SBA Guidance on PPP Loans, “Payroll Costs”

April 28, 2020 Advisory

The Small Business Administration (SBA) resumed accepting Paycheck Protection Program (PPP) applications from participating lenders on April 27, 2020, and has issued further guidance on which employee-related expenses qualify as “payroll costs” when calculating PPP loan values. Additionally, the Secretary of the U.S. Department of the Treasury (the Treasury) announced on April 28, 2020, that all PPP loans worth more than $2 million will be audited, which highlights the need for borrowers to carefully track and document “payroll cost” expenditures.

Housing Expenses are “Payroll Costs”

Specifically, the SBA advised that housing stipends and allowances qualify as “payroll costs.” This is of particular importance to many religious organizations that provide parsonage housing to their employees and to other nonprofit organizations that include housing as a major component of employee compensation. It should be noted, however, that—like all other forms of cash compensation—such housing allowances are subject to the cap of $100,000 in annual compensation per employee when determining a borrower’s “payroll costs.” 

Only U.S. Employee Expenses Qualify as “Payroll Costs”

The SBA also provided further clarification with respect to two requirements that impact eligibility. First, in addressing the requirement under the PPP that a borrower’s payroll costs subject to forgiveness must be for employees whose principal place of business is in the United States, the agency clarified that PPP applicants and lenders may consider IRS regulations (26 CFR §1.121-1(b)(2)) when determining whether an individual employee’s principal place of residence is in the United States. Under this regulation, an employee’s principal place of residence is defined as the property in which the employee spends the majority of their time during the year. 

Certain Agricultural Employers Qualify for PPP Loans

The SBA also clarified that agricultural producers, farmers and ranchers are eligible for PPP loans if:

  1. the business has 500 or fewer employees, or
  2. the business fits within the revenue-based size standard, which is average annual receipts of $1 million.

The SBA noted that agricultural producers, farmers and ranchers may also qualify for PPP loans as a small business concern if their business meets SBA’s “alternative size standard.” Under this standard, the maximum net worth of the business cannot be more than $15 million. Additionally, the average net income after federal income taxes (excluding any carryover losses) of the business for the two full fiscal years before the date of the application must not be more than $5 million. The guidance further clarified that small agricultural cooperatives and other cooperatives may receive PPP loans as long as other PPP requirements are met. 

The SBA also acknowledged the contrast between the PPP loan eligibility requirement, which limits borrower eligibility to employers with 500 or fewer employees (including full-time and part-time employees), and PPP loan forgiveness terms, which focus on whether a borrower has maintained its level of “full-time equivalent employees through June 30, 2020. This distinction has caused significant confusion among borrowers as they attempt to determine employee headcount for purposes of establishing PPP loan eligibility while focusing on a different headcount figure for securing loan forgiveness. Neither the CARES Act nor any regulatory guidance published to-date defines what constitutes a “full-time equivalent employee;” thus, further guidance is expected to address that issue, which is critical to workforce planning to maximize PPP loan forgiveness.

Finally, the SBA recently provided additional guidance on one of the certifications a borrower must make upon submitting an application for a PPP loan, specifically that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” The SBA explained that the certification must be made “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,” noting “that a public company with substantial market value and access to capital markets” will not likely be able to provide this certification in good faith. Borrowers should be prepared, upon request by the SBA, to demonstrate the business conditions which provided the basis for this certification. If there is any question as to whether the company had a proper basis for the certification, any loan repaid in full by May 7, 2020, which relates to an application filed before April 23, 2020, will be deemed to have been received based on a certification made in good faith. 

Armstrong Teasdale attorneys are actively monitoring and providing updates regarding the impact of COVID-19, including the PPP and other provisions of the CARES Act. Should the Treasury or the SBA provide additional guidance, we will be sure to update you. For additional information, visit Armstrong Teasdale’s COVID-19 Resource Center.


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