By Dean Cazenave, Blane Clark, and Elisabeth Prescott

  1. Calendar Year 2019 Payroll as Basis for Loan Amount (General Rule). If the borrower was in business for all of 2019, the PPP loan application form suggests that the borrower must use the payroll costs for calendar year 2019 (even though this appears to conflict with the language in the CARES Act, which provided for the calculation over the 12 month period preceding the loan application, and even though we understand a minority of lenders are following the language in the CARES Act and not utilizing average payroll during calendar year 2019 as called for on the application form).
  2. Apply Now and Choose Time of Funding.   Based solely on what one regional bank is informing its customers, it appears that PPP borrowers can file its application now, but wait to receive the money.  That way, the borrower can pick the 8-week period within which to spend the money (which amounts will therefore be eligible for loan forgiveness).  If the borrower has furloughed or laid off workers and expects to rehire them before June 30, 2020, it may want to wait until it has rehired them to get the loan proceeds. That way, it will be in a better position to spend the loan proceeds on eligible expenditures for periods when employees are actually working (otherwise it may be paying employees who are not actually working).  Although the SBA has not issued guidance on this issue, presumably once approved for the loan, the borrower should not be bumped because too much money has been spent.  All funding must occur before June 30, 2020.
  3. Certain Information Required with Application. There is a supplemental information form that must be completed that requires some basic information (see attached).
  4. Need to Spend 75% of Eligible Expenditures on Payroll Costs Under Forgiveness Formula. Of the amount to be forgiven based on expenditures during the 8-week period after the loan funding, at least 75% must be based on payroll costs during the 8-week period. If a business wishes to consolidate their Economic Injury Disaster Loan (loan made between January 31, 2020 and April 3, 2020) with its PPP Loan, then 75% of the refinanced combined amount of the EIDL loan and PPP Loan must be used for payroll costs during the 8-week period.
  5. Updated Interest Rate Info. The interest rate for the loans, if not forgiven, will be 1% per annum.  The maturity date will be the second anniversary of the loan. Payments are deferred for the first six months.
  6. Calculation of Eligible Payroll Costs. The CARES Act excludes from payroll costs compensation in excess of $100,000 per year, per employee. Many advisors and commentators have interpreted the $100,000 cap to apply strictly to salary and bonuses, but not other related compensation such as health insurance benefits.
  7. No Consensus or Guidance Re Treatment of Compensation Paid to Independent Contractors.  There appears to be no consensus or clear guidance (the guidance that does exist seems to be conflicting) as to whether a borrower can include in payroll costs compensation paid to individuals who provide services to the borrower but are treated as 1099 independent contractors (as opposed to employees). Some borrowers are including such compensation up to $100,000 per year per person cap. Some lenders are requesting information only on persons to whom the borrower issued a 1099-MISC (i.e., not some other 1099).
  8. No Consensus or Guidance Re Partner Compensation. There is no consensus or guidance with respect to whether employers taxed as partnerships may include compensation paid to partners. Some applicants are taking the position that the portion of partner compensation which is “wages” as reflected on 2019 k-1’s are eligible to be included in payroll costs (up to $100,000).
  9. Counting Employees. The SBA’s most recent guidance suggests that for purposes of calculating the number of employees of the borrower, applicants (and the applicant’s affiliated entities) should only count employees who principal place of residence is in the U.S. Under the SBA’s historical rules on affiliation, the size of foreign affiliates will be added to the size of the applicant, but under the new guidance, it appears that applicants should count only employees of foreign affiliates whose principal place of residence is in the U.S.
  10. Sole Proprietorships May Not Apply Until April 10, 2020.   Sole proprietorships are not allowed to submit applications until April 10, 2020. Query whether the SBA or U.S. Treasury will issue guidance with respect to sole proprietorships before April 10, 2020.