Important Developments Implementing the CARES ACT and FFCRA
Important Developments Implementing the CARES ACT and FFCRA:
How the PPP, EIDL, and Tax Credits Are Impacting Businesses, Churches, and Nonprofits
By William R. Thetford, Esq. and H. Robert Showers, Esq.
Last Updated: April 14, 2020.
Note: This is the subject of a rapidly evolving landscape. Please stay tuned for updates as they become available.
This article highlights the important developments in a myriad of pieces of legislation (especially the CARES Act) designed to address the Coronavirus and associated economic impact. Some of these pieces of legislation impose new responsibilities on employers, and other portions allow new opportunities for businesses, churches, and nonprofits to stay afloat financially and continue to pay their employees.
Funding
As we discussed in our prior articles, the funding for the PPP and EIDL has been going quickly due to the great demand for these loans. They will likely be exhausted soon, even though PPP Applications only began being accepted and processed a little over a week ago (April 3). The latest figures were that 820,000 loans have already been processed, valued at $205 billion as of Easter Sunday[1] leaving only a little over a third of the funds available after just over a week of accepting applications. There have been bipartisan calls to expand the funding by an additional $250 billion. However, the Senate was unable to pass the legislation thus far and more debate is likely required.[2]
In short, if you can file sooner, rather than later, you should. However, if your application is held up before you are accepted, you may get a second chance if more funding is approved.
The Paycheck Protection Program
The Paycheck Protection Program (PPP) is likely to be one of the most widely utilized portions of the recent legislation. Unfortunately, as typically accompanies such sweeping emergency legislation, there have been a host of ambiguities, questions, and uncertainties confronting applicants and lenders alike. Many of these initial questions have now been addressed by subsequent guidance.
What Guidance Can I Rely Upon?
The primary authority remains the 880 pages of the CARES Act itself. The first official guidance filling the holes and piecing together an interpretation and implementation of the act came in the form of the Small Business Administration’s Interim Final Rule followed by a second Interim Final Rule focused specifically on the topic of affiliations.
On top of the formal acts of Congress and rulemaking, the Treasury also published guidance on the program generally on April 6, 2020 (updated again on April 8, 10, 13, and 14) and specifically addressed questions about religious organizations participating in the PPP on April 3 (FAQs Regarding Participation of Faith-Based Organizations in the PPP and EIDL).
More guidance may come, but importantly, to allow borrowers and lenders confidence to proceed in the meantime despite the changing landscape, the SBA has indicated that borrowers and lenders will only be held accountable to the Act, rulemaking, and guidance as it exists at the time of the application.[3]
What if I Submitted My Application and Guidance Changed After I Submitted?
Thankfully, the SBA has indicated that it will not challenge borrower and lender actions that are consistent with the guidance issued at the time action was taken.
Borrowers and lenders may rely on the guidance provided in this document as SBA’s interpretation of the CARES Act and of the Paycheck Protection Program Interim Final Rule (“PPP Interim Final Rule”). The U.S. government will not challenge lender PPP actions that conform to this guidance, and to the PPP Interim Final Rule and any subsequent rulemaking in effect at the time.[4]
You will not need to resubmit your loan application if it was accurate to the extent possible given the guidance at the time. However, you may, but do not have to, revise your application based on the clarifications provided in the latest guidance if your application has not yet been processed.[5]
Is the $100,000 cap for salary only or all compensation?
This question arose early as both the Act and Interim guidance were somewhat ambiguous. We expected that based on the language, the $100,000 cap applied only for salary, wages, and similar compensation only. In other words, if an employee was paid $105,000 in salary, the employer could count the first $100,000 of the salary towards payroll and benefits such as retirement or health insurance that the employer provides would still be eligible for inclusion. The new Treasury Guidance explicitly provides that payroll costs such as retirement benefits and health insurance qualify even for employees who have reached the $100,000 maximum salary threshold. Thus, if the employee has $95,000 salary and $20,000 in benefits you may apply the $115,000 to the average monthly payroll.
Whether Payments to Independent Contractors Are Included in the Calculation of Payroll Costs.
The Act made it appear that businesses (or nonprofits or churches) could factor in 1099 payments to individual independent contractors. The Interim Final Rule left this matter ambiguous although it did say independent contractors could not be included in its number of employees and our last article noted that we expected further clarification. The short answer is that under the latest guidance independent contractors cannot be included, independent contractors must apply for themselves; despite some initial guidance that hinted the opposite direction, described below.
Language of the Interim Final Rule:
What qualifies as “payroll costs?”
Payroll costs consist of compensation to employees (whose principal place of residence is the United States) in the form of salary, wages, commissions, or similar compensation; cash tips or the equivalent (based on employer records of past tips or, in the absence of such records, a reasonable, good-faith employer estimate of such tips); payment for vacation, parental, family, medical, or sick leave; allowance for separation or dismissal; payment for the provision of employee benefits consisting of group health care coverage, including insurance premiums, and retirement; payment of state and local taxes assessed on compensation of employees; and for an independent contractor or sole proprietor, wage, commissions, income, or net earnings from self-employment or similar compensation.
Do independent contractors count as employees for purposes of PPP loan calculations?
No, independent contractors have the ability to apply for a PPP loan on their own so they do not count for purposes of a borrower’s PPP loan calculation.
The interim final rule also implied that independent contractors were included in the loan calculation costs (though not for employee count) since it stated “You are eligible for a PPP loan if [among other things] You 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.”
The latest Treasury/SBA Guidance has clarified the ambiguity and announced that independent contractor payments cannot be included on the part of any other entity. Thus, employers cannot include payments to independent contractors in their calculations. Independent contractors will have to apply for themselves.
SBA Question: Should payments that an eligible borrower made to an independent contractor
or sole proprietor be included in calculations of the eligible borrower’s payroll costs?
SBA Answer: No. Any amounts that an eligible borrower has paid to an independent contractor or sole proprietor should be excluded from the eligible business’s payroll costs. However, an independent contractor or sole proprietor will itself be eligible for a loan under the PPP, if it satisfies the applicable requirements.
Unfortunately, although this clarifies the answer to how employers should apply, in practice, this interpretation makes other issues murky. For instance, this interpretation appears to make it difficult for employers who previously contracted with independent contractors to continue the work without having the independent contractors paid twice (once through the PPP and again for continued work paid via contract by the client organization). Such an outworking seems to be contrary to the purpose of getting people back to work and off the unemployment rolls, but the SBA has now made it clearer even if contrary to previous comments in the Interim Final Rule:
Thus, independent contractors are now required to apply for PPP separately and not through its entity which contracts with them. It is unclear what protections are in place to prevent independent contracts from “double dipping” and being paid once by the PPP not to work and again by the organization to do the work. More guidance may come to resolve these new issues.
When Applying for the PPP are the Employee Counts Based on Full Time Equivalent (FTE) Employees or Employees Without Regard to Their Hours.
There has been some confusion about whether “employees” refers to a headcount of employees regardless of the hours worked or Full Time Equivalent (FTE) Employees.
For the purpose of determining the 500-employee threshold, the Act defines employee as “individuals employed on a full-time, part-time, or other basis.” Sec. 1102 (a)(1)(D)(v). The current guidance is consistent with that standard.
For determining loan forgiveness, on the other hand, it is necessary to calculate the average number of employees, and the Act specifies that the FTE standard is used for that calculation. Sec. 1106 (d)(2)(A)(i).
What time period do I review to determine number of employees and payroll costs?
The Act refers to the last 12 months. However, in practice the banks have been accepting, and the SBA has now approved in its latest guidance, the use of either the last 12 months OR calendar year 2019. For forgiveness of the loan, it will compute the 8 weeks following the loan closing and acceptance of the PPP money.
Do Lenders or Applicants make an independent determination regarding application of affiliation rules under 13 CFR 121.301(f) to borrowers?
Applicants have the primary responsibility to determine what entities (if any) are its affiliates and determine the employee headcount of the borrower and its affiliates. Lenders will rely on Applicant/borrower certifications.
Are there any exemptions or exceptions from the affiliation rules for religious organizations?
Yes, as the SBA made clear, its rulemaking “exempts otherwise qualified faith-based organizations from the SBA’s affiliation rules . . . where the application of the affiliation rules would substantially burden those organizations’ religious exercise.” Interim Final Rule on Affiliations at 5. The denial of a generally available benefit on account of a person or organization’s religion is a substantial burden on free exercise under the First Amendment and the Religious Freedom Restoration Act. Id. at 6-7; Sherbert v. Verner, 374 U.S. 398 (1963); Trinity Lutheran v. Comer, 137 S. Ct. 2012 (2017).
The applicable portion of the revised Code of Federal Regulations reads “The relationship of a faith-based organization to another organization is not considered an affiliation with the other organization under this subpart if the relationship is based on a religious teaching or belief or otherwise constitutes a part of the exercise of religion.” 13 CFR § 121.103(b)(10)(i).
As provided in the Interim Final Rule on Affiliations, the “SBA is aware of the existence of faith-based organizations that would qualify for relief under the CARES Act but for their affiliation with other entities as an aspect of their religious practice.”
The SBA correctly affirmed that “Supreme Court precedent has long recognized that the organizational structure of faith based entities may itself be a matter of significant religious concern and that faith-based organizations are therefore guaranteed the ‘power to decide for themselves, free from state interference, matters of church government as well as those of faith and doctrine.’” Interim Final Rule on Affiliations at 7 (quoting Kedroff v. St. Nicholas Cathedral of Russian Orthodox Church in N. Am., 344 U.S. 94, 116 (1952)).
Following this Supreme Court case law, the SBA has declared:
Accordingly, the SBA’s affiliation rules, including those set forth in 13 CFR part 121, do not apply to the relationship of any church, convention or association of churches, or other faith based organization or entity to any other person, group, organization, or entity that is based on a sincere religious teaching or belief or otherwise constitutes a part of the exercise of religion. Interim Final Rule on Affiliations at 10.
Thus, any reviewing lender/party will need to be reminded that under the Interim Final Rule on Affiliations “A faith-based organization seeking loans under this program may rely on a reasonable, good faith interpretation in determining whether its relationship to any other person, group, organization, or entity is exempt from the affiliation rules under this provision, and SBA will not assess, and will not require participating lenders to assess, the reasonableness of the faith-based organization’s determination.”
Who is authorized to sign for the applicant/borrower under PPP?
The authorized signer by bylaws or board resolution indicate that one individual may sing on behalf of the borrower and make the certifications. Lenders may rely on that representation, certifications and accept the single individual who is the authorized representative on behalf of the borrower.
Can I Apply for Both an Emergency Injury Disaster Loan (EIDL) or Grant and the PPP?
Yes. However, any outstanding EIDL made prior to the PPP program will be refinanced to be part of your PPP loan. That is advantageous because of the low interest, even though this additional amount will not likely satisfy the requirements for PPP loan forgiveness (the base rate of the PPP loan is calculated to be approximately the amount that can be forgiven if you use it for only those purposes) unless your average monthly eligible payroll expenditures are actually higher during the eight weeks following loan disbursement than your average monthly payroll costs in 2019 or the last 12 months.
The SBA guidance remains conflicted about whether the grant for the EIDL will be in addition to or subtracted from the amount ultimately forgiven under the PPP if you utilize both programs. We hope that the SBA will clarify this discrepancy.
Emergency Injury Disaster Loans (EIDL) and Grants
How is the $10,000 Grant Determined?
While the initial Act specified that grants would be made available to applicants for an EIDL in an amount “not to exceed $10,000,” further guidance has clarified how the amount actually granted will be determined. According to several pieces of guidance from the SBA, it now appears that the grant is based on the number of employees: $1000 per employee with a maximum of $10,000.[6] However, applicants must show economic injury to receive the loan and likely the grant as well.
Can Churches and Religious Nonprofits Apply for an EIDL and Grant from the SBA?
Yes! The initial expectation would be that churches and religious nonprofits would not be allowed to participate due to specific restrictions on using SBA loans for religious purposes. These restrictions were specifically overridden for the PPP of the CARES Act, but the Act did not discuss them in regard to other SBA loan programs like the EIDL.
However, in new guidance, the SBA announced that the previous regulations were impermissible exclusions against religious entities. Because “those regulations bar the participation of a class of potential recipients based solely on their religious status, SBA will decline to enforce these subsections and will propose amendments to conform those regulations to the Constitution.”[7]
Thus, Churches and religious organizations have the opportunity to choose among the PPP and the EIDL. You will want to examine your own individual circumstances and the program pros and cons, however, we know that most churches, small businesses, and nonprofits have found the PPP to better suit their needs.
What other terms apply to the EIDL and Grant?
To be eligible you must be an eligible employer (including small businesses, churches, and nonprofits with less than 500 employees) that is directly impacted by the coronavirus.
What happens if I seek the grant but do not get the loan?
It appears that you cannot apply for the grant without applying for the emergency loan itself. The advance/grant will be forgiven if you are denied for the EIDL. The advance/grant will be forgiven if you accept the loan (besides any necessary adjustments for the PPP). It is unclear what happens to the advance if you are approved for an EIDL but you do not accept it.
Families First Coronavirus Response Act (FFCRA) – Tax Credits and Obligations
As discussed previously,, the FFCRA is largely an additional obligation on employers to provide paid sick leave and expanded family and medical leave to their employees. The Department of Labor has created a lengthy question and answer document about the requirements for employers and employees here.
To assist some employers in funding the new obligations, the FFCRA also creates a payroll tax credit for the employer. The IRS has released an FAQ sheet on the Tax Credits for Required Paid Leave.
Can an Employer Receive FFCRA Tax Credits Simultaneously with the PPP under the CARES Act?
We noted in a previous article that it was unclear whether the FFCRA tax credits may be taken in conjunction with the PPP. It now appears that these credits are allowed in conjunction with the PPP, however, “if an Eligible Employer receives tax credits for qualified leave wages, those wages are not eligible as “payroll costs” for purposes of receiving loan forgiveness under section 1106 of the CARES Act.” (IRS FFCRA FAQs).
Can an Employer Receive Both FFCRA Tax Credits and Employee Retention Credits under the CARES Act?
Yes. If otherwise eligible, employers can receive both the FFCRA Tax Credits and the CARES Act Employee Retention Tax Credits, but employers may not apply both credits to the same wage payments. Further guidance on the Employee Retention Tax Credit has also been released by the IRS.
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Disclaimer: This memorandum is provided for general information purposes only and is not a substitute for legal advice particular to your situation. No recipients of this memo should act or refrain from acting solely on the basis of this memorandum without seeking professional legal counsel. Simms Showers LLP expressly disclaims all liability relating to actions taken or not taken based solely on the content of this memorandum. Please contact Robert Showers or Will Thetford at wrt@simmsshowerslaw.com or call at 703.771.4671 for legal advice that will meet your specific needs.
[1] ABA Bank Data: Paycheck Protection Program Loans Total $205 Billion, Apr. 12, 2020, https://bankingjournal.aba.com/2020/04/aba-data-bank-paycheck-protection-program-loans-total-205-billion/
[2] Grace Segers, Senate Democrats block $250 billion expansion of small business loan program, Apr. 9, 2020, https://www.cbsnews.com/news/senate-paycheck-protection-program-250-billion-small-business-loans-coronavirus/
[3] Treasury Department, Paycheck Protection Program Loans: Frequently Asked Questions, last updated Apr. 8, 2020, Question 17, https://home.treasury.gov/system/files/136/Paycheck-Protection-Program-Frequenty-Asked-Questions.pdf.
[4] Id.
[5] Id. at Question 17. “Borrowers and lenders may rely on the laws, rules, and guidance available at the time of the relevant application. However, borrowers whose previously submitted loan applications have not yet been processed may revise their applications based on clarifications reflected in these FAQs.”
[6] Brian Schatz, SBA Economic Injury Disaster Loan and Emergency Grant, last updated April 4, 2020, https://www.schatz.senate.gov/coronavirus/small-businesses/sba-economic-injury-disaster-loan-and-emergency-grant
[7] Small Business Administration, Frequently Asked Questions Regarding Participation of Faith-Based Organizations in the Paycheck Protection Program and the Economic Injury Disaster Loan Program, Question 5, Apr. 3, 2020, https://www.sba.gov/sites/default/files/2020-04/SBA%20Faith-Based%20FAQ%20Final.pdf.
