Practice Areas

FAQs on Paycheck Protection Program loans: The SBA’s interpretation of the CARES Act

April 8, 2020

By Laura Beckering and Phil Stanton

The U.S. Department of the Treasury released a set of frequently asked questions late on April 6, 2020, to clarify several issues with Paycheck Protection Program loans. These FAQs present the SBA’s interpretation of several provisions of the program, in some cases contradicting interpretations from banks, lawyers and other advisors. Below is a summary of some of the most important FAQs, along with guidance as to what applicants should do if they had already applied before this guidance was issued.

A minority shareholder who gives up rights to prevent action by shareholders or the board of directors of a business will no longer be deemed an affiliate of that business.

  • The affiliation rule based on ownership states that a minority shareholder is deemed to control the business and is an affiliate of the business if the shareholder has the right to prevent a quorum or otherwise block action by the shareholders or board of directors.
  • Treasury has stated that if a minority shareholder irrevocably gives up any such rights, that minority shareholder will no longer be an affiliate of the business (assuming no other relationship triggers any applicable affiliation rules).  

The “payroll cost” exclusion of employee compensation in excess of $100,000 annually applies only to cash compensation and not to non-cash benefits. Thus, an employee’s total contribution to an applicant’s payroll cost may exceed $100,000 with the inclusion of non-cash benefits.

  • The definition of payroll costs in the CARES Act excludes employee compensation in excess of an annual $100,000 salary. This exclusion, however, applies only to cash compensation.
  • The exclusion does not apply to non-cash benefits, including:
    • employer contributions to defined-benefit or defined-contribution retirement plans;
    • payments for group health care coverage, including insurance premiums; and
    • taxes assessed on employee compensation.  

“Payroll costs” do not include an employer’s share of federal payroll tax imposed on employee wages. On the other hand, payroll costs are not reduced by withholding to satisfy the employee’s portion of federal payroll tax or income tax withholding.       

  • Payroll costs under the CARES Act exclude “taxes imposed or withheld under chapters 21, 22, or 24 of the Internal Revenue Code of 1986” between February 15, 2020, and June 30, 2020.
  • Payroll costs are not reduced by taxes imposed on an employee and required to be withheld by the employer; payroll costs, however, do not include the employer’s share of federal payroll tax that is imposed on employee wages. Example: In calculating payroll cost for purposes of determining the maximum borrowing amount, Employee A earns a salary of $2,000 per payroll period and has $200 withheld for federal income tax, $120 withheld for state income tax and $120 withheld for the employee’s share of FICA. The company separately pays its $120 share of FICA. The total “payroll cost” based on the above is $2,000 per pay period for Employee A.

Companies meeting the SBA’s definition of “small business concern” are not required to have 500 or fewer employees to participate in the PPP.

  • Companies that meet the SBA’s pre-CARES Act definition of “small business concern” do not have to also satisfy the “less than 500 employees” requirement. This definition is provided in SBA regulations under section 3 of the Small Business Act, 15 U.S.C. 632. The definition depends on separate, pre-existing SBA size standards for all industries, which may be based either on gross receipts of the business or employee headcount. Businesses may use the SBA’s website to see if they meet these standards, which are based on NAICS codes:
  • Additionally, a business may qualify for the PPP as a small business concern under the SBA’s alternative standard if: (1) its maximum tangible net worth is not more than $15 million; and (2) its average net income after federal income taxes (excluding carry-over losses) for the two full fiscal years before the date of the application is not more than $5 million.  

A business may use the “less than 500 employees” standard created in the CARES Act to be eligible for a PPP loan even if the business does not qualify as a “small business concern” as defined in section 3 of the Small Business Act, 15 U.S.C. 632.

  • A business is eligible for a PPP loan if it has 500 or fewer employees who reside in the U.S., or if the business meets the SBA employee-based size standards for the applicable industry in which it operates.
  • PPP loans are also available for qualifying 501(c)(3) nonprofit organizations, 501(c)(19) veterans’ organizations, and certain tribal business concerns described in section 31(b)(2)(C) of the Small Business Act.

Borrowers and lenders who dealt with loan applications based on the version of the PPP Interim Final Rule published on April 2, 2020, do not need to take any action based on the updated guidance from April 6, 2020.

  • Borrowers and lenders may rely on the guidance available at the time of the relevant application.
  • However, if a borrower’s submitted loan application has not yet been processed, the borrower may revise the application based on clarification in the April 6, 2020, FAQs.

Please visit Greensfelder’s COVID-19 Resources webpage for updates, and please do not hesitate to call your primary Greensfelder contact with any questions.

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