Paycheck Protection Program: Frequently Asked Questions

We’ve gotten a lot of questions about the Paycheck Protection Program. We will use this location to try to offer some answers for the ASA Community.  If you have questions that are not answered here, then please email them to Jason Dickstein and he will attempt to find answers and post them to the blog.

These answers are general in nature and are not meant to reflect legal advice.  Answers to your specific questions can turn on specific facts that apply to your situation.  Many of these issues can get far more complicated when you consider unusual fact patterns.  If you are uncertain about how the law applies to your particular facts, then you should contact an attorney for assistance.

Also, please note that SBA has JUST issued regulations for this program, which are available here.

 

Is my business eligible for the Paycheck Protection Program?

The Paycheck Protection Program. is meant for small businesses, and certain other businesses described in the CARES Act.  Under SBA rules, to be considered a small business you need to meet the SBA’s guidelines for your industry.

Industry small business thresholds are distinguished and published based on NAICS codes.  To identify the threshold that applies to you, you need to first identify the NAICS code that reflects your primary business activity.  In determining the primary industry in which a concern or a concern combined with its affiliates is engaged, SBA considers the distribution of receipts, employees and costs of doing business among the different industries in which business operations occurred for the most recently completed fiscal year. SBA may also consider other factors, such as the distribution of patents, contract awards, and assets.

For example, let’s imagine you are operating a repair station and also distributing aircraft parts.  The repair station accounts for 60% of your revenues, and it also accounts for 75% of your personnel.  Under this hypothetical, the repair station appears to be the predominant business for purposes of identifying the appropriate NAICS code to apply.

This table shows a few of the NAICS codes that commonly reflect the business models of ASA members:

Business Activity NAICS (2017) Size Standard
Aircraft Parts Distribution 423860 500 employees
Aircraft Sales 441228 500 employees
Commercial Aircraft Leasing (dry lease) 532411 $35,000,000 annual revenue
Air Transportation Support Activities, including Repair Stations (but excepting “factory” conversion, overhaul and rebuilding) 488190 $35,000,000 annual revenue

There are special rules for the Paycheck Protection Program. If your business does not meet the small business thresholds, but it has 500 employees or less, then it is permitted to apply for the Paycheck Protection Program (unless otherwise excluded).  For example, a repair station that has average receipts of $40 million would appear (at first blush) to be too large to qualify as a small business; but if it has only 400 employees then it likely is permitted to apply for the Paycheck Protection Program under this special rule.

This size standard includes the employees/revenue of your foreign and domestic affiliates (you have to consider affiliates, too, when calculating whether you meet the size standards).

There are exclusions, too.  They include those who are delinquent in paying a past SBA loan, and businesses with significant owners (>20%) who are in jail, under indictment, or otherwise subject to the criminal justice process.

Source 13 C.F.R. 121.107

 

How do I calculate revenue for size standard purposes?

For small business purposes you should use your most recent tax returns to identify your revenue.   If you are looking at your business tax return, this typically means your “total income” plus “cost of goods sold.”  You msut use the average of the most recent three years.  Where there are affiliates, you have to include the revenues of your affiliates.

Source 13 C.F.R. 121.104

 

How do I calculate number of employees for size standard purposes?

For small business purposes you should use the average number of employees (including those of your affiliates) in each pay period for the past 12 calendar months.

In determining your business’ number of employees, you should counts all individuals employed on a full-time, part-time, or other basis.  This includes employees obtained from a temporary employee agency.  Part-time employees are each counted the same as full-time employees (they are not fractions).  Volunteers are not considered employees (but for many companies in the ASA community, volunteers could violate the Fair Labor Standards Act so be careful about characterizing employees as volunteers).

Source 13 C.F.R. 121.106

 

What are the SBA Affiliation Rules and how do they impact my ability to qualify as a small business?

In determining whether a business is a small business, the SBA will add in the revenue/employees of its affiliates.  So if a business has three locations that are subject to common ownership or control, then the employees/revenues of all three locations will be aggregated to determine if the business is a small busieness.

Concerns and entities are affiliates of each other when one controls or has the power to control the other.  Two businesses may also be affiliates when a third party (or group) controls or has the power to control both.   It does not matter whether control is actually exercised, so long as the power to control exists.  Factors to consider in determining affiliation include ownership, management, previous relationships with or ties to another concern, and contractual relationships.  Negative control, like minority ownership with the power to prevent a quorum, can also be a form of control.

Foreign affiliates and non-profit affiliates are also considered affiliates for these purposes.

The Paycheck Protection Program created a special exception to the affiliation rule.  The exception applies to businesses under the NAICS codes beginning with 72 and having 500 or fewer employees at each location.  This includes hotels and restaurants.  This means that a hotel chain can treat each location as a separate business for purposes of applying the 500 person limit.

Source: CARES Act, 13 C.F.R. 121.103.

 

How do I apply for the Paycheck Protection Program?

Applications for the Paycheck Protection Program must be filed with a qualified bank or financial institution.  This includes lenders who are already qualified to process SBA section 7(a) loans.  You should consult with your local lender as to whether it is participating. You can visit the SBA website for a list of SBA lenders.

Source: Treasury PPP Fact Sheet for Borrowers

 

What is the Maximum Loan Size?

The maximum loan size is two and half times of your average monthly payroll for the prior year (so, 2.5 months-worth of payroll). If you’ve already received a disaster assistance loan between January 31, 2020 and the date on which these loans are made available, then you can also refinance that prior loan under this new program (this amounts to an increase in the maximum loan authority over the “2.5 times payroll” limit).

If you refinance an Economic Injury Disaster Loan (EIDL) through this mechanism, ten you should note that it will be subject to the limits of this loan program (e.g. two year term) as well as the benefits (e.g. lower interest rate)

There is an additional cap of $10,000,000 for the total loan amounts for which you may be eligible.

Source: CARES Act

 

What Can I Use the Loan For?

You can use the loan for

  • Payroll costs for US residents (which include compensation up to $100,000 annual salary)
  • Group health care costs and insurance premiums
  • Employee salaries and commissions
  • Mortgage interest (but not principal)
  • Rent
  • Utilities
  • Interest on pre-existing debt
  • refinancing an EIDL loan made between January 31, 2020 and the date on which the PPP loans become available

Only some of these uses are eligible for loan forgiveness.

The regulations anticipate that at least 75% of the PPP Loan must be used for payroll.

Source: CARES Act, SBA PPP Regulations

 

What qualifies as “payroll costs?”

The sort of payroll costs that are allowable expenses under the Program are compensation to U.S. employees (principal place of residence must be in the United States).  This compensation can take the form of:

  • salary, wages, commissions, or similar compensation
  • cash tips or the equivalent
  • payment for vacation, parental, family, medical, or sick leave
  • allowance for separation or dismissal (severance)
  • payment for the provision of employee benefits consisting of group health care coverage, including insurance premiums, and retirement
  • payment of state and local taxes assessed on compensation of employees

This list does not include the provisions for sole-proprietors because ASA members tend to be structured as businesses.

Source: SBA PPP Regulations

 

How many employees do I have to retain qualify for the Paycheck Protection Program?

The Paycheck Protection Program does not specifically require you to retain any employees, but it is intended to allow you to retain employees, so failure to retain employees will (1) give you less payroll on which to spend the funds, and (2) reduce your ability to obtain loan forgiveness for the Paycheck Protection Program loan.

As part of the loan application, you will be required to certify “that funds will be used to retain workers and maintain payroll or make mortgage payments, lease payments, and utility payments.”  But this does not mean that you can terminate all of the employees and spend all of the money on lease payments.  The regulations clarify that at least 75% of the loan must be spent on payroll.

The real penalty for failure to retain employees is that the amount of loan forgiveness is reduced if your headcount goes down or your payroll goes down (or if you fail to use the money for payroll).

Headcount Reduction: You compare the average monthly headcount during the eight weeks from the origination of the loan to the average monthly headcount during the period beginning on January 1, 2020 and ending on February 29, 2020. If headcount has gone down then you get a percentage of forgiveness correlative to the percent of remaining employees. For example, if you had 20 employees during the 2019 period, but only 18 during the eight weeks after origination of the loan, then you would only get 90% forgiveness (and the remaining ten percent of the loan would be subject to repayment).

Payroll Reduction: The amount of loan forgiveness is also reduced by the amount of any reduction in total salary or wages of any employee (except for employees who received more than $100,000 pay in 2019). This applies if the employee’s wages during the eight weeks after origination of the loan are reduced in excess of 25 percent of the total salary or wages of the employee during the most recent full quarter during which the employee was employed before the covered period. I think this clause may have been improperly drafted by the Senate, because we are comparing wages over an eight week period to wages over a thirteen week period; but it is clearly meant to be an incentive to continue wages at (or near) their pre-loan amounts.

In addition, not more than 25 percent of the loan forgiveness amount may be attributable to non-payroll costs.  So if you try to use the loan for rent and not payroll, you could severely limit your loan forgiveness options.

Source: CARES Act, SBA PPP Regulations

 

If I already applied for an SBA section 7(a) Loan then can I apply for a Paycheck Protection Program loan?

No.  Part of the certification necessary when you apply for the Paycheck Protection Program is a certification that you do not have an application pending for a loan under the same subsection (15 USC 636(a), or section 7(a) of the original Act), nor have you received a loan under that subsection, that would duplicate the purpose of the Paycheck Protection Program.

Thus, if you’ve already applied for a section 7(a) loan to cover things that reflect allowable expenses under the Paycheck Protection Program, then you will need to withdraw that application before you can apply for the Paycheck Protection Program.

This does not seem to apply to EIDL loans, because they arise under section 7(b) of the Act (a different subsection).

Source: CARES Act

 

If I already received an SBA Economic Injury Disaster Loan (EIDL) then can I apply for a Paycheck Protection Program loan?

Yes.  EIDLs appear to arise under subsection 7(b) so they do not appear to interfere with the PPP program.  If you received an SBA EIDL loan between January 31, 2020 and April 3, 2020, then you can apply for a PPP loan.

If your EIDL loan was not used for payroll costs, it does not affect your eligibility for a PPP loan.

If your EIDL loan was used for payroll costs, then your PPP loan must be used to refinance your EIDL loan.  The EIDL features an option for an advance of up to $10,000 that does not need to be repaid (“advance”).  Proceeds from such an advance up to $10,000 on the EIDL loan will be deducted from the loan forgiveness amount on the PPP loan.

Source: CARES Act, SBA PPP Regulations

 

If I already received an SBA loan then can I apply for a Paycheck Protection Program loan?

It depends on the type of loan and it may depend on reasons why you got the loan.

Part of the certification necessary when you apply for the Paycheck Protection Program is a certification that you haven’t received a loan under the same subsection (subsection 7(a)), that would duplicate the purpose of the Paycheck Protection Program.  So if you received a subsection 7(a) loan and it was meant to be applied to payroll, mortgage, rent, or any of the other allowable costs of the Paycheck Protection Program, then you may be precluded from applying for the Paycheck Protection Program.

But you received an SBA 7(a) loan for something outside the allowable costs of the Paycheck Protection Program, then you may be permitted to apply for the Paycheck Protection Program.  The CARES Act specifies that if you already received a 7(a) loan between January 31, 2020 and the date on which the Paycheck Protection Program is made available, then you can apply for the Paycheck Protection Program loan as long as the EIDL was for a purpose other than the alowable uses for the Paycheck Protection Program.  As an example, if you were in a declared disaster zone due to a tornado and received an EIDL to pay for tornado-damage to your facility, then that would not inhibit your efforts to secure a Paycheck Protection Program loan.

Source: CARES Act

 

What is the PPP Loan Interest Rate?

1%

The statute explained that interest will be charged in an amount set by SBA, not to exceed 4 percent.  SBA had revealed a plan to set the interest rate at 0.5%, but the final regulation set interest at one percent.

Source: CARES Act, SBA PPP Regulations

When Do I Start Repaying the PPP Loan?  What is the term?

Under the statute, repayment is deferred for between 6 months and one year, and the repayment period can be up to ten years.  The US Government guidance that has been released since the Act was passed states that the loans will be for only two years and the deferment period will be six months. This means that you will start repaying the loan six months after it was issued.

Interest will continue to accrue on PPP loans during this six-month deferment.

Only the amount remaining after loan forgiveness needs to be repaid.  This may be limited to interest if the principle is entirely forgiven.

Source: CARES Act, Treasury PPP Fact Sheet for Borrowers, SBA PPP Regulations

 

Do I Have to Repay the PPP Loan?

Not if you spend it on the right things and meet the right requirements! You can receive loan forgiveness for amounts spent, during the eight weeks after origination of the loan, on:

  • Payroll
  • Mortgage interest
  • Rent
  • Utilities

Note that this is a slightly shorter list than the list of things for which you can use the loan, so you can use the loan as a typical loan for the other eligible expenses, as well.  Money spent on allowable purposes outside this list will continue to be treated as a non-forgiven loan.

Source: CARES Act

 

How Much Loan Forgiveness Can I Get?

You can get up to 100% of the principle forgiven, as long as it is used for Payroll, Mortgage interest, Rent, and/or Utilities.  However, there are certain things that can reduce this amount.  The amount of loan forgiveness will also be reduced if your headcount goes down or if your payroll is substantially reduced:

Headcount Reduction: You compare the average monthly headcount during the eight weeks from the origination of the loan to the average monthly headcount during the period beginning on January 1, 2020 and ending on February 29, 2020. If headcount has gone down then you get a percentage of forgiveness correlative to the percent of remaining employees. For example, if you had 20 employees during the 2019 period, but only 18 during the eight weeks after origination of the loan, then you would only get 90% forgiveness (and the remaining ten percent of the loan would be subject to repayment).

Payroll Reduction: The amount of loan forgiveness is also reduced by the amount of any reduction in total salary or wages of any employee (except for employees who received more than $100,000 pay in 2019). This applies if the employee’s wages during the eight weeks after origination of the loan are reduced in excess of 25 percent of the total salary or wages of the employee during the most recent full quarter during which the employee was employed before the covered period. I think this clause may have been improperly drafted by the Senate, because we are comparing wages over an eight week period to wages over a thirteen week period; but it is clearly meant to be an incentive to continue wages at (or near) their pre-loan amounts.

To get loan forgiveness, you will have to submit an application to the lender the proves what you spent the money on, so keep good records.

Source: CARES Act

What if I have already terminated employees before I realized that I could get the PPP?

If I have already terminated workers before the PPP, then you may be able to secure the full amount of loan forgiveness by rehiring them.

If you reduced headcount and/or salaries between February 15, 2020 and April 26, 2020, but you remedied headcount/salaries by eliminating the reduction in employees/salary by June 30, 2020, then the loan forgiveness will be calculated without any reduction.

Source: CARES Act

 

Is it easier to apply for the PPP than for other SBA programs?

Yes.  Some of the normal small business loan preconditions are waived for these Paycheck Protection Program loans. The most important ones are:

Source: CARES Act

 

If I seek loan forgiveness, then is the forgiveness treated as taxable income?

The amount forgiven will be treated as cancelled debt but is NOT included in gross income.

Typically, some cancelled debt is considered taxable income under federal tax standards.  But another clause in the CARES Act would exclude this forgiveness amount from gross income so this may mitigate subsequent tax consequences.

Source: CARES Act

 

What happens if PPP loan funds are misused?

If you use PPP funds for unauthorized purposes, then SBA will direct you to repay those amounts.

If you knowingly use the funds for unauthorized purposes, then you may be subject to additional penalties through mechanisms such as government fraud charges.

About Jason Dickstein
Mr. Dickstein is the President of the Washington Aviation Group, a Washington, DC-based aviation law firm. Since 1992, he has represented aviation trade associations and businesses that include aircraft and aircraft parts manufacturers, distributors, and repair stations, as well as both commercial and private operators. Blog content published by Mr. Dickstein is not legal advice; and may not reflect all possible fact patterns. Readers should exercise care when applying information from blog articles to their own fact patterns.

4 Responses to Paycheck Protection Program: Frequently Asked Questions

  1. Pingback: Paycheck Protection Program Regulations Are Available | MARPA

  2. Pingback: Congress Plans to Add Funds to Small Business Loan Programs | MARPA

  3. Pingback: Congress May Extend the Deadline for Forgivable PPP Loans | ASA Web Log

  4. Pingback: House and Senate Vote to Extend the PPP Application Period | MARPA

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