Breaking News on Payroll Protection Plan
Over the past 12 days, we have been helping our clients plan for the Payroll Protection Plan (PPP) component of the CARES Act. As many of you know by now, the process has been confusing and stressful. Several banks have already posted they are no longer accepting applications.
Last night (April 6
), the Treasury Department issued further guidance (detailed
, in addition to the Interim Final Rule published on April 2.
Below we have prepared a summary of key highlights and considerations regarding these updates
Borrowers and lenders that have already filed loan applications may rely on the laws, rules, and guidance available at the time of the relevant application. Borrowers that submitted loan applications which have not yet been processed may revise their applications accordingly. Please contact us immediately if any of these changes have a material change on your application.
While it is expected that the $349 billion allocated to this program will run out fast, Secretary Mnuchin has expressed his intent to request additional funds for businesses that miss out on this round.
As always, please feel free to reach out to us for questions and assistance. We have also created a
to provide further information and ongoing updates.
The Application Process
- The SBA confirmed PPP loans are “first-come, first-served,” and loan terms will be the same for all borrowers.
- Eligible businesses were able to apply beginning April 3, 2020, through existing SBA lenders. Independent contractors and sole proprietors are able to apply starting April 10, 2020.
- Most SBA lenders are prioritizing PPP applications for their existing customers. This may result in long delays for approvals of non-customers or even missing out on a PPP loan entirely.
- Non-SBA lenders will be able to make loans as they are approved and enrolled in the program.
Changes to the Interest Rate and Loan Maturity
- The interest rate for PPP loans will be fixed at 1% per year. This is a change from the original interest rate stated of 4%.
- All repayments will be deferred for the first six months of the loan, but interest will accrue over this period.
- The balance of the loan not forgiven (as further described below) will mature two years from the loan origination date. This is a change from the initial draft in which the term was over a ten year period.
- The loan may be repaid at any time without any prepayment penalties or fees.
- To obtain a PPP loan, borrowers will be required to submit documentation with their application establishing they were in operation as of February 15, 2020 and had employees to whom they paid salaries and payroll taxes. Borrowers will also need to submit payroll processor records, payroll tax filings or other documentation permitting the lender to confirm the borrower’s average payroll costs.
- Many SBA lenders are advising prospective PPP applicants to collect additional documentation not specifically required under the interim final rule, including prior year tax returns, copies of leases and mortgage documentation and evidence of insurance. It is unclear whether lenders will require the submission of this additional documentation following the guidance provided in the interim final rule. There may be significant differences in the underwriting practices and policies between SBA lenders.
Calculating the Size of the Loan
- With the additional guidance provided last night, there is more clarity regarding the time period you should use to measure “Average Monthly Payroll Costs.” 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 period 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, if you have not been operation for 12 months, the average number of employees for each of the pay periods that the business has been operational.
- The instructions per the application guide borrowers to limit “payroll costs” per employee to $100,000 on an annualized basis. Whereas last week’s Interim Final Rule stated payroll costs should include employee benefits and certain state and local taxes limited to $100,000. Last night’s update clarifies the limit applies only to cash compensation. This is the most significant update to share. It means for employees that were capped at $100,000, borrowers can now add health insurance, retirement contributions and state and local taxes to cash compensations for a total payroll cost in excess of $100,000. For example, if an employee’s gross cash salary is $90,000 and the employer contributes $20,000 towards that employee’s health insurance the borrower would now be able to report $110,000 as the payroll cost.
- Under the Act, payroll costs are calculated on a gross basis without regard to federal taxes imposed or withheld, such as FICA contributions and withheld income taxes. As a result, payroll costs are not reduced by taxes imposed on an employee and required to be withheld by the employer; payroll costs do not include the employer’s share of payroll tax.
- There does not seem to be a provision for including the self-employment income of partners of a partnership in the calculation of Average Monthly Payroll. The various guidelines seem to only refer to employee payroll or self-employment income of sole proprietors or independent contractors. However, we recommend you include such income since it is clearly specified as being qualified in the original Act.
- The Rule clarifies that a company’s payments to1099 independent contractors are excluded from payroll costs. This is a clear change from prior guidance. Self-employed independent contractors, however, as stated above, may apply on their own.
Interplay of PPP Loans with EIDL
- We have gotten several inquiries on this area of the CARES Act. Please refer to our email from last week or our webpage for more information.
- Some private equity sponsors and venture capital firms have criticized that their portfolio companies are unable to apply for the PPP due to the SBA’s affiliation rules. Some of these companies individually may have fewer than 500 employees, but can be ineligible to participate as a result of their common controlling ownership.
- The April 6th guidance states that minority shareholders with control will not be considered and affiliate if they irrevocably waive or relinquish existing rights specified under the affiliation rule based on ownership (13 C.F.R. 121.301(f)(1)). These include the right to prevent a quorum or otherwise block action by the board of directors or shareholders. By doing so, they would no longer be an affiliate of the business (assuming there is no other relationship that triggers the affiliation rules) and thereby eligible to apply.
Perlson LLP Viewpoint on Loan Forgiveness
PPP loans may qualify for forgiveness for loan proceeds used to cover certain payroll costs and most mortgage interest, rent, and utility costs during the eight-week period after the date the loan is made. However, no more than 25% of the forgiven amount may be use for non-payroll costs. With stay-at-home orders expected to remain in place through at least the end of April, some small businesses (e.g., restaurants, retail, construction) have drastically reduced their payroll. It will be difficult for those business to restore their payroll to historical levels during the initial eight-week period, even if they anticipate restoring full-time employment numbers by June 30, 2020. These businesses should not count on 100% of their PPP loan being forgiven.
This may present certain borrowers with a difficult business decision: (1) To attempt to restore its employee headcount quickly following receipt of the PPP loan, even if the business has not yet reopened, so that 75% of loan proceeds are spent on payroll costs or (2) accept that at least some portion of its PPP loan will not be forgiven and will be due and payable in two years. This decision needs to be well planned out and Perlson LLP is dedicated to helping you make your choice.
A borrower must request forgiveness and submit documents to its lender verifying the number of employees and pay rates, as well as payments for expenses that qualify for forgiveness. Lenders will have 60 days to then make a decision on the forgiveness request.