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The Paycheck Protection Program is allowing eligible organizations to apply for loans to help keep their workforces employed. As many would-be borrowers start working through the details of the PPP loan application, many are finding they have questions.

Employer strategies

Answers to Your Paycheck Protection Program FAQs

  • Rick Krueger
  • 4/14/2020

Update:
This article was originally published on April 14, 2020. Questions 3 and 10 have been updated to reflect additional guidance from Treasury. 

Key insights

  • The Paycheck Protection Program is designed to bring relief to eligible organizations affected by the coronavirus pandemic.
  • Guidance continues to be released.
  • Read through these frequently asked questions for more information.

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As organizations start digging into the details of the Paycheck Protection Program (PPP), many are finding they have more questions than answers. The Department of the Treasury and the Small Business Administration (SBA) recently released additional guidance. We’ve sifted through their updates to help bring clarity around the details.

1. What size business qualifies for the PPP loan?

The following entities may all be eligible for the PPP loan: businesses, sole proprietors, independent contractors, self-employed individuals, 501(c)(3) nonprofits, 501(c)(19) veterans organizations, and 31(b)(2)(C) Tribal business concerns. General eligibility is based on not exceeding any of the following:

  • 500 employees, or
  • The employee thresholds set by industry in the SBA size standards, or
  • The 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 of the business, after federal income taxes (excluding any carry-over losses), for two full fiscal years before the date of the application is not more than $5 million.

2. Are businesses involved in agricultural production eligible?

Yes. Unlike many other SBA loans, the PPP loan is available to farmers.

3. How does an international business count employees for PPP loan eligibility?

Borrowers must consider both domestic and foreign affiliates. However, there is uncertainty about which employees to count within those entities for purposes of the PPP’s 500 or fewer employee size standard. The two possibilities are:

  • Count all employees
  • Only count employees whose principal place of residence is in the United States

At this point, the available guidance seems contradictory and we are uncertain which of these possibilities will apply.

The Interim Final Rule issued on April 2 and the SBA's FAQ #3 both state that a borrower is eligible for a PPP loan “if the business has 500 or fewer employees whose principal place of residence is in the United States" (emphasis added) or meets certain other criteria. In addition, the SBA’s FAQ #33 discussed how to determine “whether an individual employee’s principal place of residence is in the United States.” All of these statements seem to imply that, while you must consider both domestic and foreign affiliates, only U.S. employees within the companies in the affiliated group should count toward eligibility.

On May 5, the SBA issued FAQ #44, which states: “For purposes of the PPP’s 500 or fewer employee size standard, an applicant must count all of its employees and the employees of its U.S. and foreign affiliates, absent a waiver of or an exception to the affiliation rules” (emphasis added). Although that language confirms that the SBA’s affiliation rules at 13 C.F.R. 121.301(f) encompass both U.S. and foreign affiliates, it creates ambiguity as to which employees are included in the headcount for purposes of the applicable size standard. Specifically, by omitting any reference to “employees whose principal place of residence is in the U.S.,” FAQ #44 seemingly contradicts language in prior FAQs and interim final rule statements that indicated that the size standard for PPP loan purposes only counts employees whose principal place of residence is in the U.S.

Organizations that relied on previous guidance in FAQs #3 and #33 and interim final rule statements to determine the employee count for PPP loan eligibility purposes should consult with legal counsel to assess the impact, if any, that FAQ #44 has on their eligibility and on the certifications they made in the loan application.

4. How are affiliated companies handled?

Many people incorrectly believed that as long as the total PPP loan amount among the affiliated companies was less than $10 million, they would be eligible for a PPP loan. However, unless you are a franchise or in the hospitality or foodservice (NAICS 72) business, you need to measure eligibility considering the U.S.-based employees of all entities controlled by your controlling owner. If the total number of employees in the affiliate group is more than 500, or is greater than the size limit as allowed based on industry, you won’t be eligible for the PPP loan.

If the affiliate group collectively has fewer than 500 U.S.-based employees, then all entities in the affiliated group are eligible. The eligible recipient is an “entity” eligible to receive a covered loan. If there is no specific provision allowing affiliates to be treated as one (we didn’t find such a provision for this purpose), it appears that each company needs to apply. Each company would need to have its own payroll (with the exception of the employee leasing issues discussed below). The loans for which the entities in the affiliated group can apply are limited to $10 million in the aggregate.

5. How are employees counted for purposes of the employee limit?

SBA Regulation Section 121.106 provides guidance on counting employees. The size standard uses the average number of U.S.-based employees (including the employees of domestic and foreign affiliates) for each pay period for the preceding completed 12 calendar months. Count part-time and temporary employees the same as full-time employees; this is essentially a headcount calculation, not a full-time-equivalent (FTE) calculation. Therefore, count anyone earning a paycheck in a pay period as an employee. If the business is in place for less than a year, use the average number of employees for each pay period.

You’ll use a different employee count for loan forgiveness purposes, as that calculation is based on FTEs.

6. Do you include employees of affiliates when determining the 500-employee limit?

Yes, except for those businesses described with a six-digit NAICS code beginning with 72, “Accommodation and Food Services.” These establishments provide customers with lodging and/or prepare meals, snacks, and beverages for immediate consumption. For these business, determine the employee count by physical location [SBA Section 7(a)(36)(D)(iii)].

7. Are independent contractors counted as employees?

No, independent contractors are not counted as employees. Additionally you should not include amounts paid to independent contractors in the average monthly payroll calculation or for the allowable uses of the PPP loan proceeds. Independent contractors can file for their own PPP loan starting on April 10, 2020.

8. What is the maximum loan amount?

The maximum loan amount is $10 million. The PPP loan size will be determined based on 2.5 times your average monthly payroll costs.

9. How are average monthly payroll costs determined?

The maximum loan amount is based on payroll costs. The CARES Act states that payroll costs are based on the average payroll for either the previous 12 months or from the calendar year 2019. Ignore the salaries, wages, commissions, and tips paid in excess of $100,000 for an employee. Although the statute refers to payments to independent contractors, the business cannot include these payments in their payroll calculation. Instead, the independent contractor would apply these payments when taking a separate loan.

The statute also seems to include self-employment income of a sole proprietor and the aggregate self-employment income of all partners (not in excess of $100,000 per partner). However, the inclusion of these amounts in the calculation for a company is being handled inconsistently. Many banks are requiring that companies exclude these amounts from the average monthly payroll costs. If they are excluded from the company filing, the sole proprietor or self-employed individual can file their own PPP loan application.

Group health care coverage, retirement pay, and state and local taxes assessed on compensation of employees are added to payroll costs. These costs, however, are not subject to the $100,000 maximum per employee.

Determine the monthly average of these costs, then multiply by 2.5.

There has also been confusion about whether to reduce payroll costs for income and payroll taxes. The SBA clarified in a frequently asked questions document dated April 6, 2020, that “payroll costs are calculated on a gross basis, without subtracting federal taxes that are imposed on the employee or withheld from employee wages.”

10. I’m a seasonal employer. How are average monthly payroll costs determined?

Following the issuance of new Treasury guidance on April 27, a seasonal employer may choose from three alternative methods of calculating average monthly payroll costs:

  • Use the average monthly payroll determined over a 12-week period beginning February 15, 2019;
  • Use the average monthly payroll for the period beginning March 1, 2019, and ending June 30, 2019; or
  • Use the average total monthly payments for payroll during any consecutive 12-week period between May 1, 2019, and September 15, 2019.

11. Does pay to H2A employees qualify as payroll costs?

Payroll costs do not include the compensation of an employee whose principal place of residence is outside the U.S. Payments to H2A employees do not qualify for loan borrowing or forgiveness. However, we believe that these employees are not included in the employee count for purpose of total employees.

12. How do the Families First Coronavirus Response Act (FFCRA) credits interact with the PPP?

Qualified sick and family leave wages that qualify for a credit under the FFCRA are not included in payroll costs for purposes of the PPP. This adjustment will likely only apply during the loan forgiveness calculation, since this credit was not in effect during 2019.

13. What expenses may be paid from the PPP loan amount?

The loan may fund payroll costs, including the employer cost of group health insurance and retirement, the interest on mortgage and other debt obligations existing at February 15, 2020, rent obligations existing at February 15, 2020, and covered utility payments under service agreements that were in place on February 15, 2020.

14. What is the forgiveness amount?

The PPP loan forgiveness is based upon the eight-week period beginning with the origination of the loan. The sum of the following enter into the forgiveness computation: payroll costs (described above), including group health care benefits and retirement benefits, mortgage interest payments, rent, and utility payments. The mortgage, rent agreements, and utility agreements must have been in place before February 15, 2020.

After computing that total, there may be reductions for non-payroll costs and for items mentioned in question 15. Non-payroll costs are limited to 25% of the forgiveness amount.

15. How is the reduction in the loan forgiveness determined?

The maximum forgiveness of the loan is reduced based upon employee retention and average pay.

The maximum loan forgiveness amount is multiplied by a fraction that measures employee retention based on the average number of full-time equivalent employees (FTEs). The borrower chooses which fraction to use. The numerator of both fractions is the average number of FTEs employed during the eight-week period. The denominator is either:

  1. The monthly average FTEs for February 15, 2019, through June 30, 2019; or
  2. The monthly average FTEs for January 1, 2020, through February 29, 2020.

In addition, the maximum loan forgiveness amount is further decreased if any employee’s pay has declined by more than 25% during the eight-week period, relative to the most recent completed quarter (this should be the first quarter of 2020). Employees who earned an annualized pay of more than $100,000 during any single 2019 pay period are excluded from this computation.

In the event you had a reduction of employees during the period from February 15, 2020, through April 26, 2020, as long as you rehire those employees no later than June 30, 2020, the FTE calculation for the number in the fraction will treat those rehired employees as if they were included in the FTE for the entire 8-week period. Please note that while a delayed rehire date won’t cause issues with the employee retention fraction, it may cause you to spend less than the required 75% threshold on payroll costs, and therefore would result in a reduction in the amount of loan forgiven.

Both the average reduction in FTE and reduction in pay must be restored to eliminate the reduction in loan forgiveness.

Most guidance from the SBA and U.S. Department of the Treasury has been related to matters associated with loan sizing thus far, and we expect significant guidance on the forgiveness calculations will be forthcoming.

16. How are FTEs computed?

Other employee limit provisions of the Small Business Act (SBA Act) are not based upon FTEs; they are based upon head count as described above. The CARES Act Sections 1102 and 1106 do not define FTEs. Guidance has not yet been provided with respect to defining an FTE.

One approach may be to reference the Internal Revenue Code. For example, CARES Act Section 1106(e) discusses an eligible recipient seeking loan forgiveness. The recipient must document the number of FTEs on payroll and pay rates based upon payroll tax filings reported to the IRS.

CARES Act Section 2301(c)(3), which pertains to the employee retention credits, defines a full-time person by referencing IRC Section 4980H. A full-time employee is an individual who works an average of at least 30 hours per week. A full-time equivalent employee is determined by adding the hours of part-time employees on a monthly basis and dividing by 120 [IRC Section 4980H(c)(2)(E)]. Until guidance is received otherwise, we suggest using this computation to determine the FTEs for those employees who work fewer than 30 hours per week. Employees working at least 30 hours per week are counted as full-time employees.

17. How do we determine the number of employees if we are a seasonal business?

The SBA Act does not define a seasonal employer or seasonal business. The statute allows the SBA administrator to define the term.

If the applicant is a seasonal employer, determine the average number of FTE employees per month during February 15, 2019, to June 30, 2019. This will be compared to the FTE employees during the eight-week period beginning after funding of the loan.

18. How do the retention credits interact with the PPP?

The retention credit of CARES Act Section 2301 is not available if the taxpayer receives a covered SBA loan under SBA Section 7(a)(36) (i.e., a PPP loan).

19. How does the deferral of payroll taxes provision of the CARES Act interact with the PPP?

Employers that received a Paycheck Protection Program loan may not defer the deposit and payment of the employer's share of Social Security tax that is otherwise due after the employer receives a decision from the lender that the loan was forgiven. The amount of the deposit and payment of the employer's share of Social Security tax that was deferred through the date the PPP loan is forgiven continues to be deferred and will be due on the "applicable dates,"

  • On December 31, 2021, 50%of the deferred amount; and
  • On December 31, 2022, the remaining amount.

20. What is the interest rate on the PPP loan?

SBA has set the rate at 1.00%.

21. What is the maturity date of the PPP loan?

The maturity date is two years from date of funding. No payments are due for the first six months; interest will accrue from the date of loan funding.

22. May CPAs sign on page 2 of the application?

The majority of the representations contained in the “Representations and Authorization” section of the PPP loan application are management responsibilities.

Additionally, CARES Act Section 1106(e)(3) & (4) requires a certification from a representative of the eligible recipient indicating “(3)(A) the documentation presented is true and correct, and (3)(B) the amount for which forgiveness is requested was used to retain employees, make interest payments on a covered mortgage obligation, make payments on covered rent obligations, or make covered utility payments; and (4) any other documentation the Administrator determines necessary.”

CPAs in public practice cannot sign the application or this certification as the authorized representative of the applicant.

How we can help

Questions continue to arise related to the PPP, and we’re staying on top of the latest guidance. Our professionals can help you understand your PPP eligibility and navigate the PPP loan application process.

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  • Rick Krueger
  • Principal