CARES Act: Frequently Asked Questions and Answers

Apr 3, 2020

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Businesses interested in applying for a PPP Loan should complete the PPP Application found HERE.

This situation is continuing to evolve.  Fox Swibel will continue to monitor developments and stands ready to advise clients in connection with financing available to businesses and non-profits. If you have questions about qualifying for or applying for emergency funding, please contact David Morris or the Fox Swibel attorney with whom you regularly work.

This article contains material of general interest and should not be construed as legal advice or a legal opinion on any specific facts or circumstances. Under applicable rules of professional conduct, this content may be regarded as attorney advertising.

CARES Act: Frequently Asked Questions and Answers

Apr 3, 2020

FAQ graphic Medium 1200

Image Source – Shutterstock

When can my business submit an application for an SBA 7(a) loan from the Paycheck Protection Program?

On April 3, 2020, eligible small businesses and sole proprietors (and on April 10, 2020, eligible independent contractors and self-employed individuals) can submit an application to any existing Small Business Association (“SBA”)-authorized lender for an SBA 7(a) loan from the Paycheck Protection Program (“PPP Loan”).

Due to the enormous number of PPP Loan applications that are anticipated to be submitted to all SBA-authorized lenders beginning on April 3, 2020, an interested eligible business should seek to submit its loan application as soon as possible, particularly in light of the fact that the SBA has released guidance that reminds applicants that “there is a funding cap and lenders need time to process your loan.”

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For purposes of calculating “payroll costs,” should a business include compensation paid to independent contractors?

Subsequent to the CARES Act becoming law on March 27, 2020, the SBA released SBA Form 2483, otherwise known as the Paycheck Protection Program Application Form (“PPP Application”).  Contrary to the legislative text of the CARES Act, the PPP Application enables independent contractors to apply for their own PPP Loan.  As a result, absent rulemaking or further guidance from the SBA to the contrary, applying businesses should not include compensation paid to independent contractors in their calculation of payroll costs, as such independent contractors are able to seek their own relief directly from the PPP.

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Is a portfolio company of a venture capital or private equity fund eligible to receive a PPP Loan?

It depends on the facts regarding the portfolio company.  The CARES Act loosened certain SBA rules, including the size requirement that a business must generally meet to be eligible for a PPP Loan.  To be eligible to participate in the PPP, a business must have no more than 500 employees (or otherwise meet industry-specific size standards established by the SBA).  The CARES Act requires a portfolio company to include in its employee total all of the employees of its affiliates, unless such portfolio company is:

  • a business with no more than 500 employees and is in the accommodations and food service industry (i.e., has an NAICS Code beginning with 72);
  • a franchise; or
  • a company that receives financial assistance from a small business investment company licensed under the Small Business Investment Act of 1958.

While always case specific, the SBA considers a business to be affiliated with another when one business controls or has the authority to control the other.  Affiliation is also established when a third party controls both businesses.  The SBA recognizes two types of control:

  • affirmative control, which will be found when an owner owns 50% or more of a company’s voting equity; and
  • negative control, which will likely be found when a minority owner has the ability, usually pursuant to a governing document (e.g., a stockholders’ agreement or operating agreement) to prevent ordinary-course operational decisions of the company, including, but not limited to: (i) making and paying distributions; (ii) establishing a quorum at a meeting of the shareholders or members of the company; (iii) approving or implementing changes to the company’s budget; (iv) setting the compensation of employees; or (v) hiring or terminating officers and C-suite executives.

Therefore, before submitting an application to receive a PPP Loan, a portfolio company should determine whether it has an affiliate(s) according to SBA rules.  If affiliation is determined, unless the portfolio company falls into one of the three aforementioned affiliation-waiver categories, such portfolio company should count the employees of its affiliate(s) in its overall employee count.

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Because the CARES Act provides a waiver of SBA affiliation rules for businesses in the accommodations and food service industry, is each restaurant in a restaurant group eligible for a PPP Loan?

Likely yes.  Prior to the enactment of the CARES Act, the SBA’s affiliation rules required a loan applicant to include in its total employee calculation the employees of its domestic and foreign affiliates.  As a consequence, many portfolio companies failed to meet the employee size requirements under SBA rules and were ineligible to apply for a PPP Loan.

The CARES Act, in part, provides a waiver to the SBA’s otherwise applicable affiliation rules for businesses in the accommodations and food service industry (i.e., a business that has an NAICS Code beginning with 72).  As a result:

  • restaurant operators will likely be eligible to receive a PPP Loan for each of its restaurants (provided that no single restaurant in the group has over 500 employees);
  • restaurant operators will not be required to count the employees of its affiliates towards its total employee count for purposes of determining whether it meets the SBA’s small business size requirements;
  • private equity funds might be eligible to receive a PPP Loan (provided that it has fewer than 500 employees).

The SBA is expected to release upcoming guidance that will hopefully further clarify the SBA’s affiliation rules with respect to the food service industry.

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Are 501(c)(3) nonprofit organizations eligible to receive economic relief under the CARES Act?

Yes.  The same as other eligible small business concerns, 501(c)(3) nonprofit organizations (i.e., charitable organizations) that have less than 500 employees are eligible to receive a maximum PPP Loan of $10 million.  Per SBA guidance as of April 3, 2020, the loan has a maturity of two (2) years and an interest rate of 1.0%.  The amount of the loan that is spent on payroll costs and other qualifying operating expenses during the eight (8) week period beginning on the date of the loan origination is eligible to be forgiven (subject to certain reductions if the business cuts payroll or salaries); provided, however, that due to the likely high number of subscriptions, at least 75% of the forgiven amount must have been used for payroll (per SBA guidance as of April 3, 2020).  Additionally, small charitable organizations might be eligible to receive an Economic Injury Disaster Loan (“EIDL”), then receive an advance on that EIDL loan up to $10,000, which the SBA is required to distribute within three (3) days of the request; provided, however, if the organization participates in the EIDL program, it is not eligible to participate in the PPP.

A charitable organization that employs between 500 and 10,000 employees will not be eligible to participate in the PPP, but will be able to tap into the nearly $500 billion pool of money allocated to provide liquidity to such “mid-sized” businesses affected by the pandemic.  It is important to note that no portion of such debt will be afforded loan forgiveness.

After a fact-specific analysis is performed, a 501(c)(3) nonprofit organization may also be eligible to receive economic relief under the CARES Act in the form of an above-the-line deduction for certain charitable contributions, an employee retention payroll tax credit, and a payroll tax postponement.

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Can a borrower receive both a PPP Loan and an EIDL?

No, borrowers may not receive a PPP Loan and an EIDL for the same purpose.  However, some businesses have begun the application process for both PPP Loans and EIDLs while they determine whether they qualify for either. Additionally, a borrower that has an existing EIDL unrelated to COVID-19 may apply for a PPP Loan, with an option to refinance the EIDL into a PPP loan.   Finally, if a borrower receives the $10,000 EIDL grant, that amount would be subtracted from the amount forgiven under the PPP Loan.

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The CARES Act requires borrowers to certify as to certain statements, including that “the uncertainty of current economic conditions makes necessary the loan request to support the ongoing operations of the eligible recipient.”  What is this certification?  Are applicants able to make this certification even if they have available credit elsewhere?

Applicants will be required to make a good-faith certification that the loan is necessary to support ongoing operations.  Based on the SBA’s past practice for borrower certifications, this would simply be a certified statement collected at closing.

The CARES Act waived, for the period from February 15, 2020, to June 30, 2020, the requirement that SBA 7(a) loan recipients demonstrate that they are unable to obtain credit elsewhere.

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Does the $100,000 salary limit include other benefits defined as “payroll costs,” such as an employer’s cost of medical insurance premiums?

No.  In the “payroll costs” definition, “salary, wage, commission, or similar compensation” is an item separate from “payment required for the provisions of group health care benefits, including insurance premiums.”  The $100,000 limit applies to “the compensation of an individual employee in excess of annual salary.”

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The CARES Act provides that the exclusion of salary over $100,000 is to be prorated over the coverage period (i.e., February 15 – June 30), so can an employer only include the 4.5 months of the $100,000 in the calculation of its maximum PPP Loan amount? 

For the purpose of calculating the maximum PPP Loan amount, the CARES Act uses a formula generally equal to the lesser of (A) “the average total monthly payments by the applicant for payroll costs” (subject to certain exceptions) multiplied by 2.5, or (B) $10 million.

In this calculation of average total monthly payments for payroll costs, salary is limited to $100,000, prorated monthly.  The annual un-prorated amount being used as a limit is $100,000 and is not limited to 4.5 months of the $100,000.

On the other hand, the list of allowable uses of the loan proceeds includes simply “payroll costs,” suggesting that the loan money may only be used to pay an individual employee an annual salary of $100,000 per year, prorated for the covered period of February 15 – June 30, 2020.  “Payroll costs” are also included in the calculation of “expected forgiveness amount,” again suggesting that there is a prorated $100,000 per employee cap in the calculation of forgivable money.

It is anticipated that the SBA will complete rulemaking and release additional guidance to further clarify these issues.

*             *             *             *             *

Can PPP Loan proceeds be used to pay the mortgage interest of a wholly-owned subsidiary?

Likely no.  The section of the CARES Act listing allowable uses of the PPP Loans includes “payments of interest on any mortgage obligation” as an allowable use.  However, the section addressing forgivable loan amounts includes “payments of interest on any covered mortgage obligation” in such amounts where “covered mortgage obligation” is a defined term meaning a mortgage on real or personal property that “is a liability of the borrower.”  So, at best, one might be able to argue that a borrower could use PPP Loan proceeds to pay the mortgage interest of a wholly-owned subsidiary, but such amounts would not be eligible to be forgiven.  The question may be addressed in subsequent rulemaking.

*             *             *             *             *

Businesses interested in applying for a PPP Loan should complete the PPP Application found HERE.

This situation is continuing to evolve.  Fox Swibel will continue to monitor developments and stands ready to advise clients in connection with financing available to businesses and non-profits. If you have questions about qualifying for or applying for emergency funding, please contact David Morris or the Fox Swibel attorney with whom you regularly work.

This article contains material of general interest and should not be construed as legal advice or a legal opinion on any specific facts or circumstances. Under applicable rules of professional conduct, this content may be regarded as attorney advertising.

When can my business submit an application for an SBA 7(a) loan from the Paycheck Protection Program?

On April 3, 2020, eligible small businesses and sole proprietors (and on April 10, 2020, eligible independent contractors and self-employed individuals) can submit an application to any existing Small Business Association (“SBA”)-authorized lender for an SBA 7(a) loan from the Paycheck Protection Program (“PPP Loan”).

Due to the enormous number of PPP Loan applications that are anticipated to be submitted to all SBA-authorized lenders beginning on April 3, 2020, an interested eligible business should seek to submit its loan application as soon as possible, particularly in light of the fact that the SBA has released guidance that reminds applicants that “there is a funding cap and lenders need time to process your loan.”

[Back to Top]

*             *             *             *             *

For purposes of calculating “payroll costs,” should a business include compensation paid to independent contractors?

Subsequent to the CARES Act becoming law on March 27, 2020, the SBA released SBA Form 2483, otherwise known as the Paycheck Protection Program Application Form (“PPP Application”).  Contrary to the legislative text of the CARES Act, the PPP Application enables independent contractors to apply for their own PPP Loan.  As a result, absent rulemaking or further guidance from the SBA to the contrary, applying businesses should not include compensation paid to independent contractors in their calculation of payroll costs, as such independent contractors are able to seek their own relief directly from the PPP.

[Back to Top]

*             *             *             *             *

Is a portfolio company of a venture capital or private equity fund eligible to receive an SBA 7(a) loan from the Paycheck Protection Program?

It depends on the facts regarding the portfolio company.  The CARES Act loosened certain SBA rules, including the size requirement that a business must generally meet to be eligible for a PPP Loan.  To be eligible to participate in the PPP, a business must have no more than 500 employees (or otherwise meet industry-specific size standards established by the SBA).  The CARES Act requires a portfolio company to include in its employee total all of the employees of its affiliates, unless such portfolio company is:

  • a business with no more than 500 employees and is in the accommodations and food service industry (i.e., has an NAICS Code beginning with 72);
  • a franchise; or
  • a company that receives financial assistance from a small business investment company licensed under the Small Business Investment Act of 1958.

While always case specific, the SBA considers a business to be affiliated with another when one business controls or has the authority to control the other.  Affiliation is also established when a third party controls both businesses.  The SBA recognizes two types of control:

  • affirmative control, which will be found when an owner owns 50% or more of a company’s voting equity; and
  • negative control, which will likely be found when a minority owner has the ability, usually pursuant to a governing document (e.g., a stockholders’ agreement or operating agreement) to prevent ordinary-course operational decisions of the company, including, but not limited to: (i) making and paying distributions; (ii) establishing a quorum at a meeting of the shareholders or members of the company; (iii) approving or implementing changes to the company’s budget; (iv) setting the compensation of employees; or (v) hiring or terminating officers and C-suite executives.

Therefore, before submitting an application to receive a PPP Loan, a portfolio company should determine whether it has an affiliate(s) according to SBA rules.  If affiliation is determined, unless the portfolio company falls into one of the three aforementioned affiliation-waiver categories, such portfolio company should count the employees of its affiliate(s) in its overall employee count.

[Back to Top]

*             *             *             *             *

Because the CARES Act provides a waiver of SBA affiliation rules for businesses in the accommodations and food service industry, is each restaurant in a restaurant group eligible for a PPP Loan?

Likely yes.  Prior to the enactment of the CARES Act, the SBA’s affiliation rules required a loan applicant to include in its total employee calculation the employees of its domestic and foreign affiliates.  As a consequence, many portfolio companies failed to meet the employee size requirements under SBA rules and were ineligible to apply for a PPP Loan.

The CARES Act, in part, provides a waiver to the SBA’s otherwise applicable affiliation rules for businesses in the accommodations and food service industry (i.e., a business that has an NAICS Code beginning with 72).  As a result:

  • restaurant operators will likely be eligible to receive a PPP Loan for each of its restaurants (provided that no single restaurant in the group has over 500 employees);
  • restaurant operators will not be required to count the employees of its affiliates towards its total employee count for purposes of determining whether it meets the SBA’s small business size requirements;
  • private equity funds might be eligible to receive a PPP Loan (provided that it has fewer than 500 employees).

The SBA is expected to release upcoming guidance that will hopefully further clarify the SBA’s affiliation rules with respect to the food service industry.

[Back to Top]

*             *             *             *             *

Are 501(c)(3) nonprofit organizations eligible to receive economic relief under the CARES Act?

Yes.  The same as other eligible small business concerns, 501(c)(3) nonprofit organizations (i.e., charitable organizations) that have less than 500 employees are eligible to receive a maximum PPP Loan of $10 million.  Per SBA guidance as of April 3, 2020, the loan has a maturity of two (2) years and an interest rate of 1.0%.  The amount of the loan that is spent on payroll costs and other qualifying operating expenses during the eight (8) week period beginning on the date of the loan origination is eligible to be forgiven (subject to certain reductions if the business cuts payroll or salaries); provided, however, that due to the likely high number of subscriptions, at least 75% of the forgiven amount must have been used for payroll (per SBA guidance as of April 3, 2020).  Additionally, small charitable organizations might be eligible to receive an Economic Injury Disaster Loan (“EIDL”), then receive an advance on that EIDL loan up to $10,000, which the SBA is required to distribute within three (3) days of the request; provided, however, if the organization participates in the EIDL program, it is not eligible to participate in the PPP.

A charitable organization that employs between 500 and 10,000 employees will not be eligible to participate in the PPP, but will be able to tap into the nearly $500 billion pool of money allocated to provide liquidity to such “mid-sized” businesses affected by the pandemic.  It is important to note that no portion of such debt will be afforded loan forgiveness.

After a fact-specific analysis is performed, a 501(c)(3) nonprofit organization may also be eligible to receive economic relief under the CARES Act in the form of an above-the-line deduction for certain charitable contributions, an employee retention payroll tax credit, and a payroll tax postponement.

[Back to Top]

*             *             *             *             *

Can a borrower receive both a PPP Loan and an EIDL?

No, borrowers may not receive a PPP Loan and an EIDL for the same purpose. However, some businesses have begun the application process for both PPP Loans and EIDLs while they determine whether they qualify for either. Additionally, a borrower that has an existing EIDL unrelated to COVID-19 may apply for a PPP Loan, with an option to refinance the EIDL into a PPP loan.   Finally, if a borrower receives the $10,000 EIDL grant, that amount would be subtracted from the amount forgiven under the PPP Loan.

[Back to Top]

*             *             *             *             *

The CARES Act requires borrowers to certify as to certain statements, including that “the uncertainty of current economic conditions makes necessary the loan request to support the ongoing operations of the eligible recipient.”  What is this certification?  Are applicants able to make this certification even if they have available credit elsewhere?

Applicants will be required to make a good-faith certification that the loan is necessary to support ongoing operations.  Based on the SBA’s past practice for borrower certifications, this would simply be a certified statement collected at closing.

The CARES Act waived, for the period from February 15, 2020, to June 30, 2020, the requirement that SBA 7(a) loan recipients demonstrate that they are unable to obtain credit elsewhere.

[Back to Top]

*             *             *             *             *

Does the $100,000 salary limit include other benefits defined as “payroll costs,” such as an employer’s cost of medical insurance premiums?

No.  In the “payroll costs” definition, “salary, wage, commission, or similar compensation” is an item separate from “payment required for the provisions of group health care benefits, including insurance premiums.”  The $100,000 limit applies to “the compensation of an individual employee in excess of annual salary.”

[Back to Top]

*             *             *             *             *

The CARES Act provides that the exclusion of salary over $100,000 is to be prorated over the coverage period (i.e., February 15 – June 30), so can an employer only include the 4.5 months of the $100,000 in the calculation of its maximum loan amount? 

For the purpose of calculating the maximum PPP Loan amount, the CARES Act uses a formula generally equal to the lesser of (A) “the average total monthly payments by the applicant for payroll costs” (subject to certain exceptions) multiplied by 2.5, or (B) $10 million.

In this calculation of average total monthly payments for payroll costs, salary is limited to $100,000, prorated monthly.  The annual un-prorated amount being used as a limit is $100,000 and is not limited to 4.5 months of the $100,000.

On the other hand, the list of allowable uses of the loan proceeds includes simply “payroll costs,” suggesting that the loan money may only be used to pay an individual employee an annual salary of $100,000 per year, prorated for the covered period of February 15 – June 30, 2020.  “Payroll costs” are also included in the calculation of “expected forgiveness amount,” again suggesting that there is a prorated $100,000 per employee cap in the calculation of forgivable money.

It is anticipated that the SBA will complete rulemaking and release additional guidance to further clarify these issues.

[Back to Top]

*             *             *             *             *

Can PPP Loan proceeds be used to pay the mortgage interest of a wholly-owned subsidiary?

Likely no.  The section of the CARES Act listing allowable uses of the PPP Loans includes “payments of interest on any mortgage obligation” as an allowable use.  However, the section addressing forgivable loan amounts includes “payments of interest on any covered mortgage obligation” in such amounts where “covered mortgage obligation” is a defined term meaning a mortgage on real or personal property that “is a liability of the borrower.”  So, at best, one might be able to argue that a borrower could use PPP Loan proceeds to pay the mortgage interest of a wholly-owned subsidiary, but such amounts would not be eligible to be forgiven.  The question may be addressed in subsequent rulemaking.

[Back to Top]