- Calendar Year 2019 Payroll as Basis for Loan Amount (General Rule). If the borrower was in business for all of 2019, it may use the payroll costs for calendar year 2019 or the last 12 months prior to application (e.g., 4/1/19 – 3/31/20). April 6 guidance issued by the SBA provided:
In general, borrowers can calculate their aggregate payroll costs using data either from the previous 12 months or from calendar year 2019. For seasonal businesses, the applicant may use average monthly payroll for the period between February 15, 2019, or March 1, 2019, and June 30, 2019. An applicant that was not in business from February 15, 2019 to June 30, 2019 may use the average monthly payroll costs for the period January 1, 2020 through February 29, 2020.
Borrowers may use their average employment over the same time periods to determine their number of employees, for the purposes of applying an employee-based size standard. 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).
- Calculation of Eligible Payroll Costs. The CARES Act excludes from payroll costs compensation in excess of $100,000 per year, per employee. Many advisors and commentators have interpreted the $100,000 cap to apply strictly to salary and bonuses, but not other related compensation such as health insurance benefits. April 6 guidance issued by the SBA answers this question as follows:
The exclusion of compensation in excess of $100,000 annually applies only to cash compensation, not to non-cash benefits, including:
- employer contributions to defined-benefit or defined-contribution retirement plans;
- payment for the provision of employee benefits consisting of group health care coverage, including insurance premiums; and
- payment of state and local taxes assessed on compensation of employees.
- Guidance Provided Re Treatment of Compensation Paid to Independent Contractors. There has been a question concerning whether a borrower can include in payroll costs compensation paid to individuals who provide services to the borrower but are treated as 1099 independent contractors or as sole proprietors (as opposed to employees). April 6 guidance issued by the SBA answers this question as follows:
Any amounts that an eligible borrower has paid to an independent contractor or sole proprietor should be excluded from the eligible business’s payroll costs. However, an independent contractor or sole proprietor will itself be eligible for a loan under the PPP, if it satisfies the applicable requirements.
It is interesting to note that there was no reference in this answer to self-employed individuals (e.g., partners) that would arguably not fall in the category of a sole proprietor or independent contractor.
- Additional Basis for Qualification as a Small Business Concern. Thus far, there has been no specific guidance whether any “alternative size standard” for a small business concern will be applied to PPP eligibility. In addition to the bases for eligibility outlined in our prior guidance, the April 6 guidance issued by the SBA provides as follows:
Additionally, a business can qualify for the Paycheck Protection Program as a small business concern if it met both tests in SBA’s “alternative size standard” as of March 27, 2020: (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.
The guidance specifically specifies that the affiliation rules will still apply to this “alternative size standard” test. However, note that the 500 employee threshold does not appear to apply to the above described financial tests, and thus a business (and its affiliates, if applicable) which meets such financial tests will qualify regardless of whether it has more than 500 employees.
- Amending Applications. Under the April 6 guidance issued by the SBA, a borrower may amend its previously filed PPP loan application to account for the updated guidance in the April 6 guidance particularly. The April 6 guidance specifically provides as follows:
Borrowers and lenders may rely on the laws, rules, and guidance available at the time of the relevant application. However, borrowers whose previously submitted loan applications have not yet been processed may revise their applications based on clarifications reflected in these FAQ’s.