Updated SBA Guidance for the Paycheck Protection Program April 10, 2020

ALG small, sba guidanceUpdated SBA Guidance for the Paycheck Protection Program
By Adam Glassman

April 9, 2020 update

The Small Business Administration (SBA) released an interim final rule for the Paycheck Protection Program (the “Program”) and continues to issue additional guidance through Frequently Asked Questions. Initial information and commentary regarding the Program were released very quickly, some of which required speculation. The new SBA guidance and FAQs will impact how the Program operates and attempts to resolve some of the ambiguity of the CARES Act.

Application Period and Requirements

The application window for Program loans opened on April 3 for small businesses and sole proprietors, but many lenders are delaying accepting applications as they seek additional guidance and understanding for implementing and administering Program loans. Independent contractors must wait until April 10 to apply pursuant to the new guidance. In all cases, loans will be available until June 30 unless the $349 billion allocated to the Program is exhausted before that point.

Another important clarification regarding the application process is that borrowers can calculate their aggregate payroll costs using data either from the previous 12 months or from the 2019 calendar year.

The new guidance has further clarified that certain businesses may not be eligible for a Program loan, including any business that has ever obtained a direct or guaranteed loan from the SBA or any other Federal agency and is currently delinquent or has defaulted within the last seven years.

The application requires certain representations and certifications from the borrower, which includes an acknowledgement that submitted tax documents are identical to those submitted to the Internal Revenue Service. Businesses must also acknowledge that they will make good faith effort to purchase American-made equipment and products to the extent feasible. This is particularly important to keep in mind for businesses that currently rely on foreign suppliers.

Low Interest Rate and Maturity Period

One of the more notable details of the new SBA guidance is that all loans will be subject to a 1% interest rate and will mature over a 2-year period. This is a departure from previous guidance issued by the SBA that suggested the interest rate would be 0.5%. Although the Program, by law, allows for a maximum interest rate of 4% and a 10-year maturity period, the SBA and Secretary of the Treasury, who have been delegated authority to govern the loan program within the confines of the law, determined that the temporary nature of the Program and current economic climate warranted a 1% interest rate and shortened maturity period.

Interest will begin to accrue when a loan originates, however, it is clear now that businesses may defer interest payments for up to six months.

Treatment of Independent Contractors and Federal Taxes

For businesses that make use of independent contractors, those contractors cannot be counted as employees when calculating the businesses loan amount. Similarly, independent contractors will not be considered for loan forgiveness purposes. As noted above, independent contractors may apply for a Program loan on their own beginning April 10.

With respect to employer-withheld federal employment taxes, including FICA (Social Security and Medicare taxes), those are expressly excluded from the definition of payroll costs and should not be factored in when calculating loan amounts. However, the employee’s federal taxes which are withheld by the employer is to be included as part of payroll costs.

Exclusion of Compensation above $100,000 in Calculating Loan Amount

The exclusion for compensation above $100,000 for an employee applies only to cash compensation, not noncash benefits. Noncash benefits will not be excluded from payroll costs calculation.

Use of Loan Proceeds and Loan Forgiveness

Another key point that was clarified through the new guidance is that at least 75% of a business’s loan proceeds must be allocated to payroll costs to be eligible for loan forgiveness. Thus, not more than 25% of a Program loan can be used for non-payroll costs such as rent, utilities or other costs. This ensures that the purpose of the Program, to keep American workers paid and employed, is uniformly maintained. Strict adherence to these percentages will be considered when the lender calculates the forgivable amount of a Program loan. Businesses should note that the principal amount of a Program loan, including accrued interest, is eligible for forgiveness. It is anticipated that further guidance regarding loan forgiveness will be disseminated soon.

SBA Affiliation Rules

In general, the SBA considers business concerns and other entities to affiliates of each other when one controls or has the power to control the other, or a third party or parties controls or has the power to control both. It does not matter whether control is exercised, so long as the power to control exists. The SBA considers factors such as ownership, management, previous relationships with or ties to another concern, and contractual relationships, in determining whether affiliation exists.

When applying for a Program loan, businesses will need to apply the SBA’s affiliation rules. This was made clear through recent FAQs and may affect a business’s ability to obtain a Program loan. Notably, the affiliation rules do not apply hospitality and dining industry businesses that have less than 500 employees and have an NAICS code beginning with 72, as well as franchise businesses with an identifier code assigned by the SBA and any business receiving financial assistance under the Small Business Investment Act of 1958. Thus, for those businesses not excluded from the affiliation rules, an analysis is necessary to determine whether an affiliation exists. The SBA defined four tests in assisting in determining this complicated question, which are ownership, management, identity of interest and stock options, convertible securities, and agreements to merge. Further, the affiliation rules require that a business be within the NAICS size standard associated with its own industry and within the highest size standard of its affiliates. Thus, in cases where a business has an affiliation and seeks to obtain a Program loan, the number of employees and annual revenues of any affiliates must be factored in along with those of the applying business.

The attorneys at McCarthy Lebit remain available to discuss any questions or needs that your business may have. We are continuing to stay apprised of COVID-19 developments and will continue to update our materials accordingly.

Adam Glassman is an attorney at the Cleveland, OH-based law firm of McCarthy, Lebit, Crystal & Liffman


While we would be thrilled to work with all individuals, institutions and companies that read our advisories, we  want to clarify that these insights do not form a lawyer-client relationship and represent only general guidance without access or reference to all of the specific facts and circumstances.  If you do wish to engage McCarthy Lebit on a specific matter, please contact us by calling 216-696-1422 or by filling out an inquiry form located here.  If you are already a firm client, please contact the McCarthy Lebit attorney you work with to discuss these advisories and/or the nature of your concern.  In closing, please understand that the law, especially during this pandemic, is changing rapidly and we would recommend that you regularly contact your legal counsel to ensure that your actions are taken based on the most up-to-date versions of the laws.

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