Q1. What is the CARES Act Paycheck Protection Program?

A1. The CARES Act (Act) Paycheck Protection Program (PPP) is part of a new Small Business Administration (SBA) lending program designed to provide small businesses with funds to pay up to 8 weeks of payroll costs including benefits. Funds can also be used to pay interest on mortgages, rent, and utilities, or to repay or refinance any outstanding amount owed under an SBA Economic Injury Disaster Loan (EIDL) received between January 31, 2020 and the date the PPP loans are made available.

Q2. Who is eligible for a PPP loan?

A2. The following businesses or organizations that were operational as of February 15, 2020 may be eligible for a PPP Loan:

  • any business, 501(c)(3) non-profit organization, 501(c)(19) veterans organization, or tribal entity that employs no more than the greater of (i) 500 employees; or (ii) the employee size standard in number of employees under the applicable NAICS code;
  • Sole proprietors, independent contractors, and self-employed individuals who regularly carry on any trade or business; and
  • a hospitality or food service business (those with an NAICS code beginning with 72) if it has fewer than 500 employees per physical location.

It should be noted that the SBA's "size standard" is usually expressed in number of employees or in millions of dollars. Since the Act specifically states businesses and organizations employing "not more than the greater of 500 employees" or "the size standard in number of employees established by the [SBA]" are eligible to apply, we believe that businesses expressed in millions of dollars that do not exceed their size standard for their applicable NAICS code are still eligible to apply, so long as the business does not exceed 500 employees together with its affiliates. However, we anticipate that the SBA will issue guidance regarding this issue, and we will keep you apprised of any updates.

Businesses are encouraged to consult the SBA's Table of Small Business Size Standard, available here, to determine their size standard.

Q3. Who qualifies as an employee under the Act?

A3. Under the Act, the term "employee" includes individuals employed on a full-time, part-time, or other basis. Based on the U.S. Department of Labor's recent guidance regarding the Families First Coronavirus Response Act (FFCRA), it is safe to assume that employees currently on leave should be included. In addition, the FFCRA guidance includes in the definition any temporary employees jointly employed and day laborers supplied by a temp agency, but does not include independent contractors as employees. By contrast, the CARES Act is less clear.

Applying the presumption that the legislature included all included terms for a purpose, and likewise omitted all omitted terms for a purpose, we do not believe that temporary employees jointly employed or day laborers supplied by a temporary agency fall within the meaning of an "employee" under the Act. The SBA has recently clarified that independent contractors do not count for purposes of loan calculations and loan forgiveness. We anticipate more guidance from the SBA regarding this issue, and we will keep you apprised of any updates.

Q4. How do I count employees for purposes of the 500-employee threshold under the Act?

A4. Employee counting under the Act is determined by aggregating the head counts of all "affiliated" entities. However, we are awaiting guidance from the SBA about what "affiliated" means and details for counting employees.

Q5. Am I eligible under the Act if I am a small business with more than one physical location and have fewer than 500 employees at each, but I am not in the hospitality or food-service industry?

A5. It depends. When determining whether a business or organization is "small," the SBA generally requires a business to aggregate all of its parent companies, affiliates, and subsidiaries. These requirements still apply under the PPP, except that they are waived for:

  • a hospitality or food service business classified under an NAICS code beginning with 72;
  • a business operating as a franchise that is an SBA assigned franchise identifier code;
  • any entity that receives financial assistance from a company licensed under Section 301 of the Small Business Investment Act of 1958, as amended.

So, if you are a small business with more than one physical location and have fewer than 500 employees at each, but you are not in the hospitality or food-service industry, you may still be eligible for a PPA loan if you are operating as a franchise with a SBA-assigned franchise identifier code, or if you receive financial assistance from a company licensed under Section 301 of the Small Business Investment Act of 1958, as amended. Otherwise, the employees at each location would likely be aggregated, and if you exceed 500 employees, then you would not be eligible. Again, we are awaiting guidance from the SBA about what "affiliated" means and details for counting employees and will keep you apprised of any updates.

Q6. Am I eligible under the Act if I am a service company, such as a law firm or an accounting firm, with more than $10 million in revenue?

A6. Probably so, if you do not exceed the SBA's size-standard in terms of millions of dollars and do not exceed 500 employees together with your affiliates. As mentioned in A2, the SBA's "size standard" is usually expressed in number of employees or in millions of dollars. Since the Act specifically states businesses and organizations employing "not more than the greater of 500 employees" or "the size standard in number of employees established by the [SBA]" are eligible to apply, we believe that businesses expressed in millions of dollars that do not exceed their size standard for their applicable NAICS code are still eligible to apply, so long as the business does not exceed 500 employees together with its affiliates. However, we anticipate that the SBA will issue guidance regarding this issue, and we will keep you apprised of any updates.

Q7. Are there any other eligibility requirements?

A7. Yes, you are ineligible for a PPP loan if:

  • you are engaged in any activity that is illegal under federal, state, or local law;
  • you are a household employer (individuals who employ household employees such as nannies and housekeepers);
  • the applicant or any owner of the applicant is presently suspended, debarred, proposed for debarment, declared ineligible, or voluntarily excluded from participation in this program by any Federal department or agency, or is presently involved in any bankruptcy;
  • the applicant, any owner of the applicant, or any business owned or controlled by any of them, is currently in default on any direct or guaranteed SBA loan or has defaulted in the last 7 years and caused a loss to the government;
  • the applicant or any 20% or greater owner of the applicant is subject to an indictment, criminal information, arraignment, or other means by which formal criminal charges are brought in any jurisdiction, or is presently incarcerated, or on probation or parole; or
  • the applicant or any 20% or greater owner of the applicant has been convicted, pleaded guilty, pleaded nolo contendere, been placed on pretrial diversion, or has been placed on any form of parole or probation within the last 5 years.

Q8. How much can I borrow?

A8. Qualified entities seeking a PPP loan can borrow up to the lesser of:

  • $10 million; or
  • 2.5 times its pre-loan 12-month gross payroll costs + any outstanding amount owed under an SBA Economic Injury Disaster Loan (EIDL) received between January 31, 2020 and the date the PPP loans are made available.

Note that there are special rules relating to the calculation of "payroll costs" for businesses that have been in operation less than 12 months and for seasonal businesses.

Q9. How do I calculate the maximum amount I can borrow?

A9. According to the SBA's Interim Final Rule regarding PPP loans, the following methodology should be used to determine the maximum amount you can borrow:

Step 1: Aggregate payroll costs (defined in detail below in A11) from the last twelve months for employees whose principal place of residence is the United States.

Step 2: Subtract any compensation paid to an employee in excess of an annual salary of $100,000 and/or any amounts paid to an independent contractor or sole proprietor in excess of $100,000 per year.

Step 3: Calculate average monthly payroll costs (divide the amount from Step 2 by 12).

Step 4: Multiply the average monthly payroll costs from Step 3 by 2.5.

Step 5: Add the outstanding amount of an Economic Injury Disaster Loan (EIDL) made between January 31, 2020 and April 3, 2020, less the amount of any "advance" under an EIDL COVID-19 loan (because it does not have to be repaid).

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