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“Paycheck Protection Program” Loans: SBA Guidance Continues to Trickle Out


Small businesses and their lenders received additional guidance from the U.S. Small Business Administration (“SBA”) on the new Paycheck Protection Program (“PPP”), which currently makes loans available to businesses that employ fewer than 500 people (generally). The guidance came in the form of an updated “Frequently Asked Questions (FAQ)” document, dated April 6, which can be found in its entirety here.

The PPP is part of the federal government’s stimulus program in response to the COVID-19 pandemic. A highly attractive feature of a PPP loan is the potential for loan forgiveness. The program makes borrowers eligible for forgiveness to the extent that the company uses at least 75% of the loan proceeds in the eight weeks after loan origination for payments of payroll costs (with some exclusions), and the remaining balance for payments of mortgage interest, rent payments, and utility payments.

The PPP loan application period officially opened April 3, and many lenders have struggled to absorb the onslaught of applications for SBA-backed loans. Meanwhile, even as borrowers begin submitting applications, both lenders and their customers have sought additional guidance from the SBA on the details of the program--eligibility, conditions, calculations, implementation, and the like.

The SBA provided initial guidance on April 2, just hours before the program launched. Find our prior alert on the initial guidance here. On April 3, the SBA provided additional guidance on whether faith-based organizations would be subject to the SBA’s affiliation rules. Find our prior alert on this topic here. The updated FAQ document provided much-needed guidance on certain other topics but left many questions unanswered.

How are foreign employees counted? In order to qualify for a PPP loan from the SBA, the applicant must be a “small business concern,” which generally means that it must have fewer than 500 employees (other size thresholds may apply for certain applicants). In counting its employees, the SBA ordinarily considers the applicant and all of its affiliates, domestic and foreign. The SBA’s affiliation rules are broad, and if applied, can disqualify many firms with large organizational structures from securing a PPP loan.

So, will the SBA apply its ordinary affiliation rules when considering PPP applications? Earlier SBA guidance indicated that SBA’s affiliation rules under 13 CFR 121.301(f) will apply to PPP loan applicants unless such rules are specifically waived in the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). However, guidance also indicated that a company is “eligible for a PPP loan if you have 500 or fewer employees whose principal place of residence is in the United States.” This suggests that the SBA will not count employees who maintain their principal residence outside the United States when applying its affiliation rules. The SBA repeated this language in the updated FAQ document.

If the most recent guidance is taken at face value, it may lead to some surprising results. For purposes of securing a PPP loan, would a large multinational business qualify as a small business if it employed 200,000 workers in Europe, but just 300 whose principal place of residence is in the United States? Nothing in the CARES Act indicates that this was the intent of Congress though arguably ambiguity remains. We'll continue to monitor for any updated guidance on this point.

Qualification Based on SBA Alternative Size Standard. The FAQ document indicates that a business with more than 500 employees may nonetheless qualify for a PPP loan if, as of March 27, 2020, it can meet both of the SBA's “alternative size standard” tests:

(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

Note that the SBA affiliation rules apply with respect to calculating the above tests.

Affiliation and Lender Underwriting. Lenders had wondered how much diligence is required to verify the affiliation status of applicants. The FAQ document states that it is the responsibility of the borrower to determine which entities (if any) are its affiliates and to determine the employee headcount of the borrower and its affiliates. Lenders are permitted to rely on borrowers’ certifications.

Minority Shareholders. Under the SBA’s affiliation rules, it is possible for a minority shareholder in a business to be considered an affiliate of the business if it possesses certain control rights--in particular, the right to prevent a quorum or otherwise block action by the board of directors or shareholders. However, the most recent guidance indicates that if a minority shareholder irrevocably waives such rights, the minority shareholder would no longer be an affiliate of the business (assuming no other relationship that triggers the affiliation rules).

High-Earner Exclusions. The CARES Act excludes any employee compensation in excess of an annual compensation of $100,000 from the definition of “payroll costs.” The exclusion of compensation in excess of $100,000 annually applies only to cash compensation, and not to non-cash benefits, and does not include employer contributions to retirement plans, healthcare insurance premiums paid by the employer, or state and local taxes paid by the employer.

Calculating Average Payroll. The borrower’s maximum loan amount equals 2.5 times the average monthly “payroll costs.” In general, borrowers can calculate their average monthly payroll costs using data either from the previous 12 months OR from calendar year 2019 (different time periods are used for seasonal businesses).

Calculating Number of Employees. As mentioned above, to be eligible for a PPP loan, borrowers must satisfy an employee-based size standard, and generally must have less than 500 employees. The CARES Act did not initially specify how an applicant should measure number of employees. The FAQ document indicates that borrowers may use their average employment over the same time periods that they used to calculate average monthly “payroll costs” to determine their number of employees. 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).

Are Federal Payroll Taxes “Payroll Costs”? The definition of “payroll costs” may include federal taxes imposed on an employee and required to be withheld by the employer, but payroll costs do not include the employer’s share of federal payroll taxes.

More guidance on the PPP loan program is expected in the coming days. In the meantime, the complete text of the CARES Act is here. Find a form of the new application here. Find additional prior alerts here and here.

For more information, please contact your Quarles & Brady attorney or:

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