerns as defined in the SBA Act; and any business concern, nonprofit organization—if described in Internal Revenue Code (IRC) Section 501(c)(3) and tax- exempt under IRC Section 501(a), veterans’ organization—if described in IRC Section 501(c)(3) and tax- exempt under IRC Section 501(a), or tribal business concern—if described in SBA Act Section 31(b)(2)(C), that:

    1. Has fewer than (i) 500 employees employed on a full-time, part-time, or other basis or (ii) if applicable, the North American Industry Classification System (NAICS) employee number size-standard for the applicable industry (i.e., under the PPP, no SBA size standard based upon average annual receipts will be used, except for business concerns and entities seeking eligibility as a small business defined in the SBA Act);
    2. Was in operation on February 15, 2020; and
    3. Had employees for whom salaries and payroll taxes were paid.

Employee counts must be determined using certain SBA affiliation rules (described later). Under the PPP, employees sourced through a Professional Employer Organization (PEO) are counted as the Borrower’s employees, and the SBA will accept as proof of employment payments made as reflected on the PEO’s payroll and payroll tax documentation.

Individuals who operate under a sole proprietorship or as an independent contractor, and self-employed individuals also are eligible for the Loans, but they must provide their Lender with such documentation as is necessary to establish eligibility, including IRS payroll tax filings and other items.

What Is Affiliation, and What Are the Affiliation Rules Applicable to PPP Loans – 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 PPP Loan qualification. Affiliation will be found to exist if the power to control exists, even if the power is not exercised.

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.

SBA guidance requires that Borrowers must make their own affiliation determinations by applying the affiliation rules above to their facts and circumstances, the results of which must be submitted to the Borrower’s lender. The Borrower’s PPP Loan application includes certifications that will be deemed to apply to the Borrower’s affiliation determinations.

If affiliation is found to exist, then the PPP Loan applicant’s employees and affiliate employees are considered collectively (i.e., Borrower’s employees + affiliate employees = total employees for the PPP 500-or-fewer-employee test). This Treasury Department resource outlines the specifics of these rules and how they can impact your business’s eligibility. The full text of the interim final rule can be found here.

Deadline for PPP Loan Application – On or before June 30, 2020. Because PPP Loans are issued on a first-come, first-served basis, and because approximately more than $2 billion in Loans (out of $349 billion available) are processed each day, it is advisable to apply as soon as practicable.

Where to Get PPP Loans – The Loans can be obtained only through authorized SBA Act Section 7(a) Lenders that “opt in” to the program and certain other lenders authorized by new SBA regulations, including any federally insured depository institution or credit union and any Farm Credit System institution (Lenders).

PPP Loan Application Certifications – In addition to the documents required to make applications for the Loans, Borrowers also must make particular good faith certifications, including an acknowledgement that the proceeds will be “used to retain workers and maintain payroll” or make other allowed payments.

No SBA Loan Fees for PPP Loans – The SBA will charge no fees for the Loans.

PPP Loan Amount Determination and Maximum – The maximum amount of the Loans will be the lesser of: (a) $10 million, or (b) the product obtained by multiplying (i) the 2019 average monthly payments (as instructed in the PPP Loan Application Form) for Payroll Costs (as very technically defined in the Act, which includes limits and exclusions concerning employees earning more than $100,000) (ii) by 2.5 plus, (c) any outstanding EIDL received between February 15, 2020, and June 30, 2020, if any part of the EIDL funds were used for Payroll Costs. Note that, concerning the reference to “2019” in “(i)” above, recent 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 specifically references CY 2019.

Loan amount calculations will be different for Borrowers that have seasonal employees, or that came into existence or started operating after June 30, 2019.

What Is Included in Payroll Costs  –  Compensation must be included in Payroll Costs on a gross basis, with no reduction for taxes imposed on an employee and required to be withheld by the employer, and no reduction for the employer’s share of any payroll taxes.

      1. Compensation (salary, wage, commission, or similar compensation, payment of cash tip or equivalent)
      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
      6. Payment of state or local tax assessed on the compensation of employees

What Is Excluded from Payroll Costs 

      1. For any Borrower that is not an independent contractor, amounts paid to independent contractors
      2. Compensation of over $100,000 for any individual (Note – The SBA has stated that the exclusion of compensation in excess of $100,000 annually applies only to cash compensation, and 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. Taxes imposed or withheld under IRC Chapters 21, 22, and 24
      4. Compensation of employees whose principal place of residence is outside the U.S.
      5. Qualified sick and family leave for which a credit is allowed under Sections 7001 and 7003 of the Families First Coronavirus Response Act
      6. Federal employment taxes imposed or withheld between February 15, 2020, and June 30, 2020, including the employee’s and employer’s share of FICA (Federal Insurance Contributions Act) and Railroad Retirement Act taxes, and income taxes required to be withheld from employees. The guidance states that Payroll Costs must be included 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 FICA and employee income taxes required to be withheld. Payroll Costs also do not include  the employer’s share of payroll taxes.

PPP Loan Proceed Disbursement Date – PPP Loan proceeds must be disbursed to the Borrower within 10 days of the date upon which the Loan was approved.

PPP Loans Require No Collateral or Personal Guarantees – There will be no SBA nonrecourse for the Loans, which also require no collateral or personal guarantees.

Allowable Use of PPP Loan Proceeds – Payroll Costs, as defined in the Act, must comprise at least 75% of the Borrower’s use of PPP Loan proceeds. Subject to that rule, PPP Loan proceeds can be used for the following expenses:

    1. Payroll Costs (as defined in the Act) and employee salaries, commissions, and similar compensation
    2. Group healthcare benefits and insurance premiums
    3. Mortgage interest payments (no prepayment of interest 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
    7. Other allowable uses for SBA Section 7(a) Loans, including working capital

Note: Independent contractors have the ability to apply for a PPP Loan, so they are excluded from the Payroll Costs of Borrowers that are not independent contractors.

The Consequences of Using PPP Loan Proceeds Other Than for Allowable Uses – For unauthorized use of Loan proceeds, the SBA will have recourse against each shareholder, member, or partner of a Borrower that is an entity; and the Borrower will be ordered by the SBA to repay unauthorized use amounts. If a Borrower knowingly makes unauthorized use of PPP Loan proceeds, the Borrower and possibly its principals will be subject to additional liability such as charges for fraud. Using PPP Loan proceeds contrary to the CARES Act allowable uses, or violating a certification on the PPP Loan application form can be considered unauthorized uses.

PPP Loan Forgiveness – Recipients of Loans will be eligible for loan forgiveness for costs incurred and payments made for Payroll Costs and covered rent obligations, covered utility payments, and interest on covered mortgage obligations (for real or personal property in place prior to February 15, 2020, with no prepayment allowed), all as defined in the Act during the eight-week period commencing on the disbursement date of the Loan. For purposes of determining the amount of Loan forgiveness, Payroll Costs are calculated on a gross basis without regard to federal employee and employer payroll taxes imposed or withheld at any time, not only during the period from February 15 through June 30, 2020.

To obtain forgiveness, Borrowers must submit a certified application with supporting documentation to their Lenders.

Reduction of Loan Forgiveness – The amount of Loan forgiveness will be reduced for:

    1. Any wage decrease in excess of 25% for employees whose pay rate was less than $100,000 per year occurring during the eight-week period starting on the date of the Loan; and
    2. The proportion of any decrease during the eight-week period starting on the date of the Loan, in the average number of monthly full-time equivalent (FTEs) employees (i.e., the numerator) compared to, at the election of the Borrower, the average number of FTEs employed per month (i.e., the denominator) during (a) the period of February 15, 2019, through June 30, 2019, or (b) the period of January 1, 2020, through February 29, 2020.

Note that the definition of FTEs for this purpose differs from the definition of employees for Loan amount qualification, as previously noted, and that special rules will apply to Borrowers that employ seasonal employees. The amount of PPP loan forgiveness also should be reduced for the dollar amount representing the percentage of loan proceeds used for non-payroll costs that is more than 25% of the total loan proceeds. In addition, Loan forgiveness will not be reduced for employees laid off between February 15, 2020, and April 26, 2020, and re-hired by June 30, 2020.

PPP Loan Repayment Term and Interest Rate – The unforgiven portion of PPP Loans will be repaid over a maximum two-year period with an interest rate of 1% and no prepayment penalty.

Automatic Repayment Deferral for PPP Loans – There will be an automatic six-month deferral of repayment for the Loans starting on the Loan date.

Tax-Free Debt Forgiveness – Debt forgiveness under this program will not result in income for federal income tax purposes.

Express Loans – Businesses can apply for express loans of up to $1 million and receive a response from the SBA within 36 hours.

The PPP Loan Application and Application Form – PPP Loan applicants must submit SBA Form 2483 (Paycheck Protection Program Application Form) and payroll documentation to its Lender, as well as anything else the Lender may request. Although the SBA continues to issue new guidance, Borrowers may rely on the laws, rules, and guidance available at the time their PPP Loan applications were submitted. However, Borrowers may want to revise their applications based on clarifications reflected in later-issued SBA guidance, if applications have not yet been processed.

The PPP application submission process began Friday, April 3, 2020, for small businesses and sole proprietors. Applications for independent contractors and self-employed individuals could be submitted starting Friday, April 10.

PYA will be helping our clients with the application process 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.

*Disclaimer: The information above is only a non-exhaustive summary of select provisions of the CARES Act; the full text of the Act can be read here.

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