Since the passage of the Coronavirus Aid, Relief and Economic Security Act (CARES Act), the Small Business Administration (SBA) and the U.S. Treasury Department have released a series of interim final rules and updated Frequently Asked Questions (FAQs) (as of April 8, 2020) regarding Paycheck Protection Program (PPP). These updates provide critical guidance and information to borrowers and lenders alike in the implementation of the highly sought after program. This blog describes some of the key clarifications to the program since its enactment.

Expanded eligibility

Not all businesses are required to have 500 or fewer employees to be an eligible borrower. A business that has more than 500 employees may qualify as a “small business concern” under section 3 of the Small Business Act, 15 U.S.C. § 632, and can qualify for the PPP loan, if it meets one, but not all, of the following requirements:

  • Meets the SBA employee-based size standard; or
  • Meets the SBA revenue-based size standard; or
  • Meets both tests under the SBA’s “alternative size standard,” as of March 27, 2020:
    • maximum tangible net worth of the business (and its affiliates) is not more than $15 million; and
    • the average net income after Federal income taxes (excluding any carry-over losses) of the business for the two (2) full fiscal years before the date of the application is not more than $5 million.

The “alternative size standards” provides certain borrowers with an opportunity to avoid the traditional size standard – 500 employees or less – when combined with affiliated compan(ies), which previously rendered a borrower ineligible based on the aggregate number of employees of their affiliated entities (looking at you, private equity and venture capital groups!).

The Interim Rules on Affiliation also confirmed that faith-based 501(C)(3) organizations are eligible, and provide that as long as the non-profit borrower’s 500 employees are U.S. residents, then any affiliate will not render the non-profit ineligible for the program.

For a more detailed explanation of the SBA eligibility rules related to the Paycheck Protection Program, please consult my colleague Jack Meadows’ blog SBA loan eligibility FAQs.

Calculating payroll costs

There were a number of important clarifications as to payroll calculation methodology that were announced, and they include the following:

  • Independent contractors may not be included in the payroll calculation;
  • When calculating payroll costs, borrowers must exclude cash compensation to employees in excess of $100,000 annually; this does not apply 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 and insurance premiums; and
    • payment of state and local taxes assessed on employee compensation.
  • Borrowers can calculate payroll using either the immediately preceding 12- month period or by using the 2019 calendar year.
  • Borrowers should use the gross basis of payroll, without any regard to the federal taxes imposed or withheld from such payments, in calculating their total costs. For example, an employee may earn $2,000 per paycheck in gross wages, from which $250 is withheld for federal payroll taxes (FICA, Federal income withholding), leaving the employee to receive $1,750. In calculating payroll costs, borrowers should report the $2,000 as the payroll cost.


Finally, there were two big announcements that borrowers should be pleased to hear:

Lenders are required to make the first disbursement of the loan no later than ten (10) calendar days from the date of the loan approval;


The eight-week period during which the borrower must use loan funds for payroll costs begins on the date the lender makes the first disbursement.

Lender liability

While borrowers may be quick to gloss over questions and instructions geared towards lenders, the FAQs give important clues to a borrower’s obligation with regard to a truthful application and executing a promissory note. Importantly, lenders are allowed to rely heavily on the borrower’s documentation and certifications when approving an application. Lenders are not required to duplicate a borrower’s calculations, nor are lenders required to verify the applicability of affiliation rules to a borrower. As a result, borrowers must be careful to ensure that their payroll calculations are accurate, and should consult legal counsel as to questions of affiliation before certifying an application. Intentionally or negligently falsifying either of these concerns may result in the borrower being declared ineligible for forgiveness, or may subject the borrower to civil and criminal penalties and fines.

Information about COVID-19 and its impact on local, state and federal levels is changing rapidly. This article may not reflect updates to news, executive orders, legislation and regulations made after its publication date. Visit our COVID-19 resource page to find the most current information.