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SBA Issues Clarifications to Paycheck Protection Program (PPP)

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The U.S. Small Business Administration (“SBA”), in consultation with the Department of the Treasury, has issued new clarifications, as of Thursday, April 23, 2020, to the interim final rule, issued Thursday, April 2, 2020, regarding Paycheck Protection Program (“PPP”) loans.

Ericksen Krentel will continue to monitor for clarification and changes to the program but has summarized the new clarifications relevant to borrowers below. The complete list of updated guidance can be found by clicking here.

As requirements and guidance on the process change frequently, Ericksen Krentel professionals are available to help you gather the required information and prepare you for the loan application process for when you and/or your bank are ready to begin their process.

Ericksen Krentel continues to monitor the ever-changing guidance and requirements for the PPP loan application and debt forgiveness process to ensure you receive the maximum benefits. Our team is ready to help create a customized approach for your organization to effectively, and correctly, use those funds to guarantee maximum forgiveness. If you received PPP funds and need assistance in allocation and forgiveness documentation or calculation, please contact us by clicking here.

You can click on any provision in the list below to go directly to that summary (direct link feature may not work on mobile devices):


The U.S. Small Business Administration (“SBA”), in consultation with the Department of the Treasury, has issued clarifications to the interim final rule, issued Thursday, April 2, 2020, regarding Paycheck Protection Program (“PPP”) loans.

Independent contractors and self-employed individuals should click here for more information. 

As questions or concerns arise, we ask that you contact us so we can address them as quickly as possible to ensure we continue to meet your needs. As a reminder, you can always monitor our COVID-19 Updates webpage by clicking here for the latest or monitoring our accounts on LinkedIn, Twitter or Facebook.

Below is a summary of the clarifications as of April 8 (you can click here to read the full list of questions and answers from the Department of the Treasury).

You can click on any provision in the list below to go directly to that summary (direct link feature may not work on mobile devices):


I filed a loan application based on the version of the PPP Interim Final Rule published April 2, 2020. Do I need to take any action based on the updated guidance in these FAQs?

No. Borrowers and lenders may rely on the laws, rules, and guidance available at the time of the relevant application. However, borrowers whose previously submitted loan applications have not yet been processed may revise their applications based on clarifications reflected in these FAQs.
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What time period should borrowers use to determine their number of employees and payroll costs to calculate their maximum loan amounts?

In general, borrowers can calculate their aggregate payroll costs using data either from the previous 12 months or from calendar year 2019.

For seasonal businesses, the applicant may use average monthly payroll for the period between February 15, 2019 or March 1, 2019, and June 30, 2019. An applicant that was not in business from February 15, 2019, to June 30, 2019 may use the average monthly payroll costs for the period January 1, 2020, through February 29, 2020.

Borrowers may use their average employment over the same time periods to determine their number of employees, for the purposes of applying an employee-based size standard. Alternatively, borrowers may elect to use SBA’s usual calculation: the average number of employees per pay period in the 12 completed calendar months prior to the date of the loan application (or the average number of employees for each of the pay periods that the business has been operational, if it has not been operational for 12 months).
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Should payments an eligible borrower made to an independent contractor or sole proprietor be included in calculating payroll costs?

No. Any amounts that an eligible borrower has paid to an independent contractor or sole proprietor should be excluded from the eligible business’ payroll costs. However, an independent contractor or sole proprietor will itself be eligible for a loan under the PPP, if it satisfies the applicable requirements.
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How should I account for federal taxes when determining payroll costs for purposes of the maximum loan amount, allowable uses of a PPP loan and the amount of a loan that may be forgiven?

Under the Act, payroll costs are calculated on a gross basis without regard to (i.e., not including subtractions or additions based on) federal taxes imposed or withheld, such as the employee’s and employer’s share of Federal Insurance Contributions Act (FICA) and income taxes required to be withheld from employees. As a result, payroll costs are not reduced by taxes imposed on an employee and required to be withheld by the employer, but payroll costs do not include the employer’s share of payroll tax.

For example, an employee who earned $4,000 per month in gross wages, from which $500 in federal taxes was withheld, would count as $4,000 in payroll costs. The employee would receive $3,500, and $500 would be paid to the federal government. However, the employer-side federal payroll taxes imposed on the $4,000 in wages are excluded from payroll costs under the statute. (The definition of “payroll costs” in the CARES Act, excludes “taxes imposed or withheld under chapters 21, 22, or 24 of the Internal Revenue Code of 1986 during the covered period,” defined as February 15, 2020, to June 30, 2020.

As described above, the SBA interprets this statutory exclusion to mean payroll costs are calculated on a gross basis, without subtracting federal taxes that are imposed on the employee or withheld from employee wages.

Unlike employer-side payroll taxes, such employee-side taxes are ordinarily expressed as a reduction in employee take-home pay; their exclusion from the definition of payroll costs means payroll costs should not be reduced based on taxes imposed on the employee or withheld from employee wages. This interpretation is consistent with the text of the statute and advances the legislative purpose of ensuring workers.
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The Paycheck Protection Program Interim Final Rule states lenders must “[c]onfirm the dollar amount of average monthly payroll costs for the preceding calendar year by reviewing the payroll documentation submitted with the borrower’s application.” Does that require that the lender replicate every borrower’s calculations?

No. Providing an accurate calculation of payroll costs is the responsibility of the borrower, and the borrower must attest to the accuracy of those calculations on the Borrower Application Form.

Lenders are expected to perform a good faith review, in a reasonable time, of the borrower’s calculations and supporting documents concerning average monthly payroll cost. For example, minimal review of calculations based on a payroll report by a recognized third-party payroll processor would be reasonable. In addition, as the PPP Interim Final Rule indicates, lenders may rely on borrower representations, including with respect to amounts required to be excluded from payroll costs.

If lenders identify errors in the borrower’s calculation or material lack of substantiation in the borrower’s supporting documents, the lender should work with the borrower to remedy the error.
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Are small business concerns required to have 500 or fewer employees to be eligible borrowers?

No. Small business concerns can be eligible borrowers even if they have more than 500 employees as long as they satisfy the existing statutory and regulatory definition of a “small business concern” under section 3 of the Small Business Act, 15 U.S.C. 632. A business that qualifies as a small business concern under section 3 of the Small Business Act, 15 U.S.C. 632, may truthfully attest to its eligibility for PPP loans on the Borrower Application Form, unless otherwise ineligible.

A business can qualify if it meets the SBA employee-based or revenue-based size standard corresponding to its primary industry, which can be determined by clicking here.

A business also can qualify for the PPP as a small business concern if it met both tests in SBA’s “alternative size standard” as of March 27, 2020:

  • maximum tangible net worth of the business is not more than $15 million; and
  • the average net income after Federal income taxes (excluding any carry-over losses) of the business for the two full fiscal years before the date of the application is not more than $5 million.

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Does my business have to qualify as a small business concern?

No. In addition to small business concerns, a business is eligible for a PPP loan if the business has 500 or fewer employees whose principal place of residence is in the United States, or the business meets the SBA employee-based size standards for the industry in which it operates (if applicable).

Similarly, PPP loans also are available for qualifying tax-exempt 501(c)(3) nonprofits, 501(c)(19) tax-exempt veterans organization and 31(b)(2)(C) Tribal business concerns that have 500 or fewer employees whose principal place of residence is in the United States or meet the SBA employee-based size standards for the industry in which they operate.
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Are lenders required to make an independent determination regarding applicability of affiliation rules under 13 C.F.R. 121.301(f) to borrowers?

No. It is the borrower’s responsibility to determine which entities (if any) are its affiliates and determine the employee headcount of the borrower and its affiliates. Lenders are permitted to rely on borrowers’ certifications.
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Are borrowers required to apply SBA’s affiliation rules under 13 C.F.R. 121.301(f)?

Yes. A borrower must certify on the Borrower Application Form they are eligible to receive a PPP loan, and that certification means the borrower:

  • is a small business concern;
  • meets the applicable SBA employee-based or revenue-based size standard, or;
  • meets the tests in SBA’s alternative size standard, after applying the affiliation rules, if applicable.

SBA’s existing affiliation exclusions apply to the PPP, including, for example the exclusions under 13 CFR 121.103(b)(2).
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The affiliation rule based on ownership states the SBA will deem a minority shareholder in a business to control the business if the shareholder has the right to prevent a quorum or otherwise block action by the board of directors or shareholders. If a minority shareholder irrevocably gives up those rights, is it still considered to be an affiliate of the business?

No. If a minority shareholder in a business irrevocably waives or relinquishes any existing rights specified, the minority shareholder would no longer be an affiliate of the business (assuming no other relationship that triggers the affiliation rules).
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The CARES Act excludes any employee compensation in excess of an annual salary of $100,000 from the definition of payroll costs. Does that exclusion apply to all employee benefits of monetary value?

No. The exclusion of compensation in excess of $100,000 annually applies only to cash compensation, not to non-cash benefits, including:

  • employer contributions to defined-benefit or defined-contribution retirement plans;
  • payment for the provision of employee benefits consisting of group health care coverage, including insurance premiums; and
  • payment of state and local taxes assessed on compensation of employees.

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Do PPP loans cover paid sick leave?

Yes. PPP loans covers payroll costs, including costs for employee vacation, parental, family, medical and sick leave. However, The CARES Act excludes qualified sick and family leave wages for which a credit is allowed under the Families First Coronavirus Response Act.
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My small business is a seasonal business whose activity increases from April to June. Considering activity from that period would be a more accurate reflection of my business’ operations. However, my small business was not fully ramped up on February 15, 2020. Am I still eligible?

A lender may consider whether a seasonal borrower was in operation on February 15, 2020, or for an eight-week period between February 15, 2019, and June 30, 2019.
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What if an eligible borrower contracts with a third-party payer such as a payroll provider or a Professional Employer Organization (PEO) to process payroll and report payroll taxes?

The SBA recognizes that eligible borrowers that use PEOs or similar payroll providers are required under some state registration laws to report wage and other data on the Employer Identification Number (EIN) of the PEO or other payroll provider.

In these cases, payroll documentation provided by the payroll provider that indicates the amount of wages and payroll taxes reported to the IRS by the payroll provider for the borrower’s employees will be considered acceptable PPP loan payroll documentation.

Relevant information from a Schedule R (Form 941), Allocation Schedule for Aggregate Form 941 Filers, attached to the PEO’s or other payroll provider’s Form 941, Employer’s Quarterly Federal Tax Return, should be used if it is available; otherwise, the eligible borrower should obtain a statement from the payroll provider documenting the amount of wages and payroll taxes. Employees of the eligible borrower will not be considered employees of the eligible borrower’s payroll provider or PEO.
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Can lenders accept signatures from a single individual who is authorized to sign on behalf of the borrower?

Yes. However, the borrower should bear in mind only an authorized representative of the business seeking a loan may sign on behalf of the business. An individual’s signature as an “Authorized Representative of Applicant” is a representation to the lender and to the U.S. government that the signer is authorized to make the certifications, including with respect to the applicant and each owner of 20% or more of the applicant’s equity, contained in the Borrower Application Form. Lenders may rely on that representation and accept a single individual’s signature on that basis.
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The amount of forgiveness of a PPP loan depends on the borrower’s payroll costs over an eight-week period; when does that eight-week period begin?

It begins on the date the lender makes the first disbursement of the PPP loan to the borrower. The lender must make the first disbursement of the loan no later than 10 calendar days from the date of loan approval.
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How do the $10 million cap and affiliation rules work for franchises?

If a franchise brand is listed on the SBA Franchise Directory, each of its franchisees that meets the applicable size standard can apply for a PPP loan. (The franchisor does not apply on behalf of its franchisees.)

The $10 million cap on PPP loans is a limit per franchisee entity, and each franchisee is limited to one PPP loan. Franchise brands that have been denied listing on the directory because of affiliation between franchisor and franchisee may request listing to receive PPP loans.

The SBA will not apply affiliation rules to a franchise brand requesting listing on the directory to participate in the PPP, but the SBA will confirm the brand is otherwise eligible for listing on the Directory.
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How do the $10 million cap and affiliation rules work for hotels and restaurants (and any business assigned a North American Industry Classification System (NAICS) code beginning with 72)?

Under the CARES Act, any single business entity assigned a NAICS code beginning with 72 (including hotels and restaurants) and that employs not more than 500 employees per physical location is eligible to receive a PPP loan.

In addition, the SBA’s affiliation rules do not apply to any business entity that is assigned a NAICS code beginning with 72 and that employs not more than a total of 500 employees. As a result, if each hotel or restaurant location owned by a parent business is a separate legal business entity, each hotel or restaurant location that employs not more than 500 employees is permitted to apply for a separate PPP loan provided it uses its unique EIN.

The $10 million maximum loan amount limitation applies to each eligible business entity, because individual business entities cannot apply for more than one loan. The following examples illustrate how these principles apply.

Example 1

Company X directly owns multiple restaurants and has no affiliates.

  • Company X may apply for a PPP loan if it employs 500 or fewer employees per location (including at its headquarters), even if the total number of employees employed across all locations is more than 500.

Example 2

Company X wholly owns Company Y and Company Z (as a result, Companies X, Y and Z are all affiliates of one another). Company Y and Company Z each own a single restaurant with 500 or fewer employees.

  • Company Y and Company Z can each apply for a separate PPP loan, because each has 500 or fewer employees. The affiliation rules do not apply, because Company Y and Company Z each has 500 or fewer employees and is in the food services business (with a NAICS code beginning with 72).

Example 3

Company X wholly owns Company Y and Company Z (as a result, Companies X, Y, and Z are all affiliates of one another). Company Y owns a restaurant with 400 employees. Company Z is a construction company with 400 employees.

  • Company Y is eligible for a PPP loan because it has 500 or fewer employees. The affiliation rules do not apply to Company Y, because it has 500 or fewer employees and is in the food services business (with a NAICS code beginning with 72).
  • The waiver of the affiliation rules does not apply to Company Z, because Company Z is in the construction industry. Under the SBA’s affiliation rules, Company Y and Company Z are affiliates of one another because they are under the common control of Company X, which wholly owns both companies. This means the size of Company Z is determined by adding its employees to those of Companies X and Y. Therefore, Company Z is deemed to have more than 500 employees, together with its affiliates. However, Company Z may be eligible to receive a PPP loan as a small business concern if it, together with Companies X and Y, meets SBA’s other applicable size standards.

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Can lenders use scanned copies of documents or E-signatures or E-consents permitted by the E-sign Act?

Yes. All PPP lenders may accept scanned copies of signed loan applications and documents containing the information and certifications required by SBA Form 2483 and the promissory note used for the PPP loan. Additionally, lenders may also accept any form of E-consent or E-signature that complies with the requirements of the Electronic Signatures in Global and National Commerce Act.

If electronic signatures are not feasible, when obtaining a wet ink signature without inperson contact, lenders should take appropriate steps to ensure the proper party has executed the document.

This guidance does not supersede signature requirements imposed by other applicable law, including by the lender’s primary federal regulator.
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Do businesses owned by large companies with adequate sources of liquidity to support the business’s ongoing operations qualify for a PPP loan?

In addition to reviewing applicable affiliation rules to determine eligibility, all borrowers must assess their economic need for a PPP loan under the standard established by the CARES Act and the PPP regulations at the time of the loan application.

Although the CARES Act suspends the ordinary requirement that borrowers must be unable to obtain credit elsewhere, borrowers still must certify in good faith that their PPP loan request is necessary.

Specifically, before submitting a PPP application, all borrowers should review carefully the required certification that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” Borrowers must make this certification in good faith, taking into account their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business.

For example, it is unlikely a public company with substantial market value and access to capital markets will be able to make the required certification in good faith, and such a company should be prepared to demonstrate to SBA, upon request, the basis for its certification.

Lenders may rely on a borrower’s certification regarding the necessity of the loan request. Any borrower that applied for a PPP loan prior to the issuance of this guidance and repays the loan in full by May 7, 2020, will be deemed by SBA to have made the required certification in good faith.
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About Ericksen Krentel

Ericksen Krentel CPAs and Consultants, founded in New Orleans, Louisiana in 1960 with offices in New Orleans and Mandeville, believes that serving as the clients’ most trusted adviser is grounded in going beyond the numbers.

That includes helping clients achieve their business and personal financial goals by providing innovative and exceptional services in the following areas: audit and assurance services, tax compliance and planning, outsourced CFO services and business valuations for a variety of industries; employee benefit plan audits; fraud and forensic accounting; business planning; IT consulting; loss calculations; and estate planning.

Learn more at www.ericksenkrentel.com.

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