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Apr 2020
09
April 09, 2020

Summary of Guidance Related to PPP Loans

On April 3, 2020, Warner provided guidance on the Paycheck Protection Program (PPP) based on the Interim Final Rule released by the Small Business Administration (SBA). Since that time, the SBA, in consultation with the Department of Treasury, issued further guidance on the PPP. The interim rules and guidance clarified some, but not all, of the open issues related to the administration of the PPP loan program.

The interim rule provides the following:
 
  • A simple methodology is available to calculate a borrower’s maximum loan amount permitted under the PPP, and provides several examples of such calculations.
  • Payments to independent contractors are not to be included in the calculation of payroll costs because independent contractors have the ability to apply for a PPP loan on their own.
  • Applicants must submit the documentation necessary to establish eligibility, such as payroll processor records, payroll tax filings, Form 1099-MISC, or income and expenses from a sole proprietorship. Borrowers that do not have this documentation must provide alternative documentation, such as bank records, sufficient to demonstrate the qualifying payroll amount.
  • The interest rate for PPP loans is 1%. This is an increase from 0.5%, which the Department of Treasury announced earlier in the week.
  • PPP loans will have a two-year term. The CARES Act permits up to a maximum term of 10 years.
  • Payments may be deferred for six months from the loan disbursement date. Interest will continue to accrue during this deferment period.
  • At least 75% of PPP loan proceeds must be used for payroll costs. Note that this is a new, stand-alone requirement that applies regardless of whether any of the loan is forgiven.
  • Not more than 25% of the loan forgiveness amount may be attributable to non-payroll costs.
  • Applicants must submit SBA Form 2483 (Paycheck Protection Program Application Form) and payroll documentation, as described above. The lender must submit SBA Form 2484 (Paycheck Protection Program Lender’s Application for 7(a) Loan Guaranty) electronically in accordance with program requirements and maintain the forms and supporting documentation in its files.
  • An applicant that received an SBA Economic Injury Disaster Loan (EIDL) from January 31, 2020 through April 3, 2020, can apply for a PPP loan. If the EIDL loan was not used for payroll costs, it does not affect eligibility for a PPP loan. If the EIDL loan was used for payroll costs, the PPP loan must be used to refinance a borrower’s EIDL loan. Proceeds from any advance up to $10,000 on the EIDL loan will be deducted from the loan forgiveness amount on the PPP loan. However, since at least 75% of the PPP loan proceeds shall be used for payroll costs, the amount of any EIDL loan that is refinanced will be included in this calculation.
  • If PPP funds are used 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 a 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.
  • Applicants will have to make several certifications at the time of their application, including the certifications listed in the CARES Act and the following:
     
    • I understand that if the funds are knowingly used for unauthorized purposes, the federal government may hold me legally liable such as for charges of fraud.

    • Documentation verifying the number of full-time equivalent employees on payroll as well as the dollar amounts of payroll costs, covered mortgage interest payments, covered rent payments and covered utilities for the eight-week period following this loan will be provided to the lender.

    • Loan forgiveness will be provided for the sum of documented payroll costs, covered mortgage interest payments, covered rent payments and covered utilities. As explained above, not more than 25% of the forgiven amount may be for non-payroll costs.

    • I further certify that the information provided in this application and the information provided in all supporting documents and forms is true and accurate in all material respects. I understand that knowingly making a false statement to obtain a guaranteed loan from SBA is punishable under the law, including under 18 USC 1001 and 3571 by imprisonment of not more than five years and/or a fine of up to $250,000; under 15 USC 645 by imprisonment of not more than two years and/or a fine of not more than $5,000; and, if submitted to a federally insured institution, under 18 USC 1014 by imprisonment of not more than 30 years and/or a fine of not more than $1,000,000.

    • I acknowledge that the lender will confirm the eligible loan amount using tax documents I have submitted. I affirm that these tax documents are identical to those submitted to the Internal Revenue Service. I also understand, acknowledge and agree that the lender can share the tax information with SBA’s authorized representatives, including authorized representatives of the SBA Office of Inspector General, for the purpose of compliance with SBA Loan Program Requirements and all SBA reviews.
     
  • The guidance states that lenders will have to comply with the following:
     
    • Confirm receipt of borrower certifications contained in the Paycheck Protection Program Application form issued by the Administration;

    • Confirm receipt of information demonstrating that a borrower had employees for whom the borrower paid salaries and payroll taxes on or around February 15, 2020;

    • Confirm the dollar amount of average monthly payroll costs for the preceding calendar year by reviewing the payroll documentation submitted with the borrower’s application; and

    • Follow applicable Bank Secrecy Act requirements.

  • With respect to the borrower’s application to have the loan forgiven, the lender may rely upon veracity of the documentation the borrower submits supporting its request if the borrower attests that it has accurately verified the payments for eligible costs.

  • The SBA will hold harmless any lender that relies on such borrower documents and attestation from a borrower.

The supplemental interim final rule and accompanying guidance provide the following:
 
  • Applicants are eligible for PPP loans if they qualify as a small business concern or they are a business that, together with its affiliates: (1) has 500 or fewer employees whose principal place of residence is in the United States; or (2) meets the applicable SBA employee-based size standards for the applicant’s industry.

  • In determining whether an applicant is affiliated with another entity, four SBA affiliation tests apply:
     
    • Affiliation based on ownership;

    • Affiliation based on stock options, convertible securities and agreements to merge;

    • Affiliation based on management; and

    • Affiliation based on identity of interest.
  • Faith-based organizations are exempt from the affiliation rules if: (1) they meet the requirements of a 501(c)(3) organization; (2) their relationship with other organizations are based on a religious teaching or belief or otherwise constitutes a part of the exercise of religion; and (3) the applicant organization has no more than 500 employees. A faith-based organization claiming the exemption must submit an addendum with its loan application stating that it made a good faith determination that it qualifies for the religious exemption.
  • Faith-based organizations are permitted to use PPP loans in the same manner as any other business. Faith-based organizations may use loans to pay the salaries of ministers and other staff engaged in the religious mission of the organization.
  • Receipt of loans through any SBA program constitutes Federal financial assistance and thus obligates the loan recipient to follow Federal nondiscrimination laws. These obligations are temporary and will no longer apply once the loan is paid or forgiven.

The SBA and Department of Treasury have also released FAQs concerning the Paycheck Protection Program. The FAQs are being updated on a regular basis and a link to the FAQs is provided below.

As of April 8, 2020, the FAQs include the following:
 
  • Lenders are expected to perform a good faith review of the payroll calculations that a borrower provides. However, a lender is not required to replicate the borrower’s calculations.
  • Applicants are solely responsible for determining which entities are its affiliates.
  • The exclusion of compensation in excess of an annual salary of $100,000 as provided in the definition of “payroll costs” only applies to cash compensation, not to non-cash benefits.
  • Applicants may calculate their aggregate payroll costs using data either from the previous 12 months or from the 2019 calendar year.
  • In determining its number of employees, applicants may use their average employment from the previous 12 months or from the 2019 calendar year. Alternatively, applicants may use the average number of employees per pay period in the 12 completed calendar months prior to the date of the loan.
  • In determining payroll costs for purposes of calculating PPP loan amounts, payroll costs include taxes imposed on an employee that are required to be withheld by the employer, but do not include the employer’s share of payroll tax.
  • The amount of loan forgiveness is based on the borrower’s payroll costs over the eight-week period beginning on the date the lender makes the first disbursement of the PPP loan to the borrower.
  • Lenders must make the first disbursement of a loan no later than 10 calendar days from the date of loan approval.
  • Lenders may use their own promissory note or an SBA form of promissory note.

The complete list of updated FAQs can be found here.

The affiliation rules are complicated and specific to the SBA. If you have concerns about the affiliation rules, please contact Ford Turrell, Tim Hillegonds, Rob Davies, Matt Crowe or your Warner attorney. 

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