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Update on Paycheck Protection Program Loans

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NOTE—The Paycheck Protection Program Flexibility Act of 2020 amends the CARES Act and this article updates the information below>> click here to read more. 


This article updates the information in the articles, “SBA Issues Interim Final Rule For The Paycheck Protection Program” dated April 3, 2020, and “Paycheck Protection Program Under The Coronavirus Aid, Relief, and Economic Security Act” dated March 31, 2020.


The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) established the Paycheck Protection Program (“PPP”).  The CARES Act provides the general framework for the loans available to businesses under the PPP and on April 2, 2020 the Small Business Administration (“SBA”) issued its Interim Final Rule (13 CFR Part 120) (the “Rule”).  On April 7, 2020 the Department of the Treasury issued additional guidance (“Treasury Guidance”) supplementing the Rule and providing additional guidance and clarification.  The Treasury Guidance is located here.  The primary issues addressed in the Treasury Guidance are as follows:

When computing payroll costs how is compensation of employees in excess of $100,000 treated?

The Treasury Guidance clarifies that the exclusion of compensation in excess of $100,000 annually applies only to cash compensation, not to non-cash benefits, including:

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

What time period should be used to determine the number of employees and Payroll Costs?

Businesses can calculate their aggregate Payroll Costs using data either from (1) the previous 12 months or (2) 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).

Should payments to an independent contractor or sole proprietor be included in calculations of the Payroll Costs?

No. Any amounts that business paid to an independent contractor or sole proprietor should be excluded from the calculation of Payroll Costs.  The independent contractor or sole proprietor will itself be eligible for a PP Loan, if it satisfies the applicable requirements.

How are federal taxes treated when determining Payroll Costs for purposes of the maximum loan amount, allowable uses of a PPP Loan, and the amount of a PPP Loan that may be forgiven?

Payroll Costs are not reduced by taxes imposed on an employee and required to be withheld by the employer, but do not include the employer’s share of payroll tax. The Treasury Guidance provided the following 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. However, the employer-side federal payroll taxes imposed on the $4,000 in wages are excluded from Payroll Costs under the statute.

Can a business use reports provided by an outside payroll processing company to support its Payroll Costs?

Yes, payroll documentation provided by the payroll company that indicates the amount of wages and payroll taxes reported to the IRS 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 payroll company’s Form 941, Employer’s Quarterly Federal Tax Return, should be used if it is available; otherwise, the business should obtain a statement from the payroll company documenting the amount of wages and payroll taxes.

The amount of forgiveness of a PPP Loan depends on the borrower’s payroll costs and other allowable expenses paid over an eight-week period; when does that eight-week period begin?

The eight-week period begins on the date the lender makes the first disbursement of the PPP Loan to the borrower.

When will the proceeds of a PPP Loan be disbursed by the lender to the business?

The lender must make the first disbursement of the loan no later than ten calendar days from the date of loan approval.

Finally, the Treasury Guidance confirmed that if a business applied for a PPP Loan prior to the release of the Treasury Guidance, the business is not required to update or resubmit its application considering the Treasury Guidance.  The business is entitled to rely on the laws, rules, and guidance available at the time of its application.  However, if an application was submitted and has not yet been processed, the business may want to revise the application taking into account the Treasury Guidance.

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