The SBA has now issued interim guidance on the Paycheck Protection Program (“PPP”), which are included in sections 1102 and 1106 in the Coronavirus Aid Relief and Economic Security (“CARES”) Act. As a reminder, the application for the PPP for small businesses with 500 or less employees, is now available and can be submitted starting today, although the ability to begin the application process is subject to the rules of each lender. I have been told by a number of you that their banks are not yet taking applications. I did just read an article in Forbes that Bank of America was taking the application now, if that helps anyone. Although the loans are available through June 30, 2020, loan funds are processed on a first come, first serve basis and given the interest in this program it is recommended that businesses begin applying as soon as possible to ensure your ability to participate in this program. This is just interim guidance and is still subject to change.

A. Eligible Borrowers

This rule clarifies that businesses that are eligible for this program are: (a) businesses with 500 or fewer employees, whose principle place of residence is in the United States, (b) businesses that are either: (1) a small business concern as defined in section 3 of the Small Business Act (15 USC 632), and subject to SBA’s affiliation rules under 13 CFR 121.301(f) unless specifically waived in the Act; (2) a tax-exempt nonprofit organization described in section 501(c)(3) of the Internal Revenue Code (IRC), (3) a tax-exempt veterans organization described in section 501(c)(19) of the IRC, or (4) a Tribal business concern described in section 31(b)(2)(C) of the Small Business Act, or any other business; and (c) businesses that were in operation on February 15, 2020 and either had employees for whom the business paid salaries and payroll taxes, or paid independent contractors, as reported on Form 1099-MISC.

Independent contractors and sole proprietors are also eligible to apply for the PPP. Independent contractors and sole proprietors must provide records to demonstrate eligibility, such as: payroll processor records, payroll tax filings, Form 1099- MISC, income and expenses from a sole proprietorship, or, if no such records are available, the borrower must provide other supporting documentation, such as bank records, sufficient to demonstrate the qualifying payroll amount.

B. Criteria that Render a Borrower Ineligible

Businesses, independent contractors or sole proprietors who would otherwise be eligible for the loan will be rendered ineligible if:

(a) The business is engaged in any activity that is illegal under federal, state or local law;
(b) Household employers, which are defined as individuals who employ household employees such as nannies or housekeepers;
(c) An owner of 20% or more of the equity of the applicant is incarcerated, on probation, on parole, presently subject to an indictment, criminal. Information, arraignment, or other means by which formal charges are brought in any jurisdiction, or has been convicted of a felony within the last five years; or
(d) The applicant or any business owned or controlled by the applicant or any of the applicant’s owners, has ever obtained a direct or guaranteed loan from SBA or any other Federal agency that is currently delinquent or has defaulted within the last seven years and caused a loss to the government.

C. How to Calculate the Maximum Principle Amount

The regulations put forth a five-step process to assist applicant to calculate the maximum principle loan amount they may be entitled to receive:

Step 1: Aggregate payroll costs from the last twelve months for employees whose principal place of residence is the United States.

Step 2: Subtract any compensation paid to an employee in excess of an annual salary of $100,000 and/or any amounts paid to an independent contractor or sole proprietor in excess of $100,000 per year.

Step 3: Calculate average monthly payroll costs (divide the amount from Step 2 by 12).

Step 4: Multiply the average monthly payroll costs from Step 3 by 2.5.

Step 5: Add the outstanding amount of an Economic Injury Disaster Loan (EIDL) made between January 31, 2020 and April 3, 2020, less the amount of any “advance” under an EIDL COVID-19 loan (because it does not have to be repaid).

D. Payroll Costs

i. What Are Included in Payroll Costs

Payroll costs are defined as:

(a) compensation to employees (whose principal place of residence is the United States) in the form of salary, wages, commissions, or similar compensation; cash tips or the equivalent (based on employer records of past tips or, in the absence of such records, a reasonable, good-faith employer estimate of such tips);
(b) payment for vacation, parental, family, medical, or sick leave;
(c) allowance for separation or dismissal;
(d) payment for the provision of employee benefits consisting of group health care coverage, including insurance premiums, and retirement;
(e) payment of state and local taxes assessed on compensation of employees; and
(f) for an independent contractor or sole proprietor, wage, commissions, income, or net earnings from self-employment or similar compensation.

ii. Excluded from Payroll Costs

The following items are expressly excluded from payroll costs:

(i) Any compensation of an employee whose principal place of residence is outside of the United States;
(ii) The compensation of an individual employee in excess of an annual salary of $100,000, prorated as necessary;
(iii) Federal employment taxes imposed or withheld between February 15, 2020 and June 30, 2020, including the employee’s and employer’s share of FICA (Federal Insurance Contributions Act) and Railroad Retirement Act taxes, and income taxes required to be withheld from employees; and
(iv) 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).

iii. Independent Contractors

Compensation paid to independent contractors may not be included in payroll costs. Independent contractors may apply for a PPP loan.

E. Loan Terms

The interest rate on all loans with be 100 basis points or 1% (this is an increase from the 0.5% originally put forth in the Treasury Department’s guidance). The maturity date is two years. Each borrower may only apply for one PPP loan.

No payments will be required for 6 months following disbursement of the loan. However, interest will accrue during the 6-month deferment.

F. Loan Forgiveness

The amount of loan forgiveness can be up to the full principle amount of the loan and any accrued interest. If borrowers use the loan proceeds for the forgivable purposes discussed below and employment levels and employee compensation is maintained the amount of loan forgiveness can be up to 100%.

To be eligible for forgiveness, the loan proceeds must be used on: (a) payroll costs; (b) payments of mortgage interest for obligations incurred prior to February 15, 2020; (c) payment of rent incurred prior to February 15, 2020; and (d) payment of utility obligations incurred prior to February 15, 2020. No more than 25% of the loan forgiveness amount may be used on non-payroll costs (i.e., mortgage interest, rent and utilities). In fact, at least 75% of the PPP loan proceeds must be used on payroll costs.

G. EIDL

If a business applied for an Emergency Injury Disaster Loan (“EIDL”) loan with the SBA between January 31, 2020 and April 3, 2020, they may refinance the EIDL loan into the PPP loan. If the EIDL loan was used for payroll costs, it must be refinanced into the PPP loan.

However, if the EIDL loan was used for a purpose other than payroll costs it does not affect eligibility for a PPP loan. Proceeds on any advance up to $10,000 on the EIDL loan will be deducted from the loan forgiveness amount on the PPP loan.

H. Permissible Use of PPP Funds

PPP funds may be used for the following purposes: (i) payroll costs (see above); ii. costs related to the continuation of group health care benefits during periods of paid sick, medical, or family leave, and insurance premiums; iii. mortgage interest payments (but not mortgage prepayments or principal payments); iv. rent payments; v. utility payments; vi. interest payments on any other debt obligations that were incurred before February 15, 2020; and (vi) to refinance an existing EIDL loan.

At least 75% of the PPP loan proceeds must be used for payroll costs, including the amount of the EIDL loan that was refinanced into the PPP loan.

I. Misuse of the Loan Proceeds

If borrowers use PPP funds for unauthorized purposes, SBA will direct the borrower to repay those amounts. If a borrower knowingly uses the funds for unauthorized purposes, the borrower will be subject to additional liability such as charges for fraud. If one of the borrower’s shareholders, members, or partners uses PPP funds for unauthorized purposes, SBA will have recourse against the shareholder, member, or partner for the unauthorized use.

The attorneys in Forchelli Deegan Terrana LLP’s Employment & Labor practice group will continue to keep you updated on any changes to your requirements as an employer as updates become available. Should you have any questions, or wish us to assist you with the loan application, do not hesitate to contact me at the below contact information.

If this loan program is not appropriate for you, please look into the Economic Injury Disaster Loan (EIDL). It may better align with your business plan. Either way, we are here to help.

Battling the novel coronavirus is difficult for everyone. We are here if you need us. With best wishes for your, and your family’s health and safety.

Gregory S. Lisi
Partner-in-Charge, Employment & Labor practice group
GLisi@Forchellilaw.com | 516.248.1700