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On March 27, 2020, Congress passed, and President Trump enacted, the Coronavirus Aid, Relief, and Economic Security (CARES) Act to provide emergency health care and economic assistance during the COVID-19 global pandemic. One of the main provisions created by the CARES Act is an extension of lending by the Small Business Administration (SBA) known as the Paycheck Protection Program (PPP). Beginning Friday, April 3, 2020, this application process will open for most small businesses. On Thursday, April 2nd, the SBA issued an interim final rule concerning certain provisions of the PPP. Those relevant clarifications are summarized here:
Interest Rate: The interest rate of PPP loans will be 1%.
Definition of Payroll Costs: The interim final rule clarifies how “payroll costs” are determined for the purposes of the PPP:
The following costs are included in payroll costs:
The following costs are excluded from payroll costs:
Note: The “final” PPP guidelines are not clear as to how payments to partners in a partnership will be considered in the definition of payroll costs.
For purposes of calculating max loan amount, FICA (employee and employer portion) and federal income taxes that are imposed or withheld between February 15, 2020 and June 30, 2020 appear to be excluded. For example, if an applicant uses the prior 12-month period for loan amount calculation (e.g. April 1, 2019 - March 31, 2020) to calculate payroll costs, FICA and federal income tax imposed or withheld during the period February 15, 2020 - March 31, 2020 may be excluded from the loan calculation. If, however, an applicant uses the 2019 calendar year as the payroll cost base, then the employee portion of FICA and income taxes will be included in the calculation of the loan amount, since calendar year 2019 is not during the exclusionary period of February 15, 2020 - June 30, 2020.
For purposes of loan forgiveness, FICA and income tax withholding paid with loan proceeds will not be eligible for loan forgiveness since they will be imposed or withheld during the exclusion period (i.e. February 15, 2020 - June 30, 2020). Below, we address the conflicting guidance on the time period to use as the payroll cost base. P&N is monitoring this issue closely and will update on any further clarification provided.
There is a variety of conflicting guidance with respect to the period over which to calculate payroll costs for non-seasonal employers. Specifically, the guidance is as follows:
P&N is monitoring this issue closely and will update on any further clarification provided.
The SBA has indicated it will issue additional guidance on loan forgiveness.
If a borrower has received an EIDL from January 31, 2020 to April 3, 2020, PPP is still available. If the EIDL loan was not used for payroll costs, then PPP eligibility is unaffected. If a borrower used an EIDL for payroll costs, then the borrower’s PPP loan must be used to refinance the existing EIDL loan.
The interim rule makes clear that if a borrower uses PPP funds for unauthorized purposes (e.g., not an allowed use of funds), then they will need to repay those amounts. In addition, if a borrower knowingly uses funds for unauthorized purposes, then such borrower will be subject to charges for fraud.
Each lender shall:
In addition, for purposes of loan forgiveness, the lender does not need to conduct any verification if the borrower submits documentation supporting the request for forgiveness and attests that such documents accurately verified payments for eligible costs.
While this interim rule did not address the application of the SBA affiliation rules to PPP loans, the SBA noted in this interim rule that it intends to issue such guidance promptly.
As the CARES Act is finalized, future legislation is developed, deadlines are updated, and additional challenges and opportunities are uncovered, P&N’s dedicated professionals are committed to understanding and applying this information to help our clients. Please contact us or connect with your P&N advisor to discuss your organization’s questions, concerns, and priorities.