By Cary Zimmerman and Kevin O’Connor

The Treasury Department and Small Business Administration (SBA) have issued new FAQs regarding Paycheck Protection Program loans. Below is a summary of the guidance. The FAQs state that they will be updated on a regular basis, so future updates may be forthcoming. We will provide updates to this summary as necessary, if that happens.

Additionally, Treasury Secretary Mnuchin has indicated that he is in contact with Congressional leadership to make an additional $250 billion available for this program. This announcement is a welcome one as many banks already report that they have made tens of billions of loans in just 5 days, with some using their entire SBA allotment by Monday morning.

How to Calculate Payroll Costs

  • Payments to independent contractors should not be included in calculations of payroll costs: These amounts should be excluded, and independent contractors are themselves eligible for PPP loans if they otherwise satisfy requirements.
  • Borrower payroll costs should be calculated on a gross basis without regard to federal taxes imposed on, or withheld from, the employee: Payroll costs should not be reduced by taxes imposed on employees and required to be withheld by the employer. However, payroll costs does not include the employer’s share of payroll tax.
  • Non-cash benefits provided to employees are not subject to the “in excess of $100,000” exclusion for calculating payroll costs: Benefits paid for by employers, such as retirement plan contributions, health insurance premiums and payment of state and local taxes assessed on employee compensation, are not subject to the requirement to exclude compensation in excess of $100,000/year, for purposes of calculating payroll costs.
  • In calculating aggregate payroll costs and average employment (if applying an employee-based size standard), borrowers can use data from either (i) calendar year 2019 or (ii) the trailing twelve months: Either measurement period is acceptable. Borrowers also may elect to use “the average number of employees per pay period in the 12 completed calendar months prior to the date of the application (or average number of employees for each of the pay periods that the business has been operations, if it hasn’t been operational for 12 months).” Seasonal businesses can use average monthly payroll for the period between February 15, 2019, or March 1, 2019, and June 30, 2019. If the borrower wasn’t in business from February 15, 2019 to June 30, 2019, it can use the average monthly payroll costs for the period January 1, 2020 through February 29, 2020.
  • In evaluating eligibility, lenders can apply either of two measurement periods to seasonal businesses: For seasonal businesses, lenders can consider whether the borrower was in operation on February 15, 2020 or for an 8-week period between February 15, 2019 and June 30, 2019. This gives borrowers and banks flexibility for seasonal businesses that were ramping up in calculating headcount and payroll costs.
  • Borrowers are accountable for accurately calculating payroll costs: This is the responsibility of the borrower—not the lender—and lenders aren’t required to replicate all borrower calculations. Lenders must “perform a good faith review” of submitted calculations and documentation, in a reasonable time, and the lender’s level of diligence must be commensurate with the quality of the supporting documents supplied. If the application contains errors, the lender must work with the borrower to remedy them.

Regular SBA Rules for Eligibility, Affiliation Still Apply

  • Borrowers with >500 employees can be eligible: Borrowers can be eligible if they have over 500 employees, if they meet either condition below.
    • If they otherwise qualify as a “small business concern” under the Small Business Act; this is attainable for any employee that meets the SBA’s employee- or revenue-based metric applicable to it industry (based on NAICS code; see SBA’s size standards tool here).
    • If they satisfy the “alternative size standard” test, which requires that, as of March 27, 2020: (1) the borrower’s maximum tangible net worth is ≤$15 million; and (2) its average net income after federal income taxes (less any carry-over losses) for the two full fiscal years before the application date was ≤$5 million.
  • Lenders will not verify affiliation: Lenders are not required to audit affiliation; the borrower bears the responsibility of determining employee headcount of the borrower and its affiliates, and lenders will rely on the borrowers’ certifications.
  • Affiliation rules under 13 CFR 121.301 apply: In addition to the affiliation rules in 13 CFR 121.301, borrowers must adhere to the affiliation rules in the previously published Interim Final Rule on Affiliation.
  • Minority shareholders with blocking rights can relinquish them to eliminate affiliation: If a minority shareholder in a business has blocking rights that give rise to affiliation under applicable rules, the shareholder can irrevocably waive or relinquish those rights to cease to be an affiliate.

Questions About the Application Itself

  • Borrowers that use payroll providers or PEOs to process payroll and report payroll taxes may submit those providers’ reports as documentation: If the borrower uses such a third-party provider and the provider reports wages and other data for the borrower’s employees under its EIN, it is acceptable for the borrower to submit payroll documentation provided by the payroll provider indicating the amount of wages and payroll taxes reported to the IRS by the payroll provider for the borrower’s employees.
  • A single authorized representative of the borrower may sign the PPP application: Only an authorized representative of the business may sign the application, and such signature is a representation to the lender and U.S. government that the signer is indeed authorized to make the certifications contained in the application.
  • Felons may apply for the PPP loans: Businesses are only ineligible for the PPP loans if any ≥20% owner is presently incarcerated, on parole or on probation; subject to an indictment, criminal information, arraignment, or otherwise subject to formal criminal charges in any jurisdiction; or, within the last 5 years, for any felony, has been convicted; pleaded guilty; pleaded nolo contendere; been placed on pretrial diversion; or been placed on any form of parole or probation.
  • Lenders may use their own application portals and forms: Lenders may use their own portals and forms that “ask for the same information (using the same language) as the Borrower Application Form.” Lenders are still required to send the data to the SBA using the SBA’s interface.
  • Previously submitted applications are grandfathered: Borrowers and lenders who already processed loan applications without the benefit of the guidance in the FAQs “may rely on the laws, rules, and guidance available at the time of the relevant application” but if the applications have not yet been processed, borrowers may revise the applications based on the clarifications in the FAQs.

If you have any questions about the PPP Loans or or other SBA loan programs, contact Cary Zimmerman at or 216.736.7275, Kevin O’Connor at or 216.736.7213 or one of our Banking & Finance professionals.