Lender’s responsibility with respect to borrower’s payroll calculation (Question 1)
The FAQ confirms that lenders are not required to recalculate every aspect of borrower’s payroll cost calculation. Lenders will be protected provided that they “perform a good faith review, in reasonable time, of borrower’s calculations.” The level of investigation by the lender should be determined based upon the quality of documentation submitted by the borrower. We believe that reports, forms and other information filed with a governmental agency (IRS, State) would carry the most weight in this regard.
The guidance further confirms that the determination of accurate payroll is the responsibility of borrower.
Application of PPP to “small business concerns” (Question 2)
The CARES Act greatly expands the ability of any “business concern” to take advantage of an SBA loan guaranty under the PPP. Eligibility of any for-profit or non-profit entity is generally determined based upon whether the business has more than 500 employees.
However, the FAQ clarifies that a borrower may qualify with more than 500 employees if it otherwise satisfies the statutory and regulatory requirements as a “small business concern.” Small business concerns, as defined, are determined based upon certain established size standards that differ depending on the type of industry involved. These standards focus on either number of employees or amount of revenue. For example, a grocery store may qualify as a small business concern with no more than 500 employees (similar to the CARES Act requirement), and an accounting firm may qualify with not more than $22,000,000 in annual revenue.
In addition, the FAQ indicates that a business may qualify if it satisfies the following “alternative size standard” as of March 27, 2020: (i) tangible net worth of not more than $15 million, and (ii) average net income after federal income taxes for the two most recent full years of not more than $5 million.
Lender’s responsibility regarding borrower employee and affiliate determinations (Question 4).
The FAQ clarifies that lenders are permitted to rely on the borrower’s certification regarding employees and affiliates and will not be responsible for separately investigating those determinations.
Borrower’s determination of affiliates (Questions 5 and 6)
Borrowers must apply the recently issued SBA Affiliation Rules applicable to the PPP. One of those rules provides that a minority owner may constitute an affiliate of a borrower (based upon control) if it has the ability to block action by the board or shareholders of the borrower. The FAQ clarifies that the minority owner may avoid being deemed an affiliate if it “irrevocably gives up those rights.”
Application of the $100,000 cap on “annual salary” (Question 7)
The correct interpretation and application of the $100,000 cap on annual salary (as being included in payroll costs) has caused considerable confusion among borrowers and lenders under the PPP. Although seemingly inconsistent with the Interim Rule, the FAQ provides that the $100,000 cap applies to “cash compensation” only, and that other non-cash benefits may be included in payroll costs regardless of whether those amounts cause the total compensation to exceed $100,000. This would include amounts for employee retirement benefits, health insurance coverage and state/local taxes assessed on the employee’s compensation.
Application of PPP to employers that lease their employees (Question 10)
Many have questioned whether employers that lease their employees could apply for a PPP loan, given that the employer would pay a third party (independent contractor) which would then separately run payroll for those workers (meaning that the borrower/employer would arguably not technically have its own “payroll costs”).
The FAQ allows the employer in those cases to include amounts it pays to a “payroll provider or a Professional Employer Organization (PEO)” as payroll costs for purposes of the loan application.
Required signatures on borrower’s application (Question 11)
The FAQ permits a bank to accept a single signature from an agent authorized to act on behalf of the borrower. This includes allowing that signature to serve as the required certification of BOTH the borrower AND each 20 percent + owner.
Lender use of its own online portal and application forms (Question 13)
Lenders are authorized to collect information through their own online portals and may use any other application form provided it includes the same information and certifications as contained in the SBA application.
Time period for calculating “payroll costs” to determine loan amount (Question 14)
The CARES Act provides that the loan amount is determined based upon payroll costs “incurred during the 1-year period” before the date on which the loan is made. The SBA borrower application form then included a statement that most applicants will use payroll costs for calendar year 2019. This created a significant amount of uncertainty for borrowers and lenders.
The FAQ confirms that borrowers may use either amounts for 2019 or for the actual 12-month period preceding the date of the loan.
Importantly, this FAQ response also provides that a borrower may use its “average employment” over that same time period in determining whether it satisfies the 500 employee limitation. This is significant in that the CARES Act statutory language provides that a business with over 500 employees at any time after February 15, 2020, would not be eligible for a PPP loan.
Determination of “gross” / “net” payroll costs
Another area of significant uncertainty has been how payroll taxes and other tax amounts assessed against employee compensation impact the determination of payroll costs. As enacted, the statute provides that the payroll cost calculation is a “gross” payroll amount as to FICA and employee income tax withholdings for the period ending on February 15, after which it is to be determined “net” of those amounts (as the “covered period” begins on Feb. 15).
However, the FAQ states that borrowers should calculate payroll costs by (i) including (or not reducing the amount by) taxes imposed on an employee – including employee’s share of FICA and income tax withholdings collected by the employer; and (ii) excluding the employer’s share of payroll costs.
Uncertainty regarding which PPP application should be used (Question 17)
There have been two separate SBA applications circulated, with many borrowers completing and submitting the earlier version to their lender. The FAQ confirms that either application may be used for PPP purposes.