The Small Business Administration (SBA) published an Interim Final Rule clarifying the Payroll Protection Program (PPP) portion of the CARES Act. The Rule answers the questions below.
Q. I eligible for the Payroll Protection Program?
A. Employers are eligible for a PPP loan if:
- There are 500 or fewer employees in the United States, or
- It is a business that operates in a certain industry and meet the applicable SBA employee-based size standards for that industry, and:
- 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 (SBA intends to promptly issue additional guidance with regard to the applicability of affiliation rules at 13 CFR §§ 121.103 and 121.301 to PPP loans.); or,
- A tax-exempt nonprofit organization described in section 501(c)(3) of the Internal Revenue Code (IRC), a tax-exempt veterans organization described in section 501(c)(19) of the IRC, Tribal business concern described in section 31(b)(2)(C) of the Small Business Act, or any other business; and
- The business was in operation on February 15, 2020, and either had employees paid salaries and payroll taxes or paid independent contractors, as reported on a Form 1099-MISC.
- An individual operates under a sole proprietorship or as an independent contractor or eligible self-employed individual, and in operation on February 15, 2020.
Q. What documents must be submitted?
- Documentation establishing eligibility such as: payroll processor records
- Payroll tax filings or
- Form 1099-MISC or income and expenses from a sole proprietorship.
If you do not have any such documentation, additional supporting documentation, such as bank records, is sufficient to demonstrate the qualifying payroll amount.
Q. If I am eligible, how much can I borrow?
A. The maximum loan amount is the lesser of $10 million or an amount that you will calculate using a payroll-based formula specified in the Act, as explained below:
- 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)
Q. What qualifies as “payroll costs?”
- Compensation to employees (in 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)
- Payment for vacation, parental, family, medical, or sick leave
- Allowance for separation or dismissal
- Payment for the provision of employee benefits consisting of group health care coverage, including insurance premiums, and retirement
- Payment of state and local taxes assessed on compensation of employees.
Q. Is there anything that is expressly excluded from the definition of payroll costs?
A. The following is excluded:
- Any compensation for employees who live outside the United States
- Compensation of an employee in excess of an annual salary of $100,000
- 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)
- 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)
Q. Do independent contractors count as employees for purposes of PPP loan calculations?
A. No, independent contractors have the ability to apply for a PPP loan on their own.
Q. Is the PPP “first-come, first-served?”
Q. What forms do I need and how do I submit an application?
A. The applicant must submit SBA Form 2483 (Paycheck Protection Program Application Form) and payroll documentation, as described above.
Q. What can the proceeds of a PPP loan be used for?
- Payroll costs (At least 75 percent of the PPP loan proceeds shall be used for payroll costs. For purposes of determining the percentage of use of proceeds for payroll costs, the amount of any EIDL refinanced will be included.)
- Costs related to the continuation of group health care benefits during periods of paid sick, medical, or family leave, and insurance premiums
- Mortgage interest payments (but not mortgage prepayments or principal payments)
- Rent payments
- Utility payments
- Interest payments on any other debt obligations that were incurred before February 15, 2020
- Refinancing an SBA EIDL loan made between January 31, 2020 and April 3, 2020