Good News on PPP From SBA/Treasury

• April 7, 2020
• Paul Neiffer

The SBA in consultation with the Department of Treasury issued timely updated a Frequently Asked Questions document last night.

Many of the questions that we reviewed over the last week in this blog were answered in this FAQ and the answers are favorable to applicants.  Let’s review each of the Q&A’s from the document.

1. Lenders are not required to thoroughly review the calculation of the payroll costs provided by the borrower.  That is the responsibility of the borrower to accurately complete that calculation.  However, if the lender identifies errors, they will work with the borrower to fix the application.  The SBA will likely review the loan amount at some point in time.
2. Can a borrower have more than 500 employees?  The answer is yes as long as they meet the definition of a “small business concern”.  We had mentioned in previous posts that you can have up to 1,500 employees based on some industries.  Also, it appears you could have an unlimited number of employees if (1) your tangible net worth of the company is less than $15 million and (2) your average net income for the previous two years is not more than $5 million.
3. Does a business have to qualify as a small business concern?  The answer is no.  Any business with fewer than 501 employees automatically qualifies.  This eliminates the “Small Business Concern” requirements of having less than $1 million in revenue for most farm operations.  Farms with fewer than 501 employees automatically qualify even if their revenue is $1 billion dollars.  Also, the Q&A states that you do not include any non-US employees in your count.  This means H2A workers are not included when you determine how many employees you have.  Farm operations with a large amount of H2A workers will welcome this interpretation.
4. Are the banks required to verify the affiliates of the applicant?  The answer is no.  The applicant is required to verify all of the affiliates and how it affects their application.  This affiliate rules prevents closely related entities from spreading the employee count out.  All employees of the affiliated group will be counted to see if they meet the 500/industry employee limit.
5. Are applicants required to apply the SBA affiliation rules?  Answer is yes.  As discussed in #4, these rules prevents groups of multiple companies from getting around the 500/industry group limit.  However, if you think you are over 500 employees based on affiliation, make sure to review the industry size limits for each applicant.  For example, you may have an Ag based business with 400 employees and a manufacturing company with 800 employees.  As an affiliated group, you are over 500, but the Ag is under 500 and the manufacturing industry is allowed to have 1,250 employees.  We believe both companies would qualify for the loan. 
6. Can a minority shareholder give up their rights to control the business under the affiliation rules? The answer is yes and this would no longer require affiliation.
7. What does compensation in excess of $100,000 mean?  The answer to this is good news for all borrowers.  Only compensation in the form of wages, salaries, etc. is excluded.  All other payroll related costs such as group insurance, retirement pay and state and local taxes are allowed.  For example, suppose you have an employee who earns $125,000, has group insurance of $10,000, retirement payments of $6,000 and state and local taxes of $4,000.  The limit is not $100,000 but $120,000 for the payroll costs calculation.
8. Does the PPP cover paid sick leave?  The answer is yes for purposes of calculating your loan amount.  However, paid Sick or Family leave under provided under the Family First Coronavirus Response Act is not allowed to be included as part of payroll costs when you determine your loan forgiveness amount.
9. This question deals with seasonal employers and the answer remains ambiguous.  It states a lender may consider whether you are a seasonal borrower but really does not provide much help on what that means for this particular question.
10. This question deals with using a third-party payer for payroll or a Professional Employer Organization (PEO).  SBA recognizes that many companies use these entities and will respect the labor costs reported on the applicant, however, if these payers are related parties, there may be additional documentation required to verify which entity had which employees and the amount paid.  This can become very important both for the loan application process and for the forgiveness calculation.
11. Deals with who can sign the application.  Only one person is required to sign but needs to be an Authorized Representative of the applicant.
12. Deals with if you have a felony conviction in the past and how long that stays with you.  Generally only counts if convicted in last five years.
13. Can lenders use their own online portals?  Answer is yes.
14. What time period is used to calculate the maximum loan amount? Answer is either 2019 calendar year or previous 12 months.  Not sure if this means trailing twelve months or previous 12 actual months.  For example, if you get a loan approved on April 10, 2020, trailing twelve months is the period April 10, 2019 to April 9, 2020.  Actual months would be April 2019 to March 2020.  We assume it is the actual months to be used, but don’t know for sure.  The wording in the law appears to be trailing twelve months.
15. Confirms you can’t use any payments to independent contractors.  This is in conflict with the actual wording of the law, but we have to now deal with the rules. The FAQ does not address how self-employment income of partners (through guaranteed payments or pass-through income) affects the partnership’s maximum loan amount.
16. This part is really good news.  You will use gross payroll and will not have to reduce your payroll costs by any federal payroll taxes imposed or withheld.  This means both the employee and employer portion of these taxes are not subtracted or included in payroll costs amounts.  It also means that employee federal income tax withheld is not subtracted from payroll costs.  The wording in the original law was a little unclear.  Several commentators thought the wording “exclude” these taxes meant you subtracted it from gross wages.  This FAQ simply states you don’t really do anything with them.  You don’t include any of those taxes and you don’t subtract any of those taxes which is what we wanted all along. Use gross wages.
17. Deals with if you filed using the original Interim Final Rules.  If the application has not been finalized you can update it.
18. Deals with some lender rules that we won’t cover here.

In conclusion, this updated FAQ is very favorable to all applicants including farmers.  It reinforces what we had concluded in previous posts that all farmers qualify no matter their revenue as long as they have fewer than 501 employees on an affiliated basis.

Now we just need to see the rules on self-employed farmers since we still don’t know how to handle those applications.

, Ag General, Ag Policy, Farm Taxes | 9 Comments »