New Expanded SBA Eligibility for PPP Loans
Late on April 6, 2020, the Small Business Administration (“SBA”) and the Treasury Department issued updated Frequently Asked Questions (“FAQs”) expanding the employers able to use the Paycheck Protection Program (“PPP”) and clarifying a number of questions for determining the maximum loan amount, documentation to be provided to banks and the banker’s responsibilities with respect to these loans.
In Q&A 2, SBA provided an “alternative size standard” under which employers may qualify under the PPP program and also opened up eligibility to employers that qualify under either the revenue based size standard or employee based size standard defined in the SBA regulations for their primary NAICS code.
The most significant window of opportunity lies in the new “alternative size standard.” SBA now states that an employer will qualify for PPP if it meets both of the following tests:
- Employer’s maximum tangible net worth on March 27, 2020, is not more than $15 million; and,
- Employer’s average net income after Federal income taxes (excluding any carry-over losses) for the two full fiscal years before the date of application is not more than $5 million.
Employers should keep in mind that the affiliation rules still apply. Thus, except in the case where entities are not subject to the affiliation rules, all affiliated businesses must be considered in calculating the $15 million net worth limit and the $5 million average net income amount. There is no guidance on what is included in tangible net worth. It seems reasonable to start with book or tax net worth and subtract intangible assets such as goodwill, patents, copyrights, and unamortized loan costs. Similarly, there is no indication as to net income is determined on a financial statement or tax basis.
This provides an opportunity to many affiliated companies, including those owned by private equity or venture capital, who previously determined that they were ineligible under PPP based on the number of employees of their affiliated entities.
In addition, employers with workforces of 500 or more employees may now qualify if the employer’s average revenues over the previous three years is less than the revenue based size standard for the primary NAICS code of the company. Given that revenue size standards generally range from $5 – 35 million, it is unlikely that an employer with over 500 employees will have revenues under the applicable size standard.
Determining the Maximum Loan Amount
In a favorable clarification, the government confirms in Q&A 16 that there should be no tax adjustment for Federal Income Tax Withholding (“FIT”) or the employer share of OASDI or Medicare. There is also no adjustment for employer OASDI or Medicare.
As expected, the guidance clarifies that an applicant’s average monthly payroll can be determined using either calendar year 2019 or the previous 12 months. (Q&A 14). In addition, the $100,000 limitation applies only to cash compensation and not to health care costs, retirement plan contributions or state taxes. (Q&A 7).
An entity that contracts with a PEO can include the worksite employees whose wages are reported under the PEO’s EIN. Acceptable documentation for this will be payroll documentation provided by the PEO that indicates the wages and payroll taxes reported to the IRS and, if available, relevant information from the PEO’s Schedule R of Form 941 (Q&A 10).
In addition, the guidance makes clear that it is the borrower’s responsibility to determine applicability of the affiliation rules and the employee headcount, not the bank’s (Q&A 5). This should facilitate the processing of applications at the banks.
If you previously believed you were not eligible for the program, determine if the new tangible net worth and net income standards can be met or if the revenue standard for your primary NAICS code is met.
If you have previously filed your loan application deducting any federal income tax withholding or the employee’s share of employment taxes and your bank has not processed the application, you can resubmit the application with this adjustment to provide for a higher maximum loan amount.
For assistance with completion of your PPP application or to obtain access to CB advisors who can address questions applicable to your situation please contact firstname.lastname@example.org.