This series of questions highlights the issues we have encountered in helping clients complete the application process. For official guidance please refer to 13 C.F.R. 120 (the final interim rule) and Section 1102 et. seq. of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). This summary is not legal advice and only addresses Paycheck Protection Loans. Prospective borrowers should coordinate all relief they seek through the U.S. Small Business Administration (SBA) whether or not under the CARES Act, and should consult with counsel about these matters.
HOW SHOULD A BORROWER SUBMIT AN APPLICATION? Loan applications should be submitted through a lender credentialed by the SBA. Some such banks appear to be taking applications from existing customers only. Other banks appear to be accepting all applicants through on-line portals. The SBA is currently working to credential new non-traditional lenders.
WHAT DOCUMENTATION IS REQUIRED? The Final Interim Rule provides what little information is available concerning what documentation must accompany the loan application. Below are excerpts from the Final Interim Rule that give some insights on what documentation will be acceptable:
What we learn from guidance to borrowers:
Section 2(a): “You must… submit such documentation as is necessary to establish eligibility such as payroll processor records, payroll tax filings, or Form 1099-MISC, or income and expenses from a sole proprietorship. For borrowers that do not have any such documentation, the borrower must provide other supporting documentation, such as bank records sufficient to demonstrate the qualifying payroll amount.”
Section 2(q): “What forms do I need and how do I submit an application?
The applicant must submit SBA Form 2483 (Paycheck Protection Program Application Form) and payroll documentation, as described above. The lender must submit SBA Form 2484 (Paycheck Protection Program Lender’s Application for 7(a) Loan Guaranty) electronically in accordance with program requirements and maintain the forms and supporting documentation in its files.”
What we learn from guidance to lenders:
Section 3(b): “What do lenders have to do in terms of loan underwriting?
Each lender shall:
- Confirm receipt of borrower certifications contained in Paycheck Protection Program Application form issued by the Administration;
- Confirm receipt of information demonstrating that a borrower had employees for whom the borrower paid salaries and payroll taxes on or around February 15, 2020;
- Confirm the dollar amount of average monthly payroll costs for the preceding calendar year by reviewing the payroll documentation submitted with the borrower’s application.”
NOTE: Lenders are also instructed to follow existing BSA protocols or alternatively are given instructions if those don’t apply.
Section 3(b) (flush language): “Each lender’s underwriting obligation under the PPP is limited to the items above and reviewing the Paycheck Protection Application Form. Borrowers must submit such documentation as is necessary to establish eligibility such as payroll processor records, payroll tax filings, Form 1099-MISC, or income and expenses from a sole proprietorship. For borrowers that do not have any such documentation, the borrower must provide other supporting documentation, such as bank records, sufficient to demonstrate the qualifying payroll amount.”
Section 3(c): “Can lenders rely on borrower documentation for loan forgiveness? Yes. The lender does not need to conduct any verification if the borrower submits documentation supporting its request for loan forgiveness and attests that it has accurately verified the payments for eligible costs. The Administrator will hold harmless any lender that relies on such borrower documents and attestation from a borrower. The Administrator, in consultation with the Secretary, has determined that lender reliance on a borrower’s required documents and attestation is necessary and appropriate in light of section 1106(h) of the Act, which prohibits the Administrator from taking an enforcement action or imposing penalties if the lender has received a borrower attestation.” NOTE: The Final Interim Rule makes clear that the borrowers, not the lenders, are liable for the information provided. The loan application form recites the penalties for making a knowing misrepresentation.
Required documents. According to the Interim Final Rule, a borrower must establish that it was in business as of February 15, 2020, and must provide payroll data for the 12 months immediately preceding loan issuance. In general, we have found that lenders are requiring the following documentation:
- Quarterly federal and state payroll tax returns;
- Quarterly unemployment tax returns;
- 12-14 months of payroll reports and data (U.S. Treasury frequently asked questions Q&A 14 requires either 12 previous months or calendar year 2019 with flexible dates for seasonal businesses and businesses started after June 30, 2019.);
- An analysis of payroll data showing monthly totals; and
- Formation documents filed with the state agency with which business organizations file such documents.
U.S. Treasury frequently asked questions make clear that data prepared by a payroll provider is acceptable documentation, but must be accompanied by relevant payroll tax returns or certification by the provider.
CAN A COMPANY CONSIDER INDEPENDENT CONTRACTORS IN CALCULATING ITS AVAILABLE LOAN AMOUNT? This has been the subject of some debate. The Final Interim Rule appears to say that the contractors have to apply for their own relief and cannot be included by the company for which they work. The U.S. Treasury Department’s frequently asked questions (see the link below) confirms this result. This interpretation could limit the loan available for a company that has misclassified employees as independent contractors, or utilizes a labor force primarily dependent on independent contractors.
S-corporation context. A similar issue could arise in the context of an S-corporation where the owner takes dividend distributions without taking any compensation that is subject to payroll taxes. In that case, the distributions might not constitute payroll costs. It is an issue to consider in light of the representations the applicant is required to make in connection with these loans.
Partnership context. No guidance currently addresses how partners who receive partnership distributions rather than wages for services performed. However, the Final Interim Regulation allows those subject to self-employment tax to apply for loans. In the case of a partnership where partners perform services for the partnership, as in, for example, a law or accounting partnership, our current view is that the K-1 compensation of partners performing services for the partnership should be included in calculating the total allowable amount of the loan. This makes more sense than requiring each partner to make a separate application when it is the partnership, not an individual partner, that pays staff payroll.
Employee leasing/PEO. In the case of businesses that employ the services of a staffing agency, the relationship between the company and the employees will be important in determining which entity can apply for a loan with respect to the employees providing by the staffing agency. However, it is important to note that Section (b)(4) of 13 C.F.R. 121.103 (SBA Affiliation Rules) provides that:
“Business concerns which lease employees from concerns primarily engaged in leasing employees to other businesses or which enter into a co-employer arrangement with a Professional Employer Organization (PEO) are not affiliated with the leasing company or PEO solely on the basis of a leasing arrangement.”
Q&A 10 of the U.S. Treasury Department’s frequently asked questions provides that the borrower / employer, and not the payroll provider or Professional Employer Organization, should be deemed to be the employer for purposes of obtaining a Paycheck Protection Loan. Thus, it appears that for purposes of Paycheck Protection Loans, a borrower using a PEO may not be required to be aggregated with that entity for determining qualification for the loan, but will be able to consider the workforce it receives through the PEO in calculating the amount of the loan. Because the Affiliation Rules imply that some PEO or leasing company arrangements could result in aggregation, thus, a company that desires to apply for a Paycheck Protection Loan and that uses a staffing agency should consult with counsel about how to characterize that relationship.
WHAT SHOULD MULTIPLE OWNERS OF GREATER THAN 20% DO? All owners of an applicant owning more than 20% of the applicant must sign an application. Because the certifications on the form could have one owner making representations about something another might do or know. Owners should all agree to take the same position with respect to those issues so that each can have documentation that he or she has not made knowing misrepresentations. Note that the Interim Final Rule provides that the SBA will take action against an owner who makes a misrepresentation or who misuses loaned funds, implying that other owners who do not do those things will not be targeted. Also, the U.S. Treasury frequently asked questions (see the link below) allows one owner to sign for all owners. However, the one signature will be deemed to be a certification by all 20% owners. In order to avoid problems, a written agreement between the owners of a company is likely to be valuable in helping co-owners avoid liability for the bad acts of other co-owners.
This article is designed to provide information to loan applicants in the early days of the Paycheck Protection Program. More information is being issued by the government frequently. For the most current official guidance see:
https://home.treasury.gov/coronavirus; and
https://www.sba.gov/funding-programs/loans/covid-19-relief-options