SBA Issues New FAQs regarding the Paycheck Protection Program

By William Pokorny, Jason Patterson and Tracey Truesdale - Franczek P.C.

April 15, 2020

To clear up some uncertainty in the language of the CARES Act’s Payroll Protection Program (“PPP”) and the subsequent interim final rules, the Small Business Administration (“SBA”) issued Frequently Asked Questions (“FAQs”) which are available here. Highlighted below are some of the more significant issues addressed by the FAQs. The basics of the PPP are covered in an updated summary of the CARES Act Employer Relief programs, available here.

Borrower Eligibility: The FAQs clarify what entities qualify as eligible borrowers:  

> Any business, nonprofit, veterans organization, or Tribal concern with 500 or less employees. If these employers employ more than 500 employees, they may still qualify if they otherwise meet the SBA’s size standard for their industry.  
> A “small business concern” as defined by the Small Business Act with more than 500 employees if the following conditions are met:

   1. The employer otherwise meets the size or revenue standards for its industry set forth in Title 13, Part 121 of the Code of Federal Regulations (chart summarizing size standards available here); or

   2. The employer meets the SBA’s “alternative size standard” which requires: (i) the maximum tangible net worth of the business to be no more than $15 million; and (ii) 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.

> Any business with a NAICS code starting with “72” (mainly hospitality and food service employers) and franchises. These employers are eligible if they employ less than 500 employees at each physical location.
> Sole proprietors, independent contractors, and self-employed individuals.

Please note that employers may be required to include its “affiliates” when determining its size. The SBA’s guidance on its affiliation rules can be found here.

Calculation of Monthly Payroll Costs: When calculating average monthly payroll costs, the employer may use an average from either the previous 12 months or the 2019 calendar year.

Exclusion of Salaries over $100,000 in Payroll Costs: The Act excludes from the definition of payroll costs any employee compensation in excess of an annual salary of $100,000. The FAQs clarify that the exclusion does not apply to non-cash benefits such as retirement plans, payment of health insurance premiums, and payment of state and local taxes.

Paid Sick Leave under PPP: PPP loans can be used to cover paid sick leave. However, the CARES Act excludes qualified sick and family leave wages for which an employer can take a credit under the Families First Coronavirus Response Act.

Inclusion of Federal Taxes in Payroll Costs: Payroll costs should be calculated on a gross basis without regard to federal taxes imposed or withheld from employees. For example, if an employee earns $4,000 per month in gross wages, from which $500 is withheld for federal taxes, the employer would still include the entire $4,000 when calculating payroll costs. However, the employer should exclude its portion of federal payroll taxes from its payroll costs calculation.   

We will continue to monitor the SBA’s guidance and provide updates as they become available.