Explanation of Additional Guidance Issued by Treasury on CARES Act Paycheck Protection Loan Program


The U.S. Department of Treasury just issued their additional guidance last night (April 2, 2020). While this is an “Interim Final Rule,” it is effective without advance notice and public comment because the Coronavirus Aid, Relief, and Economic Security (CARES) Act authorizes the Small Business Administration (SBA) to issue regulations to implement the Paycheck Protection Program (PPP or "Loan program") without regard to notice requirements (i.e., the rule is being issued to allow for immediate implementation of this program but could change down the road – see below summary for specific examples).

While Calfee's Corporate and Capital Markets and Commercial Finance attorneys are reviewing the guidance and related documents in greater detail, there are several issues worth highlighting immediately:

  • The loans will be funded on a first come/first served basis;
  • The interest rate was increased from 0.5% to 1%;
  • The maturity is still two years;
  • SBA will allow lenders to rely on certifications of the borrower in order to determine eligibility of the borrower and use of loan proceeds. SBA will allow lenders to rely on specified documents provided by the borrower to determine qualifying loan amount and eligibility for loan forgiveness. However, the calculation of the loan amount will be determined by the lender based on tax and other documentation provided by the borrower;
  • There was no additional guidance provided with respect to the applicability of the affiliation rules, other than to say that the “SBA intends to promptly issue additional guidance with regard to the applicability of affiliation rules … to PPP loans;”
  • Independent contractors will not be included in an employer’s payroll (i.e., independent contractors must apply for their own loans);
  • Pages 8-11 of the guidance provide additional details regarding calculation of the loan amount by clarifying what is included and excluded from “payroll costs” (please refer to the Loan Calculation Guidance summary below);
  • Not more than 25% of the loan forgiveness amount may be attributable to non-payroll costs;
  • Like with the affiliation rules, the SBA will issue additional guidance on loan forgiveness; and
  • Borrowers can use e-signatures.
  • A new sample form of application was distributed after midnight, which now provides that 20% owners no longer have to actually sign the form (instead, the applicant must certify on behalf of the 20% owners).

Loan Calculation Guidance

Maximum loan amount is the lesser of $10 million or 2.5 times the borrower’s Average Monthly Payroll Costs

  • Determine aggregate annual Payroll Costs (defined below) for the applicable period;
  • Subtract any compensation paid to employees in excess of an annual salary of $100,000 and/or amounts paid to independent contractors in excess of $100,000;
  • Divide that amount by 12 to determine Average Monthly Payroll Costs;
  • Multiply Average Monthly Payroll Costs by 2.5;
  • Add any outstanding amount of an Economic Injury Disaster Loan (EIDL) made between 1/31/2020 and 4/3/2020 less any EIDL advance grant.

Definition of Payroll Costs

  • Cash compensation – salary, wages, commissions and cash tips
  • Benefits – vacation, parental/family/medical/sick leave, group healthcare coverage premiums and retirement
  • State and local taxes assessed on employee compensation

Certain items are expressly excluded from Payroll Costs

  • Compensation to employees whose principal place of residence is outside the U.S.
  • Compensation in excess of an annual salary of $100,000
  • Federal Insurance Contributions Act (FICA) tax, Railroad Retirement Tax Act and federal income taxes imposed or withheld between 2/15/2020 and 6/30/2020
  • Qualified sick and family leave wages for which a tax credit is allowed under the Families First Coronavirus Response Act (FFCRA) 

Updates related to all COVID-19 government assistance programs are provided with the most current information made available to Calfee at the time of publication. Clarifications and further guidance are being disseminated from government authorities on an ongoing basis. All information should be reaffirmed prior to the submission of any application and/or program.

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