SBA Issues Significant FAQ Guidance on Paycheck Protection Program (PPP) Loans

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Jason B. Freeman

Jason B. Freeman

Managing Member


Mr. Freeman is the founding member of Freeman Law, PLLC. He is a dual-credentialed attorney-CPA, author, law professor, and trial attorney.

Mr. Freeman has been named by Chambers & Partners as among the leading tax and litigation attorneys in the United States and to U.S. News and World Report’s Best Lawyers in America list. He is a former recipient of the American Bar Association’s “On the Rise – Top 40 Young Lawyers” in America award. Mr. Freeman was named the “Leading Tax Controversy Litigation Attorney of the Year” for the State of Texas for 2019 and 2020 by AI.

Mr. Freeman has been recognized multiple times by D Magazine, a D Magazine Partner service, as one of the Best Lawyers in Dallas, and as a Super Lawyer by Super Lawyers, a Thomson Reuters service. He has previously been recognized by Super Lawyers as a Top 100 Up-And-Coming Attorney in Texas.

Mr. Freeman currently serves as the chairman of the Texas Society of CPAs (TXCPA). He is a former chairman of the Dallas Society of CPAs (TXCPA-Dallas). Mr. Freeman also served multiple terms as the President of the North Texas chapter of the American Academy of Attorney-CPAs. He has been previously recognized as the Young CPA of the Year in the State of Texas (an award given to only one CPA in the state of Texas under 40).

Freeman Law has written at length on the benefits of the Paycheck Protection Program (PPP) Loan under the CARES Act.  Those articles can be found here:  Paycheck Protection Program SBA Loans (“PPP Loans”); Paycheck Protection Program (PPP) Information Sheet.  The PPP Loan program is also discussed in Freeman Law’s most up-to-date Compendium of Recent Coronavirus Legislation and Regulatory Reform.

In what seems to be a recurring occurrence, late last night the U.S. Small Business Administration (“SBA”), in consultation with the Treasury Department, revised its list of frequently asked questions (“FAQs”) and Answers.  The revised FAQs and Answers provide much needed clarity on some ambiguities in the PPP Loan program.  More so, although the FAQs do not carry the force and effect of law (as they also specifically acknowledge), borrowers and lenders may rely on the FAQ guidance to the extent it is the SBA’s interpretation of the CARES Act and the PPP Interim Rule, issued previously by the SBA.

Employee Wages in Excess of $100,000

The CARES Act provides that compensation in excess of $100,000 is not permitted as “payroll costs” (neither as part of the maximum loan amount or the forgivable portion of the loan).  However, there was some ambiguity in the statute regarding this limitation and compensation of non-cash benefits over the threshold.

In FAQ & Answer No. 7, the SBA concludes that the exclusion of compensation in excess of $100,000 applies only to cash compensation and not to non-cash benefits.  These non-cash benefits include:  (1) employer contributions to defined-benefit or defined-contribution plans; (2) payment for group health care coverage, including insurance premiums; and (3) state and local taxes on compensation.

The 1-Year Period for Computation of Payroll Costs

The statutory text of the CARES Act provides that eligible borrowers are entitled to a maximum loan amount based on the average total monthly payments of the borrower for payroll costs “incurred during the 1-year period before the date on which the loan is made,” multiplied by 2.5 and only to the extent of $10 million.  However, in prior guidance, the SBA indicated that lenders may request documents and other information from borrowers for their 2019 calendar year payroll costs.  The result–some lenders requested payroll costs for the 1-year period prior to the loan application and other lenders requested payroll costs for the 2019 calendar year.

In FAQ & Answer No. 14, the SBA concludes that borrowers can generally calculate their payroll costs using data from either the previous 12 months or from calendar year 2019.

Borrowers with Independent Contractors

The CARES Act provides that payroll costs include “the sum of payments of any compensation to or income of a sole proprietor or independent contractor that is a wage, commission, income, net earnings from self-employment, or similar compensation . . .”

After the CARES Act was enacted, the SBA issued an Interim Final Rule.  On page 6, this rule indicated that eligible borrowers included those who were in operation on February 15, 2020 and “either had employees for whom you paid salaries and payroll taxes or paid independent contractors, as reported on a Form 1099-MISC.”  But on page 11 of that same rule, the SBA indicated that independent contractor expenses did not count for purposes of determining payroll costs.  The stated rationale was that independent contractors had the ability to apply for the PPP loan separately.

In FAQ & Answer No. 15, the SBA reaffirms that independent contractor expenses are not payroll costs.

Federal Income Tax Withholding and FICA

And now to perhaps the most widely debated issue regarding the PPP loan program:  whether payroll costs include federal income tax withholding and FICA taxes.  The CARES Act provides that “payroll costs” do not include any taxes imposed or withheld under chapters 21 (FICA), 22 (Railroad Retirement taxes), or 24 (federal income tax withholding) of the Internal Revenue Code for the “covered period.”  For these purposes, the “covered period” is February 15, 2020, through June 30, 2020.

Thus, the question was whether federal income tax withholding and FICA taxes not incurred prior to February 15, 2020, had to be excluded from payroll costs.  Equally as important was whether federal income tax withholding and FICA taxes paid during February 15, 2020, through June 30, 2020, were forgivable amounts.  These were significant questions with multiple answers.

But in FAQ & Answer No. 16, SBA concludes that payroll costs should be computed on a gross basis without regard to federal taxes imposed or withheld.  According to the SBA’s interpretation of the CARES Act (in addition to its interpretation of the purpose of the Act), payroll costs should not be reduced by federal income tax withholding or the employee’s share of FICA.  However, SBA continues to believe that the employer’s share of FICA should be excluded from payroll costs.  Significantly, SBA further concludes that this definition of payroll costs should apply for purposes of computing the maximum loan amount, allowable uses of the loan proceeds, and the amount of forgiveness.


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