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On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security Act, P.L. 116-136 (the “CARES Act” or the “Act”). The legislation is intended to provide relief for individuals and businesses that have been negatively impacted by the coronavirus outbreak.

One of the most significant aspects of the CARES Act is the creation of the Paycheck Protection Program (the “PPP”), under which certain eligible businesses and individuals may receive forgivable Small Business Administration (SBA) loans during the period beginning on February 15, 2020 and ending on June 30, 2020.

The CARES Act left many questions about PPP loans unanswered. However, since its enactment, the SBA and Treasury have issued additional guidance to provide clarification and answers to some of those question. They first issued an Interim Final Rule effective April 2, 2020 (the “Interim Final Rule”), and have since issued additional answers to Frequently Asked Questions, last updated April 7, 2020 (the “FAQs”). This article addresses some, but not all, of the questions answered by the additional guidance.

How much can an eligible borrower receive as a PPP loan?

The maximum loan amount is the lesser of $10 million or an amount that will be calculated using a payroll-based formula, as follows:

Step 1: Aggregate payroll costs (defined below) from the last 12 months (or from calendar year 2019, as clarified by the FAQs) 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, for an independent contractor or sole proprietor calculating his or her own payroll costs, subtract any amounts paid to such 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) 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) (see below).

What qualifies as “payroll costs”?

Payroll costs consist of: (i) compensation to employees (whose principal place of residence is in the United States) in the form of salary, wages, commissions, or similar compensation; (ii) cash tips or the equivalent; (iii) payment for vacation; parental, family, medical, or sick leave (except as noted below); (iv) allowance for separation or dismissal; (v) payment for the provision of employee benefits consisting of group health care coverage, including insurance premiums, and retirement; and (vi) payment of state and local taxes assessed on compensation of employees. For independent contractors or sole proprietors calculating their own payroll costs, payroll costs include the foregoing, in addition to wage, commissions, income, or net earnings from self-employment or similar compensation paid to the independent contractor or sole proprietor.

What is excluded from “payroll costs”?

Payroll costs do not include: (i) any compensation of an employee whose principal place of residence is outside of the United States; (ii) the compensation of an individual employee in excess of an annual salary of $100,000, prorated as necessary; (iii) the employer’s share of federal employment taxes (discussed below); and (iv) qualified sick and family leave wages for which a credit is allowed under the Families First Coronavirus Response Act.

The FAQs clarify that the exclusion of compensation in excess of $100,000 annually applies only to cash compensation, not to non-cash benefits, including: employer contributions to defined-benefit or defined-contribution retirement plans; payment for the provision of employee benefits consisting of group health care coverage, including insurance premiums; and payment of state and local taxes assessed on compensation of employees.

How should a borrower account for federal taxes when determining its payroll costs?

The FAQs provide that payroll costs are calculated on a gross basis without regard to (i.e., not including subtractions or additions based on) federal taxes imposed or withheld, such as the employee’s and employer’s share of FICA and income taxes required to be withheld from employees. As a result, payroll costs are not reduced by taxes imposed on an employee and required to be withheld by the employer. However, payroll costs do not include the employer’s share of payroll tax.

For example, an employee who earned $4,000 per month in gross wages, from which $500 in federal taxes was withheld, would count as $4,000 in payroll costs. The employee would receive $3,500 and $500 would be paid to the federal government. However, the employer-side federal payroll taxes imposed on the $4,000 in wages are excluded from payroll costs.

Do independent contractors and sole proprietors count as employees for purposes of PPP loan calculations?

No, independent contractors and sole proprietors have the ability to apply for a PPP loan on their own and so are not counted for purposes of a borrower’s PPP loan calculation. There was some confusion as to this question given the wording of the CARES Act, however the Interim Final Rule and FAQs make clear that independent contractors and sole proprietors do not count as employees, and thus payments made to them are not included in calculations of an eligible borrower’s payroll costs.

How can PPP loans be used?

The proceeds of a PPP loan can be used for: (i) payroll costs (as defined above); (ii) costs related to the continuation of group health care benefits during periods of paid sick, medical, or family leave, and insurance premiums; (iii) mortgage interest payments (but not mortgage prepayments or principal payments); (iv) rent payments; (v) utility payments; (vi) interest payments on any other debt obligations that were incurred before February 15, 2020; and/or (vii) refinancing an SBA EIDL loan made between January 31, 2020 and April 3, 2020. However, the Interim Final Rule provides that at least 75% of the PPP loan must be used for payroll costs.

What if a borrower has already received an EIDL loan?

If a borrower has already received an EIDL loan from January 31, 2020 through April 3, 2020, the borrower can still apply for a PPP loan. If the EIDL loan was not used for payroll costs, it does not affect the borrower’s eligibility for a PPP loan. If the EIDL loan was used for payroll costs, the PPP loan must be used to refinance the EIDL loan. Proceeds from any advance up to $10,000 on the EIDL loan will be deducted from the loan forgiveness amount on the PPP loan.

What is the interest rate on a PPP loan?

Although the CARES Act provides that the PPP loan will have a maximum interest rate of 4%, under the Interim Final Rule, the SBA and Treasury determined that the interest rate on a PPP loan will be 100 basis points or 1%.

What is the maturity date on a PPP loan?

Although the CARES Act provides that a PPP loan will have a maximum maturity of up to 10 years from the date the borrower applies for loan forgiveness, under the Interim Final Rule, the SBA and Treasury determined that the maturity is two years.

Can eligible borrowers apply for more than one PPP loan?

No, eligible borrowers may not receive more than one PPP loan. Therefore, under the Interim Final Rule, the SBA and Treasury recommend eligible borrowers consider applying for the maximum amount.

When will borrowers begin paying principal and interest on the PPP loan?

Borrowers will not have to make any payments for 6 months following the date of disbursement of the loan. Interest, however, will continue to accrue on PPP loans during this 6-month deferment.

Can the PPP loan, including interest, be forgiven in whole or in part?

Yes. The amount of loan forgiveness can be up to the full principal amount of the loan. The Interim Final Rule clarifies that any accrued interest can also be forgiven. The borrower will not be responsible for any loan payment if the borrower uses all of the loan proceeds for forgivable purposes and employee and compensation levels are maintained.

However, the actual amount of loan forgiveness will depend, in part, on the total amount of payroll costs, payments of interest on mortgage obligations incurred before February 15, 2020, rent payments on leases dated before February 15, 2020, and utility payments under service agreements dated before February 15, 2020, paid or incurred by the borrower over the eight-week period following the date of the loan. The Interim Final Rule provides that not more than 25% of the loan forgiveness amount may be attributable to nonpayroll costs, and clarifies that independent contractors do not count as employees for purposes of PPP loan forgiveness because they can apply for a PPP loan on their own.

In addition, the amount of loan forgiveness will be reduced in the event a borrower reduces the total number of employees or the wages of an employee.

What form does an applicant need to submit to receive a PPP loan?

The applicant must submit SBA Form 2483 (Paycheck Protection Program Application Form).