Since we published last Wednesday’s blog post summarizing the Paycheck Protection Program (PPP) and other COVID-19 relief programs made available under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), the Small Business Administration (SBA) has published interim regulations and guidance about the PPP that clarify—and in some cases change—some aspects of the program. This post is intended to summarize the key information included in these SBA rules and guidance that are relevant to eligible 501(c)(3) organizations (those with 500 or fewer employees).
Exclusion of Payments to Independent Contractors from “Payroll Costs” Calculation: Although the CARES Act seemed to provide that payments of compensation to a sole proprietor or independent contractor are included in calculating an organization’s payroll costs, the interim final rule clarifies that organizations should exclude such amounts from the calculation of payroll costs. Accordingly, applicants should exclude Form 1099 payments to individual contractors in their calculation of payroll costs.
Methodology for Calculating the Maximum Loan Amount: In the interim final rule, the SBA set forth the following methodology for calculating payroll costs:
- Aggregate payroll costs (as defined in our earlier post, but excluding payments to independent contractors, as explained above) from the last twelve months for employees whose principal place of residence is in the United States.
- Subtract any portion of compensation for any individual that exceeds $100,000 when annualized.
- Divide the resulting amount by 12 to calculate average monthly payroll costs.
- Multiply the resulting amount by 2.5.
- Add the outstanding amount of any Economic Injury Disaster Loan (EIDL) between January 31, 2020 and April 3, 2020, less the amount of any advance under an EIDL COVID-19 loan.
More Details About the Application Process: Applicants are required to submit documentation that can be used to calculate their monthly payroll costs. The interim final rule provides that applicants must submit “such documentation as is necessary to establish eligibility[,] such as payroll processor records, payroll tax filings, or Form 1099-MISC,” or, if lacking such documentation, “other supporting documentation, such as bank records, sufficient to demonstrate the qualifying payroll amount.” Ultimately, each lender will decide what it needs in order to satisfy this documentation requirement.
25% Cap on Overhead Expenses: Under the interim final rule, PPP loan recipients may use no more than 25% of the loan amount to pay for overhead expenses (including rent or mortgage payments, payments on interest for other debt, and utility costs). The SBA had previously indicated in guidance materials that it would apply a 25% cap on overhead in calculation of the amounts eligible for forgiveness but had not suggested that this cap would also apply to an organization’s permitted use of the loan funds. The interim final rule imposes a 25% cap for both purposes—permitted use of loan funds and calculation of the amount forgiven.
Liability for Errors: The interim final rule states that the SBA will require borrowers to repay amounts used for unauthorized purposes and that borrowers could be charged criminally if they knowingly misuse loan funds or knowingly make a false statement in applying for loan funds. While this is unsurprising, the regulation also provides that the SBA is holding lenders harmless for issuing funds to applicants in excess of their maximum loan amounts or for any unauthorized use of loan funds by borrowers, and reiterates that lenders are not expected to verify the documentation that applicants provide in support of their loan applications. While it is always important to be accurate and truthful in documents submitted to banks or government agencies, given the very light expectations for vetting by lenders before they issue loan funds, applicants should take special care to ensure their calculation of the loan amount they are entitled to is accurate and that their use of the funds is consistent with the program’s requirements.
Clarification of Affiliation Rules: If a 501(c)(3) organization, together with its “affiliated” organizations, employs more than 500 people, then each of the affiliated organizations is ineligible for a PPP loan. In addition to the SBA’s interim final rule discussed above, the SBA released guidance for determining whether two or more entities are “affiliated” for purposes of eligibility for the PPP. Importantly, the SBA stated that “affiliation” exists where a President, CEO, or “other officers, managing members, or partners who control the management” (or an individual or entity that controls the Board of Directors or management) also controls the management of another entity. The guidance states that affiliation also arises where one organization controls the management of another through a management agreement. However, existing SBA regulations provide that an organization leasing a worker from a temp agency or through an arrangement with a Professional Employer Organization (PEO) will not be an affiliate of the leasing agency or PEO.