Final Guidance on the Paycheck Protection Program (PPP) Loans

April 3, 2020

Late yesterday, the Treasury released interim final guidance on the Paycheck Protection Program (PPP) loans from the Small Business Administration (SBA) signed into law by the Coronavirus Aid, Relief, and Economic Security Act (or CARES Act) last week.  While there are still numerous unanswered questions, along with a few new questions raised, there are several notable points we feel you need to be aware of if you have applied or are considering applying for this loan product:

1. Federal employment taxes withheld from employees:  While there was some confusion between the CARES Act language and the initial SBA guidance, the interim final guidance clarifies that federal employment taxes withheld from employees (including federal income taxes and FICA taxes) are excluded from “payroll costs”  However, per the language of the guidance, it is only federal employment taxes withheld between February 15, 2020 and June 30, 2020.  “Payroll costs” is an important term as it is used to calculate not only the maximum loan amount for eligible businesses, but also the forgivable portion of the loan.  Here are a couple specific observations about this clarification:
   • This would not seem to affect the calculation of the maximum loan amount, except in “new business” cases which are required to use January 1, 2020 through February 29, 2020 as their measurement period to calculate average monthly payroll costs.
   • However, this will affect every borrower’s eligible loan forgiveness. The loan forgiveness period or “covered period” (8 week period beginning on the date the loan is made) for all borrowers is expected to fall within this timeframe, so borrowers and their advisors will need to be aware that the amount of federal employee tax withholdings will not eligible for loan forgiveness.
2. Measurement period for average monthly payroll costs:  Unfortunately, this is an item of confusion that has not been resolved.  The CARES Act, as well as the latest guidance reads that the measurement period for determining average monthly payroll costs is “the last twelve months” before the loan is made (except for seasonal or new businesses).  However, the final borrower application (also released today by the Treasury) still states that businesses except for seasonal businesses and new businesses should use 2019 annual costs in their calculations in the instructions on page 3.  Please defer to your lender to determine your appropriate measurement timeframe for determining average monthly payroll costs.
3. Payments to independent contractors:  The guidance clarifies that payers of independent contractors do not get to claim the payments they make to their contractors as payroll costs for purposes of the loan amount or loan forgiveness calculations.  The initial guidance and instructions seemed to indicate that contractor payments would not be includable costs but they were inconclusive on this matter.  If you have already calculated your average monthly payroll costs including payments made to independent contractors or sole proprietors, you will need to adjust your calculations accordingly.
4. Payment deferral:  Payment deferral for any remaining portion of the loan (after any loan forgiveness) was set at 6 months.  Interest will continue to accrue during the deferral period though.  The CARES Act allowed the SBA to defer payments for no less than 6 months and no more than 1 year.
5. Interest rate:  The interest rate on PPP loans was increased from 0.5% to 1%.  The CARES Act allowed the SBA to set a rate as high as 4%, but initial guidance mandated a rate of only 0.5%.  It appears the rate was increased to 1% after receiving comments on their initial guidance earlier this week.
6. Loan maturity:  Any remaining portion of the PPP loans (after any loan forgiveness) will have a maturity of 2 years.  This remained unchanged from the initial guidance earlier this week.
7. Loan forgiveness limitation:  As a reminder, no more than 25% of the available loan forgiveness amount may be attributable to non-payroll costs (rent, utilities, mortgage interest).  This was not required in the CARES Act but was mandated by the SBA in order to encourage the funds to be used for their primary intended purpose, which is to maintain wage levels and number of employees.
8. Use of loan proceeds:  This did not technically change from prior guidance, but the application requires applicants to initial certifying that they will use the funds for the intended purpose of the loan and will be potentially subject to penalties including fraud charges if they do not.  It is the intent of the SBA that no more than 25% of loan proceeds be used for rent, utilities, mortgage interest, and interest on other debt obligations (NOTE: interest on non-mortgage debt obligations do not appear to be eligible for forgiveness but are still an authorized use of funds).  All four of these expense categories must have been in place prior to 2/15/2020.  Therefore at least 75% of the funds are intended to be used for payroll costs.  The application itself does not list these percentages, but they are specifically mentioned in the guidance.

Remember, the Paycheck Protection Program has limited funding and will be on a first-come, first-serve basis.  We expect the available funding to be spoken for very quickly so if you are interested but have not already contacted your lender, you need to do so immediately.

The updated SBA borrower application for this program which was also released on Thursday.  If you have already completed an application using the initial form, you should check with your lender to determine if they will need an updated application.

NOTE: If you are approved for a PPP loan, you will not be eligible to receive an employee retention credit or payroll tax payment deferral.  In some instances, the employee retention credit and payroll tax payment deferral may actually be more beneficial for your business than a PPP loan.

Please let us know if you have any questions on any of these incentives and we’d be happy to assist.