As a business owner adversely affected by the current situation with the coronavirus, you have a few different options to consider regarding financial relief under the new Coronavirus Aid, Relief, and Economic Security (CARES) Act. You can choose to take advantage of the COVID-19 Economic Injury Disaster Loan or the Paycheck Protection Program that has a loan forgiveness tool offered through the Small Business Administration (SBA). Or, you may choose tax relief options which include an Employee Retention Credit and a temporary payroll tax holiday.

Here's a brief breakdown of the available options so you can consider what might make the most sense for your business.

COVID-19 Economic Injury Disaster Loan

The COVID-19 Economic Injury Disaster Loan loans through the Small Business Administration must be applied for directly through their website. This loan application is available now. These are low-interest loans for working capital to small businesses suffering substantial economic injury as a result of COVID-19.

 

 

 

Agencies Issue PPP Loan Forgiveness Application

The Small Business Administration and Treasury Department released the Paycheck Protection Program Loan Forgiveness Application and instructions. The application form and instructions inform borrowers how to apply for forgiveness of their PPP loans, consistent with the CARES Act. The SBA also said it will also soon issue regulations and guidance to help borrowers complete their applications and inform lenders of their responsibilities.

 

Paycheck Protection Program

How to Calculate Loan Amounts (pdf)

 

The newly created Paycheck Protection Program (PPP) is modeled on the existing SBA 7(a) program. Please call your business banking officer to be added to their active list for details when the process is available to the bank.

Here are a few key points to consider regarding PPP:

  • Businesses that meet the SBA’s “small business concern” definition, as well as businesses with up to 500 employees, are eligible. There are also special considerations for certain hospitality and food service companies.
  • The maximum amount you can borrow is 2.5 times of your average monthly “payroll costs”, not to exceed $10 million. “Payroll costs” could also include cash tip equivalents, the cost of health benefits, the cost of retirement benefits, the cost of leave and the payment of state or local taxes assessed on employee compensation (capped at $100,000 on an annualized basis for each employee).
  • Loans are 100% guaranteed by the SBA. There are no application fees or closing costs and no collateral or personal guarantee is required. The interest rate is 1% with a repayment term of 2 years.
  • The program’s intent is for you to be able to keep your employees on payroll. A portion of your total loan will be eligible for forgiveness in the amount equal to your “payroll costs”, as well as any interest paid on covered mortgage obligations, covered rent obligations, and covered utility payments during the 8 week period after the loan is made, that was in effect before February 15, 2020. Forgiven amounts will not be taxable as income to your business. Expect to have to verify the employees kept on payroll and wages paid to them during that time period.

What You Need to Apply

  • Verification of your average monthly payroll cost - which can be determined from your 941 Form or reports pulled from your payroll system
  • Define the purpose of the loan - using it for payroll, rent/mortgage interest, utilities, or other
  • Contact your business banking officer to receive information about applying

Employee Retention Credit

If you choose not to participate in the loan forgiveness program, you may be eligible for an Employee Retention Credit. This is a fully refundable 50% tax credit applicable to the employer’s share of payroll taxes on wages up to $10,000 per employee. To be eligible, you must prove that your operations were suspended because of an official government order related to COVID-19, or that your gross receipts declined by at least 50% compared to the same quarter last year.

Payroll Tax Holiday

In addition, if you choose not to seek loan forgiveness, you’re eligible for a temporary payroll tax holiday. This gives you the option to defer payment of the employer share of Social Security taxes through the end of 2020. Fifty-percent of the deferred amounts would then be due by December 31, 2021, and the remaining due by December 31, 2022.

Frequently Asked Questions

When can applicants apply for a PPP loan?

Qualified borrowers should talk to an SBA-approved lender as soon as possible, given that there are limited program funds available. At this time, the program's earliest acceptance dates are:

  • Friday, April 3rd for small businesses and sole proprietorships
  • Friday, April 10th for independent contractors and self-employed individuals

How is the maximum loan amount calculated?

  • Maximum loan size is up to two months of your average monthly payroll costs from the last year plus an additional 25% of that amount. That amount is subject to a $10 million cap. If you are a seasonal or new business, you will use different applicable time periods for your calculation. Payroll costs will be capped at $100,000 annualized for each employee.
  • Monthly Payroll costs include:
    • Salary, wages, commissions, or tips (capped at $100,000 on an annualized basis for each employee)
    • Employee benefits including costs for vacation, parental, family, medical, or sick leave; allowance for separation or dismissal; payments required for the provisions of group health care benefits including insurance premiums; and payment of any retirement benefit
    • State and local taxes assessed on compensation
    • For a sole proprietor or independent contractor: wages, commissions, income, or net earnings from self-employment, capped at $100,00 on an annualized basis for each employee
    • It does not include federal payroll taxes
  • Note that the applicant should provide the appropriate documentation to demonstrate previous payroll expenses that shows the specific amount of compensation paid per employee (because of the $100,000 per employee cap noted above)

What documentation is needed from a borrower?

Other than the PPP application form, please follow standard lending practices. To support the PPP applications, CNB recommends the items below:

  • Articles of Incorporation / Certificate of Formation
  • By-laws / operating agreement / partnership agreement
  • Verification that the business was in operations as of 02/15/2020 (such as a rent check, utilities bill, or bank statement)
  • Form 941 for each quarter in 2019 (and first quarter of 2020, if available)
  • Payroll reports for each pay period for the preceding 12 months. If the business uses ADP's Run module, this report can be found in Reports > Payroll for All Employees
  • Documentation reflecting the health insurance premiums paid by the business under a group health plan including owners of the company for the immediately preceding 12 months prior to the date of the SBA loan origination
  • Documentation of all retirement plan funding by the employer for the immediately preceding 12 months
  • A detailed profit and loss statement for the year ended 2019 and YTD 2020

Can the borrower use the PPP loan funds for any operating expenses?

PPP loan funds should be used for:

  • Payroll costs, including benefits
  • Interest on mortgage obligations, incurred before February 15, 2020
  • Rent, under lease agreements in force before February 15, 2020
  • Utilities, in service before February 15, 2020

How much of the PPP loan will be forgiven?

  • The borrower will owe money when the loan is due if loan funds were used for anything other than payroll costs, mortgage interest, rent, and utilities payments over the 8 weeks after getting the loan.

    Due to likely high subscription, 75% of the funds must be used for payroll costs.

  • The borrower will also owe money if the business does not maintain its staff and payroll
    • Number of Staff: The amount of loan forgiveness will be reduced if the business decreases its full-time employee headcount
    • Level of Payroll: The amount of loan forgiveness will also be reduced if the business decreases salaries and wages by more than 25% for any employee that made less than $100,000 annualized in 2019
    • Re-Hiring: The business has until June 30, 2020 to restore its full-time employment and salary levels for any changes made between February 15, 2020 and April 26, 2020

How does a borrower request loan forgiveness?

The borrower can submit a request to the lender that is servicing the loan.

  • The request should include documentation to verify the number of full-time equivalent employees and pay rates, as well as the payments on eligible mortgage, lease, and utility obligations
  • The lender must certify that the documents are true and that you used the forgiveness amount to keep employees and make eligible mortgage interest, rent, and utility payments
  • The lender must make a decision on the forgiveness within 60 days

Which borrowers are best candidates for PPP?

Any qualified small business may apply.

Are small business concerns required to have 500 or fewer employees to be eligible borrowers in the PPP?

No. Small business concerns can be eligible borrowers even if they have more than 500 employees, as long as they satisfy the existing statutory and regulatory definition of a "small business concern" under section 3 of the Small Business Act, 15 U.S.C. 632. A business can qualify if it meets the SBA employee-based or revenue-based size standard corresponding to its primary industry. Go to www.sba.gov/size for the industry size standards.

Additionally, a business can qualify for the Paycheck Protection Program as a small business concern if it met both tests in SBA's "alternative size standard" as of March 27, 2020: (1) maximum tangible net worth of the business is not more than $15 million; and (2) the average net income after Federal income taxes (excluding any carry-over losses) of the business for the two full fiscal years before the date of the application is not more than $5 million.

A business that qualifies as a small business concern under section 3 of the Small Business Act, 15 U.S.C. 632, may truthfully attest to its eligibility for PPP loans on the Borrower Application Form, unless otherwise ineligible.

Does my business have to qualify as a small business concern (as defined in section 3 of the Small Business Act, 15 U.S.C. 632) in order to participate in the PPP?

No. In addition to small business concerns, a business is eligible for a PPP loan if the business has 500 or fewer employees whose principal place of residence is in the United States, or the business meets the SBA employee-based size standards for the industry in which it operates (if applicable). Similarly, PPP loans are also available for qualifying tax-exempt nonprofit organizations described in section 501(c)(3) of the Internal Revenue Code (IRC), tax-exempt veterans organization described in section 501(c)(19) of the IRC, and Tribal business concerns described in section 31(b)(2)(C) of the Small Business Act that have 500 or fewer employees whose principal place of residence is in the United States, or meet the SBA employee-based size standards for the industry in which they operate.

The CARES Act excludes from the definition of payroll costs any employee compensation in excess of an annual salary of $100,000. Does that exclusion apply to all employee benefits of monetary value?

No. The exclusion of compensation in excess of $100,000 annually applies only to cash compensation, not to non-cash benefits, including:

  • employer contributions to defined-benefit or defined-contribution retirement plans
  • payment for the provision of employee benefits consisting of group health care coverage, including insurance premiums; and
  • payment of state and local taxes assessed on compensation of employees.

Do PPP loans cover paid sick leave?

Yes. PPP loans covers payroll costs, including costs for employee vacation, parental, family, medical, and sick leave. However, the CARES Act excludes qualified sick and family leave wages for which a credit is allowed under sections 7001 and 7003 of the Families First Coronavirus Response Act (Public Law 116-127).

My small business is a seasonal business whose activity increases from April to June. Considering activity from that period would be a more accurate reflection of my business's operations. However, my small business was not fully ramped up on February 15, 2020. Am I still eligible?

In evaluating a borrower's eligibility, a lender may consider whether a seasonal borrower was in operation on February 15, 2020 or for an 8-week period between February 15, 2019 and June 30, 2019.

May lenders accept signatures from a single individual who is authorized to sign on behalf of the borrower?

Yes. However, the borrower should bear in mind that, as the Borrower Application Form indicates, only an authorized representative of the business seeking a loan may sign on behalf of the business. An individual's signature as an "Authorized Representative of Applicant" is a representation to the lender and to the U.S. government that the signer is authorized to make the certifications, including with respect to the applicant and each owner of 20% or more of the applicant's equity, contained in the Borrower Application Form. Lenders may rely on that representation and accept a single individual's signature on that basis.

What time period should borrowers use to determine their number of employees and payroll costs to calculate their maximum loan amounts?

In general, 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 periods 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 the average number of employees for each of the pay periods that the business has been operational, if it has not been operational for 12 months).

Should payments that an eligible borrower made to an independent contractor or sole proprietor be included in calculations of the eligible borrower's payroll costs?

No. Any amounts that an eligible borrower has paid to an independent contractor or sole proprietor should be excluded from the eligible business's payroll costs. However, an independent contractor or sole proprietor will itself be eligible for a loan under the PPP, if it satisfies the applicable requirements.

How should a borrower account for federal taxes when determining its payroll costs for purposes of the maximum loan amount, allowable uses of a PPP loan, and the amount of a loan that may be forgiven?

Under the Act, payroll costs are calculated 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 Federal Insurance Contributions Act (FICA) and income taxes required to be withheld from employees. As a result, payroll costs are not reduced by taxes imposed on an employee and required to be withheld by the employer, but payroll costs do not include the employer's share of payroll tax. For example, an employee who earned $4,000 per month in gross wages, from which $500 in federal taxes was withheld, would count as $4,000 in payroll costs. The employee would receive $3,500, and $500 would be paid to the federal government. However, the employer-side federal payroll taxes imposed on the $4,000 in wages are excluded from payroll costs under the statute.

Are participating PPP lenders barred from lending to outside bank directors and shareholders?

Participating PPP lenders are not barred by existing SBA restrictions from lending to outside bank directors and shareholders that own less than 30 percent equity in the bank. The rule notes that lenders should comply with all other state and federal regulations concerning loans to associates.

Can employees of a PPP lender obtain a PPP loan from the bank they’re associated with?

Officers and key employees of a PPP lender may not obtain a PPP loan from the lender in which they are associated but may borrow from a different PPP lender.

How should partners in a partnership apply for PPP loans?

Partners in a partnership should apply for PPP loans at the partnership level, not as self-employed individuals. Instead, self-employment income of active partners (up to $100,000 annualized) may be reported as a payroll cost by the partnership.

When will the PPP loan be disbursed?

The lender must make the disbursement of the loan no later than ten calendar days from the date of loan approval.

When the applicant calculates the amount of compensation to be deducted from employees making more than $100,000 per year, does the applicant need to deduct all employee benefits?

No. The applicant is only required to deduct cash compensation. Non-cash benefits like employer contributions to defined benefit or defined contribution retirement plans, payment for the provision of employee health benefits consisting of group health care coverage (including insurance premiums), and payment of state and local taxes assessed on compensation of employees.

When calculating payroll costs, does the applicant include paid sick leave?

Yes. The PPP loan includes costs for employee vacation, parental, family, medical, and sick leave. However, the CARES Act excludes qualified sick and family leave wages for which a credit is allowed under sections 7001 and 7003 of the Families First Coronavirus Response Act

How do applicants show payroll costs when they utilize a third-party payer for payroll costs such as a payroll provider or a Professional Employer Organization (PEO) to process payroll and report payroll taxes?

When the applicant uses a PEO or similar payroll provider to report wage and other data on the EIN of the payroll provider, the applicant would use the payroll documentation provided by the payroll provider that indicates the amount of wages and payroll taxes reported to the IRS by the payroll provider for the borrower’s employees. The applicant should use information from Schedule R (Form 941), Allocation Schedule for Aggregate Form 941 Filers, attached to the PEO’s or other payroll provider’s Form 941, Employer’s Quarterly Federal Tax Return if these forms are available. Otherwise, the applicant should obtain a statement from the payroll provider documenting the amount of wages and payroll taxes. Employees of the applicant will not be considered employees of the applicant’s payroll provider or PEO.

What time frame does the applicant use to determine the average of monthly payroll costs?

To calculate monthly payroll costs, applicants will compute the average using 2019 calendar year payroll. Alternatively, they can aggregate payroll cost data from the previous twelve months. For seasonal businesses, applicants can elect to use their average monthly payroll for the time period between February 15, 2019 and June 30, 2019. For new businesses, applicants can elect to use their average monthly payroll for the time period between January 1, 2020 and February 29, 2020. In all cases the applicant must make deductions for employees with payroll amounts that exceed $100,000 on an annualized basis.

When an applicant needs to determine the number of employees for the employee-based size standard, what method should they use?

Borrowers may use their average employment over the same time periods to determine their number of employees, for the purposes of applying an employee-based size standard. Alternatively, borrowers may elect to use the average number of employees per pay period in the 12 completed calendar months prior to the date of the loan application (or the average number of employees for each of the pay periods that the business has been operational, if it has not been operational for 12 months).

What is considered "payroll cost"?

"Payroll costs" include more than simple base salary. Payroll costs include salary, payment of cash tips, vacation, parental, family medical or sick leave, payments for the provisions of group health care, benefits including insurance premiums, retirement payments, and the payment of state and local tax assessed on the compensation of employees. For an independent contractor or sole proprietor who is applying for a loan, payroll cost includes wages, commissions, income, or net earnings from self-employment or similar compensation.

What is expressly excluded from the definition of payroll cost?

The following forms of compensation are expressly excluded from the definition of payroll cost:

  • any compensation of an employee whose principal place of residence is outside the United States;
  • individual employee compensation in excess of $100,000 annually;
  • amounts paid to independent contractors, as independent contractors can apply for their own PPP loan;
  • Federal employment taxes imposed or withheld between February 15, 2020 and June 30, 2020 including the employer’s share of FICA and income taxes required to be withheld from employees; and
  • certain qualified sick and family leave wages for which a credit is allowed under the Families First Coronavirus Response Act

What can PPP loans be used for?

PPP loans can be used for payroll costs, group healthcare costs, mortgage interest payments, utilities, rent, interest on debt that existed as of February 15, 2020, and to refinance an SBA EIDL loan made between January 31, 2020 and April 3, 2020. Note, however, that 75 percent of the PPP loan must be used for payroll purposes. Only 25 percent may be used for the other permissible purposes.

How does the applicant consider federal payroll taxes when determining payroll costs to compute the maximum loan amount, allowable uses of the loan, and loan forgiveness?

Payroll costs are calculated 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 Federal Insurance Contributions Act (FICA) and income taxes required to be withheld from employees. As a result, payroll costs are not reduced by taxes imposed on an employee and required to be withheld by the employer, but payroll costs do not include the employer’s share of payroll tax. For example, an employee who earned $4,000 per month in gross wages, from which $500 in federal taxes was withheld, would count as $4,000 in payroll costs. The employee would receive $3,500, and $500 would be paid to the federal government. However, the employer-side federal payroll taxes imposed on the $4,000 in wages are excluded from payroll costs under the statute.

How does PPP loan forgiveness operate?

Under the PPP, a borrower will be eligible for loan forgiveness up to the full principal amount and any accrued interest. The forgiveness amount is equal to the amount spent by the borrower during an 8-week period after the origination date of the loan on payroll costs, interest payments (but not principal) on any mortgage incurred prior to February 15, 2020, payment of rent on any lease in force prior to February 15, 2020, and payment on any utility for which service began before February 15, 2020. The amounts forgiven may not exceed the principal amount of the loan. The maximum amount of loan forgiveness for non-payroll expenses is 25% of the loan amount.

Eligible payroll costs include compensation up to $100,000 in prorated wages per employee. Aggregate payroll cost must not exceed payroll costs incurred during the equivalent 8-week period in the previous year, proportionate to the number of employees.

The amount of loan forgiveness may be reduced if there is a reduction in the number of employees or a reduction more than 25 percent in wages paid to employees. To encourage employers to rehire any employees who have already been laid off due to the COVID-19 crisis, borrowers that re-hire workers previously laid off will not be penalized for having a reduced payroll at the beginning of the period. The PPP also allows forgiveness for additional wages paid to tipped workers.

Borrowers will verify through documentation to the lender their payments during the period, and lenders that receive the required documentation will not be subject to an enforcement action or penalties by the Administrator relating to loan forgiveness for eligible uses.

A lender may request that the SBA purchase the expected forgiveness amount of a PPP loan or pool of PPP loans at the end of week seven of the covered period. The lender must submit a report requesting advance purchase with the expected forgiveness amount to the SBA. The report shall include the Paycheck Protection Program Application Form and information about how the forgiveness amount was determined. The SBA will purchase the expected forgiveness amount of the PPP loan(s) within 15 days of the date on which the SBA receives a complete report that demonstrates that the expected forgiveness amount is indeed reasonable.

How should self-employed individuals determine payroll costs?

Self-employed individuals should complete IRS Schedule C for 2019, line 31, to determine self-employment income for 2019, and use that amount both for computing the maximum loan amount and for computing the allowable salary/payroll costs that may be forgiven during the eight-week period following loan disbursement. Self-employed individuals that have employees should also include the gross wages and tips computed using 2019 IRS Form 941.

What documentation will a self-employed individual be required to submit to the lender when requesting loan forgiveness?

  1. Borrower certification to substantiate the request for loan forgiveness
  2. For self-employed individuals with employees, Form 941 and state quarterly wage unemployment insurance tax reporting forms or equivalent payroll processor records that best correspond to the covered period (with evidence of any retirement and health insurance contributions)
  3. Business rent, business mortgage interest payments on real or personal property, or business utility payments during the covered period (if loan proceeds used for these purposes)

For self-employed individuals, what amounts are eligible for forgiveness?

Loan forgiveness cannot exceed the full principal amount of the loan plus accrued interest. Seventy-five percent of the amount forgiven must be attributable to payroll costs. The following items that are spent during the covered period are eligible for forgiveness:

  1. Payroll costs including salary, wages, and tips up to $100,000 annualized pay per employee (for eight weeks, a maximum of $15,385 per individual) as well as covered benefits for employees including health care expenses, retirement contributions, and state taxes imposed on employee payroll paid by the employer (such as unemployment insurance premiums) (note: seventy-five percent of the total loan forgiveness must be attributable to payroll costs)
  2. Owner compensation replacement, calculated based on 2019 net profit, with forgiveness of such amounts limited to eight weeks’ worth (8/52) of 2019 net profit, excluding any qualified sick leave equivalent amount for which a credit is claimed under section 7002 of the Families First Coronavirus Response Act (FFCRA) or qualified family leave equivalent amount for which a credit is claimed under section 7004 of FFCRA
  3. Payments of interest on mortgage obligations on real or personal property incurred before February 15, 2020, to the extent they are deductible on Form 1040 Schedule C (business mortgage payments)
  4. Rent payments on lease agreements in force before February 15, 2020, to the extent they are deductible on Form 1040 Schedule C (business rent payments) 5. Utility payments under service agreements dated before February 15, 2020, to the extent they are deductible on Form 1040 Schedule C (business utility payments)

Can self-employed individuals in a partnership receive a PPP loan?

Yes. However, a partner in a partnership may not submit a separate PPP loan application for his or herself as a self-employed individual. Rather, the partnership would file a PPP loan and use the self-employment income of the general active partners to determine eligible payroll costs.

How does a self-employed individual calculate the maximum borrowing amount if they do not have employees?

If the self-employed individual does not have employees, the maximum loan amount is calculated as follows:

Step 1: Locate the 2019 IRS Form 1040 Schedule C line 31 net profit amount (Note: if this amount is over $100,000 it should be reduced to $100,000; if this amount is zero or negative, the self-employed individual is not eligible for a PPP loan)

Step 2: Calculate the average monthly net profit amount by dividing the amount from Step 1 by 12

Step 3: Multiply the average monthly net profit amount calculated in Step 2 by 2.5

Step 4: Add the outstanding amount of any EIDL made between January 31, 2020 and April 3, 2020 that the applicant seeks to refinance, less the amount of any advance under an EIDL COVID-19 loan

Even if the self-employed individual has not filed a 2019 tax return with the IRS, the applicant must provide the 2019 Form 1040 Schedule C with their PPP loan application to substantiate the PPP loan amount applied for and a 2019 IRS Form 1099-MISC detailing nonemployee compensation received (box 7), invoice, bank statement, or book of record that establishes self-employment. Additionally, the applicant must provide a 2020 invoice, bank statement, or book of record to establish that he or she was in operation on or around February 15, 2020.

How does a self-employed individual calculate the maximum borrowing amount if they do have employees?

If the self-employed individual has employees, the maximum loan amount is calculated as follows:

Step 1: Compute payroll by adding together the following items:

  • The 2019 IRS Form 1040 Schedule C line 31 net profit amount (Note: if this amount is over $100,000 it should be reduced to $100,000; if this amount is zero or negative, the amount should be set at zero)
  • 2019 gross wages and tips paid to employees whose principal place of residence is in the United States computed using 2019 IRS Form 941 Taxable Medicare wages & tips (line 5c- column 1) from each quarter plus any pre-tax employee contributions for health insurance or other fringe benefits excluded from Taxable Medicare wages & tips; subtract any amounts paid to any individual employee in excess of $100,000 annualized and any amounts paid to any employee whose principal place of residence is outside the United States
  • 2019 employer health insurance contributions (health insurance component of Form 1040 Schedule C line 14), retirement contributions (Form 1040 Schedule C line 19), and state and local taxes assessed on employee compensation (primarily under state laws commonly referred to as the State Unemployment Tax Act or SUTA from state quarterly wage reporting forms).

Step 2: Calculate the average monthly amount by dividing the amount from Step 1 by 12

Step 3: Multiply the average monthly amount calculated in Step 2 by 2.5

Step 4: Add the outstanding amount of any EIDL made between January 31, 2020 and April 3, 2020 that the applicant seeks to refinance, less the amount of any advance under an EIDL COVID-19 loan

Even if the self-employed individual has not filed a 2019 tax return with the IRS, the applicant must provide the 2019 Form 1040 Schedule C with their PPP loan application to substantiate the PPP loan amount applied for and a 2019 IRS Form 1099-MISC detailing non-employee compensation received (box 7), invoice, bank statement, or book of record that establishes self-employment. The applicant must also supply the 2019 Form 1040 Schedule C, Form 941 or other tax forms or equivalent payroll processor records and state quarterly wage unemployment insurance tax reporting forms from each quarter in 2019 or equivalent payroll processor records, along with evidence of any retirement and health insurance contributions, if applicable. Additionally, the applicant must provide a 2020 invoice, bank statement, or book of record to establish that he or she was in operation on or around February 15, 2020.

For individuals applying for a PPP loan that have income from self-employment who file a 2019 Form 1040, Schedule C, what can the PPP loan be used for?

For these individuals a PPP loan can be used for the following:

  1. Owner compensation replacement calculated based on 2019 net profit
  2. Employee payroll costs
  3. Mortgage interest payments on any business mortgage obligation on real or personal property, business rent payments, and business utility payments (note: the applicant must have claimed or be entitled to claim a deduction for these expenses on 2019 Form 1040 Schedule C for them to be a permissible use during the eight-week period following the disbursement of the loan)
  4. Interest payments on other debt obligations incurred before February 15, 2020 (these amounts would not be eligible for debt forgiveness)
  5. Refinance an SBA EIDL made between January 31, 2020 and April 3, 2020 (note: if the EIDL was used for payroll costs, the PPP loan must be used to refinance the EIDL; proceeds from any advance up to $10,000 on the EIDL will be deducted from the loan forgiveness amount on the PPP loan)

Can an individual with self-employment income receive a PPP loan?

A self-employed individual with self-employment income can receive a PPP loan if all of the following conditions are met:

  • the self-employed individual was in operation on February 15, 2020
  • the self-employed individual has self-employment income (such as an independent contractor or a sole proprietor)
  • the principal place of residence is in the United States
  • the self-employed individual filed or will file a Form 1040 Schedule C for 2019.

Do businesses owned by large companies with adequate sources of liquidity to support the business's ongoing operations qualify for a PPP loan?

In addition to reviewing applicable affiliation rules to determine eligibility, all borrowers must assess their economic need for a PPP loan under the standard established by the CARES Act and the PPP regulations at the time of the loan application. Although the CARES Act suspends the ordinary requirement that borrowers must be unable to obtain credit elsewhere (as defined in section 3(h) of the Small Business Act), borrowers still must certify in good faith that their PPP loan request is necessary. Specifically, before submitting a PPP application, all borrowers should review carefully the required certification that “current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” Borrowers must make this certification in good faith, taking into account their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business. For example, it is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith, and such a company should be prepared to demonstrate to SBA, upon request, the basis for its certification. Lenders may rely on a borrower’s certification regarding the necessity of the loan request. Any borrower that applied for a PPP loan prior to the issuance of this guidance and repays the loan in full by May 7, 2020 will be deemed by SBA to have made the required certification in good faith.

How do the $10 million cap and affiliation rules work for franchises?

If a franchise brand is listed on the SBA Franchise Directory, each of its franchisees that meets the applicable size standard can apply for a PPP loan. (The franchisor does not apply on behalf of its franchisees.) The $10 million cap on PPP loans is a limit per franchisee entity, and each franchisee is limited to one PPP loan.

Franchise brands that have been denied listing on the Directory because of affiliation between franchisor and franchisee may request listing to receive PPP loans. SBA will not apply affiliation rules to a franchise brand requesting listing on the Directory to participate in the PPP, but SBA will confirm that the brand is otherwise eligible for listing on the Directory.

How do the $10 million cap and affiliation rules work for hotels and restaurants (and any business assigned a North American Industry Classification System (NAICS) code beginning with 72)?

Under the CARES Act, any single business entity that is assigned a NAICS code beginning with 72 (including hotels and restaurants) and that employs not more than 500 employees per physical location is eligible to receive a PPP loan.

In addition, SBA’s affiliation rules (13 CFR 121.103 and 13 CFR 121.301) do not apply to any business entity that is assigned a NAICS code beginning with 72 and that employs not more than a total of 500 employees. As a result, if each hotel or restaurant location owned by a parent business is a separate legal business entity, each hotel or restaurant location that employs not more than 500 employees is permitted to apply for a separate PPP loan provided it uses its unique EIN.

The $10 million maximum loan amount limitation applies to each eligible business entity, because individual business entities cannot apply for more than one loan. The following examples illustrate how these principles apply.

Example 1. Company X directly owns multiple restaurants and has no affiliates.

  • Company X may apply for a PPP loan if it employs 500 or fewer employees per location (including at its headquarters), even if the total number of employees employed across all locations is over 500.

Example 2. Company X wholly owns Company Y and Company Z (as a result, Companies X, Y, and Z are all affiliates of one another). Company Y and Company Z each own a single restaurant with 500 or fewer employees.

  • Company Y and Company Z can each apply for a separate PPP loan, because each has 500 or fewer employees. The affiliation rules do not apply, because Company Y and Company Z each has 500 or fewer employees and is in the food services business (with a NAICS code beginning with 72).

Example 3. Company X wholly owns Company Y and Company Z (as a result, Companies X, Y, and Z are all affiliates of one another). Company Y owns a restaurant with 400 employees. Company Z is a construction company with 400 employees.

  • Company Y is eligible for a PPP loan because it has 500 or fewer employees. The affiliation rules do not apply to Company Y, because it has 500 or fewer employees and is in the food services business (with a NAICS code beginning with 72).
  • The waiver of the affiliation rules does not apply to Company Z, because Company Z is in the construction industry. Under SBA’s affiliation rules, 13 CFR 121.301(f)(1) and (3), Company Y and Company Z are affiliates of one another because they are under the common control of Company X, which wholly owns both companies. This means that the size of Company Z is determined by adding its employees to those of Companies X and Y. Therefore, Company Z is deemed to have more than 500 employees, together with its affiliates. However, Company Z may be eligible to receive a PPP loan as a small business concern if it, together with Companies X and Y, meets SBA’s other applicable size standards.”

Does the cost of a housing stipend or allowance provided to an employee as part of compensation count toward payroll costs?

Yes. Payroll costs includes all cash compensation paid to employees, subject to the $100,000 annual compensation per employee limitation.

Are agricultural producers, farmers, and ranchers eligible for PPP loans?

Yes. Agricultural producers, farmers, and ranchers are eligible for PPP loans if: (i) the business has 500 or fewer employees, or (ii) the business fits within the revenue-based sized standard, which is average annual receipts of $1 million.

Additionally, agricultural producers, farmers, and ranchers can qualify for PPP loans as a small business concern if their business meets SBA’s “alternative size standard.” The “alternative size standard” is currently: (1) maximum net worth of the business is not more than $15 million, and (2) the average net income after Federal income taxes (excluding any carry-over losses) of the business for the two full fiscal years before the date of the application is not more than $5 million.

For all of these criteria, the applicant must include its affiliates in its calculations. Link to Applicable Affiliation Rules for the PPP.

Are agricultural and other forms of cooperatives eligible to receive PPP loans?

As long as other PPP eligibility requirements are met, small agricultural cooperatives and other cooperatives may receive PPP loans.

To determine borrower eligibility under the 500-employee or other applicable threshold established by the CARES Act, must a borrower count all employees or only full-time equivalent employees?

For purposes of loan eligibility, the CARES Act defines the term employee to include “individuals employed on a full-time, part-time, or other basis.” A borrower must therefore calculate the total number of employees, including part-time employees, when determining their employee headcount for purposes of the eligibility threshold. For example, if a borrower has 200 full-time employees and 50 part-time employees each working 10 hours per week, the borrower has a total of 250 employees.

By contrast, for purposes of loan forgiveness, the CARES Act uses the standard of “full-time equivalent employees” to determine the extent to which the loan forgiveness amount will be reduced in the event of workforce reductions.

Section 1102 of the CARES Act provides that PPP loans are available only to applicants that were "in operation on February 15, 2020." Is a business that was in operation on February 15, 2020 but had a change in ownership after February 15, 2020 eligible for a PPP loan?

Yes. As long as the business was in operation on February 15, 2020, if it meets the other eligibility criteria, the business is eligible to apply for a PPP loan regardless of the change in ownership. In addition, where there is a change in ownership effectuated through a purchase of substantially all assets of a business that was in operation on February 15, the business acquiring the assets will be eligible to apply for a PPP loan even if the change in ownership results in the assignment of a new tax ID number and even if the acquiring business was not in operation until after February 15, 2020. If the acquiring business has maintained the operations of the pre-sale business, the acquiring business may rely on the historic payroll costs and headcount of the pre-sale business for the purposes of its PPP application, except where the pre-sale business had applied for and received a PPP loan. The Administrator, in consultation with the Secretary, has determined that the requirement that a business "was in operation on February 15, 2020" should be applied based on the economic realities of the business’s operations.

Will SBA review individual PPP loan files?

 

Yes. The SBA has decided, in consultation with the Department of the Treasury, that it will review all loans in excess of $2 million, in addition to other loans as appropriate, following the lender’s submission of the borrower’s loan forgiveness application. Additional guidance implementing this procedure will be forthcoming. The outcome of SBA’s review of loan files will not affect SBA’s guarantee of any loan for which the lender complied with the lender obligations set forth by the PPP.

Will a borrower’s PPP loan forgiveness amount be reduced if the borrower laid off an employee, offered to rehire the same employee, but the employee declined the offer?

No. The SBA and Treasury intend to issue an interim final rule excluding laid-off employees whom the borrower offered to rehire (for the same salary/wages and same number of hours) from the CARES Act’s loan forgiveness reduction calculation. The interim final rule will specify that, to qualify for this exception, the borrower must have made a good faith, written offer of rehire, and the employee’s rejection of that offer must be documented by the borrower. Employees and employers should be aware that employees who reject offers of re-employment may forfeit eligibility for continued unemployment compensation.

Can a seasonal employer that elects to use a 12-week period between May 1, 2019 and September 15, 2019 to calculate its maximum PPP loan amount under the interim final rule issued by Treasury on April 27, 2020, make all the required certifications on the Borrower Application Form?

Yes. The Borrower Application Form requires applicants to certify that “The Applicant is eligible to receive a loan under the rules in effect at the time this application is submitted that have been issued by the Small Business Administration (SBA) implementing the Paycheck Protection Program.” On April 27, 2020, Treasury issued an interim final rule allowing seasonal borrowers to use an alternative base period for purposes of calculating the loan amount for which they are eligible under the PPP. An applicant that is otherwise in compliance with applicable SBA requirements, and that complies with Treasury’s interim final rule on seasonal workers, will be deemed eligible for a PPP loan under SBA rules. Instead of following the instructions on page 3 of the Borrower Application Form for the time period for calculating average monthly payroll for seasonal businesses, an applicant may elect to use the time period in Treasury’s interim final rule on seasonal workers.

Do nonprofit hospitals exempt from taxation under section 115 of the Internal Revenue Code qualify as "nonprofit organizations" under section 1102 of the CARES Act?

Section 1102 of the CARES Act defines the term "nonprofit organization" as "an organization that is described in section 501(c)(3) of the Internal Revenue Code of 1986 and that is exempt from taxation under section 501(a) of such Code." The Administrator, in consultation with the Secretary of the Treasury, understands that nonprofit hospitals exempt from taxation under section 115 of the Internal Revenue Code are unique in that many such hospitals may meet the description set forth in section 501(c)(3) of the Internal Revenue Code to qualify for tax exemption under section 501(a), but have not sought to be recognized by the IRS as such because they are otherwise fully tax-exempt under a different provision of the Internal Revenue Code.

Accordingly, the Administrator will treat a nonprofit hospital exempt from taxation under section 115 of the Internal Revenue Code as meeting the definition of "nonprofit organization" under section 1102 of the CARES Act if the hospital reasonably determines, in a written record maintained by the hospital, that it is an organization described in section 501(c)(3) of the Internal Revenue Code and is therefore within a category of organization that is exempt from taxation under section 501(a).16 The hospital's certification of eligibility on the Borrower Application Form cannot be made without this determination. This approach helps accomplish the statutory purpose of ensuring that a broad range of borrowers, including entities that are helping to lead the medical response to the ongoing pandemic, can benefit from the loans provided under the PPP.

Borrowers review carefully the required certification on the Borrower Application Form that "[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant." SBA guidance and regulations provide that any borrower who applied for a PPP loan prior to April 24, 2020 and repays the loan in full by May 7, 2020 will be deemed by SBA to have made the required certification in good faith. Is it possible for a borrower to obtain an extension of the May 7, 2020 repayment date?

SBA is extending the repayment date for this safe harbor to May 14, 2020. Borrowers do not need to apply for this extension. This extension will be promptly implemented through a revision to the SBA's interim final rule providing the safe harbor. SBA intends to provide additional guidance on how it will review the certification prior to May 14, 2020.

Is an employer that repays its PPP loan by the safe harbor deadline (May 14, 2020) eligible for the Employee Retention Credit?

Yes. An employer that applied for a PPP loan, received payment, and repays the loan by the safe harbor deadline (May 14, 2020) will be treated as though the employer had not received a covered loan under the PPP for purposes of the Employee Retention Credit. Therefore, the employer will be eligible for the credit if the employer is otherwise an eligible employer for purposes of the credit.

How will SBA review borrowers' required good-faith certification concerning the necessity of their loan request?

When submitting a PPP application, all borrowers must certify in good faith that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” SBA, in consultation with the Department of the Treasury, has determined that the following safe harbor will apply to SBA’s review of PPP loans with respect to this issue: Any borrower that, together with its affiliates,20 received PPP loans with an original principal amount of less than $2 million will be deemed to have made the required certification concerning the necessity of the loan request in good faith.

SBA has determined that this safe harbor is appropriate because borrowers with loans below this threshold are generally less likely to have had access to adequate sources of liquidity in the current economic environment than borrowers that obtained larger loans. This safe harbor will also promote economic certainty as PPP borrowers with more limited resources endeavor to retain and rehire employees. In addition, given the large volume of PPP loans, this approach will enable SBA to conserve its finite audit resources and focus its reviews on larger loans, where the compliance effort may yield higher returns.

Importantly, borrowers with loans greater than $2 million that do not satisfy this safe harbor may still have an adequate basis for making the required good-faith certification, based on their individual circumstances in light of the language of the certification and SBA guidance. SBA has previously stated that all PPP loans in excess of $2 million, and other PPP loans as appropriate, will be subject to review by SBA for compliance with program requirements set forth in the PPP Interim Final Rules and in the Borrower Application Form. If SBA determines in the course of its review that a borrower lacked an adequate basis for the required certification concerning the necessity of the loan request, SBA will seek repayment of the outstanding PPP loan balance and will inform the lender that the borrower is not eligible for loan forgiveness. If the borrower repays the loan after receiving notification from SBA, SBA will not pursue administrative enforcement or referrals to other agencies based on its determination with respect to the certification concerning necessity of the loan request. SBA’s determination concerning the certification regarding the necessity of the loan request will not affect SBA’s loan guarantee.