SBA Issues Some Guidance

• April 3, 2020
• Paul Neiffer

The SBA issued guidance yesterday on the Paycheck Protection Program (PPP).  I think I would like to underline the word some since it really does not provide much more clarity than the law already did.

Here is what we learned:

• Size is limited to the greater of 500 employees or SBA employee-based industry size standards that meet the definition of a SBA small business concern.  This means you may be eligible with up to 1,250 or perhaps higher numbers for some industries, however, in this case you may need to meet certain revenue and net worth standards.  There appear to be no revenue or net worth limits if you have less than 500 employees.  Additionally, the SBA Fact Sheet specifically states that “all businesses – including nonprofits, veterans organizations, Tribal business concerns, sole proprietorships, self-employed individuals and independent contractors with 500 or fewer employees can apply.”
• You had to be in business on February 15, 2020 paying employees or paid independent contractors.
• The following businesses are ineligible for loans:
  • Engaged in any illegal activity under federal, state or local law (cannabis?);
  • You are a household employer (you employ nannies or housekeepers);
  • Any owner of 20% or more is incarcerated, on probation or parole; presently subject to an indictment, criminal information, arraignment, or other means by which formal criminal charges are brought in any jurisdiction; or has been convicted of a felony with the last five years; or
  • You have a current SBA loan that is delinquent or you have defaulted on within last 7 years and caused a loss to the SBA.
  • Also, the SBA has a list of other business identified in 13 CFR 120.110 that are ineligible.  Some key businesses excluded are:
    • Financial institutions such as banks,
    • Real estate landlords and developers,
    • Life insurance companies,
    • Business located in foreign countries (however US owned by aliens may qualify).
• The guidance indicates payroll costs are determined for the last twelve months (not calendar year 2019), however, in later parts of the guidance they indicate the use of calendar year 2019 data.  It appears that applicants can use whichever is either the easiest or provides the greatest loan amount.
• It is very specific that any compensation of an employee whose principal place of residence is outside the US is excluded from payroll costs.  So H2A compensation does not apply, however, there is nothing in the guidance telling you to not count them in your employee count.
• There is an interesting iii. provision stating that federal employment taxes imposed or withheld between February 15, 2020 and June 30, 2020 are excluded.  The SBA really needs to clarify exactly what that means.  We have opined that you simply exclude these amounts, but does this mean you also subtract them from calculated payroll costs during that period to determine your loan forgiveness amount.  This is awkward language at best.
• You cannot include independent contractors in your calculation.  We had surmised this might be the case since this could be considered to be double dipping.  Those contractors will apply for their own loan.
• The interest rate has been bumped from .5% to 1%.  Community banks lobbied for this and it makes sense since many banks would not participate fully in the program for a rate that low.  In many cases they would lose money.
• The maturity date is confirmed at two years and no payments are due for six months, however interest will accrue from date of loan funding.
• You can only apply for one loan.
• They confirmed that at least 75% has to be spent on payroll costs with the other 25% allowed for interest on mortgages, rents and utilities as long as all of these items were in place on February 15, 2020.

There still remains many items that the guidance did not provide such as:

• How do you determine the number of “jobs” that are listed on the application?  The SBA rules indicate that any person employed during a month is considered a “job”.  Do you look at the people immediately on payroll the month before the application; do you take the average over the last 12 months or for all of 2019.  This need defining.
• How do you determine full-time equivalent employees (FTE) for both periods?  This needs guidance now since the amount of loan forgiveness is based on maintaining FTE levels.  There is already a definition in the Income Tax Code for FTE under ACA but do we apply the same calculations?
• There is no mention of how SBA will determine if you are a seasonal employer.  The application refers to the election for a seasonal employer however it does not mention the dates you are required to use if you don’t make the election and whether you are or not.
• It does not state how it determines if the primary residence of an employee is outside the US.  H2A workers are a given, but what about other workers with green cards, undocumented workers, etc.  How is that determined which is very important to farmers.  Some have asked how are the banks going to know this and for H2A it will be fairly obvious when they review W-3 and payroll records since Box 5 Medicare wages will be substantially less than Box 1 wages.  Also, remember you are subject to fraud penalties if you knowingly mistake these wages.
• Lobbyists for certain industries that are allowed to count multiple locations with less than 500 employees are lobbying to have a $10 million limit applied to each location.  This has not been finalized.  If that is allowed funds may run out very quickly.
• And finally a key question for many farmers is how is self-employment income calculated.  Is it only the income on Schedule F or does it include equipment gains?  How is it calculated during the deferral period?  Remember they only allow one loan to be processed.  If you have employees and want to get a loan for your SE earnings, you will need to wait until April 10.
• How do you file for multiple single member LLCs that all show up on one Form 1040.  A farmer may have a Schedule F LLC, a Schedule C trucking LLC and a Schedule C harvesting company.  Is this one application or three?

The bottom line is that the guidance essentially summarized the actual law passed last Friday and added some clarity but more is needed.  We will keep you posted.

 

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