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CARES Act: SBA Releases PPP Loan Forgiveness Application and Issues Guidance on Treatment of Entities with Foreign Affiliates Under PPP
Practical Law Legal Update w-025-5852 (Approx. 5 pages)
CARES Act: SBA Releases PPP Loan Forgiveness Application and Issues Guidance on Treatment of Entities with Foreign Affiliates Under PPP
by Practical Law Finance
| Published on 19 May 2020 • USA (National/Federal) |
The Small Business Administration (SBA) released the PPP Loan Forgiveness Application and instructions informing borrowers how to apply for forgiveness of their PPP loans. The application and instructions are intended to reduce compliance burdens and simplify the process for borrowers by, in part, providing for an "alternative payroll covered period" that aligns with borrowers' regular payroll cycles and providing flexibility to include eligible payroll and non-payroll expenses paid or incurred during the eight-week period after receiving the PPP loan. The SBA also issued an interim final rule clarifying that employees of foreign affiliates are included for purposes of determining whether a PPP borrower has more than 500 employees.
On March 27, 2020, the US government passed the CARES Act in response to the COVID-19 crisis. Under the CARES Act, the Small Business Administration (SBA) is offering loans under the Paycheck Protection Program (PPP). On April 2, 2020, the SBA issued an interim final rule (Initial Rule) outlining the key provisions for implementing the PPP. Subsequently, the SBA has issued additional interim final rules (see Practice Note, Road Map to the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), Paycheck Protection Program).
On May 15, 2020, the SBA released the PPP Loan Forgiveness Application and instructions (Application) informing borrowers how to apply for forgiveness of their PPP loans. The application and instructions are intended to reduce compliance burdens and simplify the process for borrowers by, in part, providing for an "alternative payroll covered period" that aligns with borrowers' regular payroll cycles and providing flexibility to include eligible payroll and non-payroll expenses paid or incurred during the eight-week period after receiving the PPP loan.
On May 18, 2020, the SBA issued an interim final rule (IFR) clarifying that employees of foreign affiliates are included for purposes of determining whether a PPP borrower has more than 500 employees. This IFR is effective immediately. Public comment on the proposed rule must be received on or before June 22, 2020.
PPP Loan Forgiveness
The Application and instructions are intended to reduce compliance burdens and simplify the process for borrowers by including:
- Options for borrowers to calculate payroll costs using an "alternative payroll covered period" that aligns with borrowers' regular payroll cycles.
- Borrowers with a biweekly (or more frequent) payroll schedule may elect to calculate eligible payroll costs using the eight-week (56-day) period that begins on the first day of their first pay period following their "PPP Loan Disbursement Date" (the Alternative Payroll Covered Period).
- Flexibility to include eligible payroll and non-payroll expenses paid or incurred during the eight-week period after receiving their PPP loan.
- Payroll costs incurred but not paid during the borrower's last pay period of the "Covered Period" (or Alternative Payroll Covered Period) are eligible for forgiveness if paid on or before the next regular payroll date.
- An eligible nonpayroll cost must be paid during the Covered Period or incurred during the Covered Period and paid on or before the next regular billing date, even if the billing date is after the Covered Period.
- Instructions for calculations required by the CARES Act to confirm eligibility for loan forgiveness.
- Borrower-friendly implementation of statutory exemptions from loan forgiveness reduction based on rehiring by June 30, 2020. The borrower is exempt from the reduction in loan forgiveness based on FTE employees if the borrower:
- reduced its FTE employee levels in the period beginning February 15, 2020, and ending April 26, 2020; and
- restored its FTE employee levels by not later than June 30, 2020 to its FTE employee levels in the borrower's pay period that included February 15, 2020.
- Addition of a new exemption from the loan forgiveness reduction for borrowers who have made a good-faith, written offer to rehire workers that was declined.
The SBA intends to issue additional regulations and guidance on completing the Application and lender responsibilities in the loan forgiveness process.
Treatment of Foreign Affiliates in Calculating Number of Employees
The IFR clarified that employees of foreign affiliates are included for purposes of determining whether a PPP borrower has more than 500 employees.
The CARES Act limits entities that are eligible for a PPP loan to small business concerns, or certain business concerns, nonprofit organizations, veterans organizations, and Tribal businesses that employ not more than the greater of 500 employees, or the SBA's employee-based size standard for the industry in which the entity operates, if applicable. Further, the SBA's affiliation regulations provide that to determine a concern's size, employees "and all of its domestic and foreign affiliates" are included. 13 C.F.R. § 121.301(f).
The IFR stated that to calculate the number of employees in determining eligibility for the PPP, an entity must include all employees of its domestic and foreign affiliates, except where the affiliation rules expressly do not apply to the entity. Any entity that, together with its domestic and foreign affiliates, does not meet the 500-employee or other applicable PPP size standard is therefore ineligible for a PPP loan.
The SBA's affiliation rules do not apply to any business concern:
- With not more than 500 employees that, as of the date on which the PPP loan is disbursed, is assigned a North American Industry Classification System code beginning with 72.
- Operating as a franchise that is assigned a franchise identifier code by the SBA.
- That receives financial assistance from a company licensed under section 301 of the Small Business Investment Act of 1958 (15 U.S.C. § 681).
The SBA also applies affiliation exceptions to certain categories of entities under 13 CFR § 121.103(b).
The IFR further stated that, due to reasonable borrower confusion based on SBA guidance (which was later resolved through a clarifying FAQ on May 5, 2020), the SBA will not find any borrower that applied for a PPP loan prior to May 5, 2020 to be ineligible based on the borrower's exclusion of non-US employees from its headcount calculation if it and its affiliates had no more than 500 employees whose principal place of residence is in the US. Those borrowers will not be deemed to have made an inaccurate certification of eligibility solely on that basis. Under no circumstances may PPP funds be used to support non-US workers or operations.
For purposes of this safe harbor, a borrower must include its affiliates to the extent required under the April 15, 2020 interim final rule on affiliates (see Legal Update, CARES Act: SBA Publishes Interim Final Rule Clarifying Affiliate Rules Under Paycheck Protection Program). SBA's affiliation exceptions in 13 CFR § 121.103(b) apply to the PPP.