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FAQs & Clarification to the Paycheck Protection Program CARES Act

The Department of the Treasury (Treasury) and the Small Business Administration (SBA) issued frequently asked questions (FAQs) on the Paycheck Protection Program (PPP) established under the Coronavirus Aid, Relief and Economic Security Act (CARES Act). The PPP provides small employers with an incentive to keep workers on their payroll during the COVID-19 crisis. Under the PPP, which is an extension of the SBA Section 7(a) loan program, qualifying small businesses are eligible to borrow up to $10 million in order to maintain their workforce from February 15, 2020, until June 30, 2020. All or a portion of the loan may be forgiven if the borrower follows the SBA guidelines. The FAQs provide much-needed guidance to businesses and individuals by clarifying several of the PPP requirements that lacked specificity due to the understandable rush to enact the CARES Act and the rapid issuance of the SBA’s interim final regulations on April 3, 2020. The following highlights several of the issues discussed in the FAQs.

Small Business Eligibility

The SBA clarified that program eligibility is not limited to small businesses with fewer than 500 employees. Instead, small businesses with more than 500 employees are eligible to participate, 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, which imposes size standards for different industries. Additionally, a business can qualify for the PPP as a small business concern if it meets both of the following tests in the SBA’s “alternative size standard” as of March 27, 2020: (1) the 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.

SBA Affiliation Rules

The SBA size regulations are used to determine whether an organization is eligible for participation in the  SBA’s programs. The rules require that an organization’s affiliates be included in determining whether the business has 500 or fewer employees. Affiliation exists when one business controls or has the power to control another or when a third party (or parties) controls or has the power to control both businesses. Under the rules, control may arise through ownership, management, or other relationships or interactions between the parties. The FAQs provide that the affiliation rules do apply under the PPP but that lenders are not required to make an independent determination regarding applicability of the SBA affiliation rules under 13 C.F.R. 121.301(f). Instead, it is the responsibility of the borrower to determine which entities (if any) are its affiliates and determine the employee headcount of the borrower and its affiliates. Lenders are permitted to rely on borrowers’ certifications.

Payroll Substantiation Requirements

The maximum loan amount under the PPP is equal to the employer’s average monthly payroll cost during the one-year period prior to the date the loan was made and then multiplied by 2.5. The FAQ provides that the lender is not required to replicate all of the borrower’s calculations but may rely upon the  borrower’s attestation of the accuracy of the calculations. The guidance further indicates that lenders are expected to perform a good-faith review, in a reasonable time, of the borrower’s calculations and supporting documents concerning average monthly payroll cost. Further, if the lender identifies errors in the borrower’s calculation or material lack of substantiation in the borrower’s supporting documentation, the lender is encouraged to work with the borrower to remedy the issue. The documentation that several financial institutions are requiring includes business and sole proprietor tax returns, quarterly payroll reports, reports prepared by third-party payroll processors, and any other information that supports the applicant’s requested loan amount.

Definition of Payroll Costs

Under the PPP, eligible employers may borrow an amount calculated from the employer’s average monthly payroll cost. The CARES Act limits the amount of compensation that may be included in the calculation to $100,000 per employee. The FAQs clarify that the exclusion of...