What we know about the Paycheck Protection Program now and how it applies to Tribal gaming

Information is current as of May 6, 2020

Eligibility and applying

  1. Enterprises with more than 1/3rd of their revenue derived from legal gaming were originally prohibited under existing SBA regulations.  This was modified to less than 50% from legal gambling and under $1m just before the first round of funding was depleted.  The most recent guidance eliminated the prohibition on gambling revenue completely, as long as the enterprise otherwise meets the eligibility criteria.  We’ve seen casinos apply and get approved during this second round of funding.
  2. The second round of funding included a set aside of $30 billion for lending institutions with less than $10 billion in assets.  On April 29, the SBA briefly suspended applications from large lenders.  These actions are clearly to the favor of small lenders, including Native-owned lending institutions.  We are finding that clients are generally having greater success in getting funded through smaller institutions, particularly if there is already an existing relationship.
  3. As part of the application, an enterprise must certify that “current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.”  This certification has come under fire for public companies that have made headlines about receiving these funds, but the risk exists for entities of all sizes that the SBA may challenge this certification. {edit: the SBA issued a safe harbor on this certification for loans less than $2 million}.  As a precaution, it is highly advisable that Applicants prepare a memorandum to memorialize the facts and circumstances considered in making this certification, which should be approved by the Board or Tribal Council, as appropriate.  See this article for ideas on what to include.
  4. The affiliation rules contained in 13 CFR 121.301(f) are applicable to the Paycheck Protection Program.  So, too, are the exclusions in 13 CFR 121103(b)(2)(i) that states “Business concerns owned and controlled by Indian Tribes, Alaska Native Corporations (ANCs) organized pursuant to the Alaska Native Claims Settlement Act, Native Hawaiian Organizations (NHOs), Community Development Corporations (CDCs) authorized by 42 USC 9805, or wholly-owned entities of Indian Tribes, ANCs, NHOs, or CDCs are not considered affiliates of such entities.”  Further, subsection (ii) says that the Tribe’s entities are also not considered to be affiliates with each other because of their common ownership or management.  Affiliation among entities may be found for other reasons.  This means that employee count does not pool together the Tribe’s employees with the casino’s employees – the casino (and any other entity) is separate.
  5. The 500-employee count has additional nuances for Tribal casinos, beside the affiliation rules mentioned above.  Businesses may also qualify for the Paycheck Protection Program by applying the SBA’s alternative size standards applicable to their industry.  Casinos may qualify by having annual revenues up to $30 million, and casino hotels may have up to $35 million.  These revenue figures are applied to the Applicant and its affiliates – which, as established above, does not automatically include the Tribe, other Tribal entities, or even other casino locations.  Each location should generally be looked at individually to determine eligibility.

Calculating application amounts

  1. The maximum loan amount is calculated by multiplying the average monthly payroll by 2.5.  Most applicants are advised to use 2019 payroll, divide by 12 (to obtain monthly), and then multiply by 2.5.  The guidance has been clarified that payroll costs are calculated on the gross basis without regard for deductions such as the employee’s portion of FICA or income tax withholding.  The employer’s portion of FICA is not included in the payroll cost calculation.  However, the portion of wages that are in excess of $100,000 for any employee must be subtracted out from the base calculation.
  2. Non-cash benefits like retirement contributions and group health insurances are included in the payroll cost calculation.  These should be added to the annual wages but are not subject to the $100,000 ceiling.  That ceiling is only applied to wages.  Applicants will want to use only the employer portion of premiums paid or report their wages on a net taxable basis to avoid double-counting the employee portion of premiums.  Deriving net taxable wages is most easily done from the quarterly Form 941s.
  3. The SBA defines employee count in 13 CFR 121.106.  This count should be used on the face of the application that asks for number of employees.  The calculation is the average number of employees for each of the pay periods for the preceding completed 12 calendar months.  This means that part-time and full-time employees all count as 1 for the purposes of this section.

Strategizing use of loan proceeds

  1. PPP funds must be spent in the 8-week period that begins on the date of disbursement (when you get the money).  The funds shall be disbursed within 10 days of obtaining SBA approval.  Many questions still exist on how this 8-week period will work, especially around what exactly needs to occur in the 8-week period.  For example:  does any paycheck paid in the 8-week period count?  Must the paycheck be only for services rendered during the 8-week period (regardless of the paycheck date)?  This same question of timing exists for rent, mortgage interest, and utilities.  The “conservative” approach – and the one I am generally advising considering the current guidance – is to use the dates paid, provided they are reasonable.  This advice may change subject to additional guidance and should not be relied upon for anything other than general planning.
    1. Examples of what I consider reasonable:
      1. 4 consecutive paycheck dates, for a bi-weekly payroll, on the regular pay schedule, all dated within the 8-week period
      1. 2 consecutive invoices for health insurance premiums, billed monthly, and paid within the 8-week period
      1. 2 consecutive utility bills, billed monthly, billed and paid within the 8-week period
      1. 2 consecutive rent payments, due monthly, paid within the 8-week period
    1. Examples of what I consider unreasonable:
      1. 9 consecutive paycheck dates, for a weekly payroll, that includes an off cycle pay period
      1. 3 consecutive utility bills, all technically dated within the 8-week period, but a normal year would include 12 approximately monthly payments
      1. 2 consecutive rent payments, one of which was for the month prior to obtaining the loan
  2. The goal for casinos (and everyone!) is to maximize the amount of forgiveness.  This requires spending no more than 25% on the allowable non-payroll expenses.  Many casinos will have a difficult time spending the full 25% on the other non-payroll expenses (utilities, rent, mortgage interest) usually because they do not pay traditional rent on their facilities or they have no debt.  Utilities alone may only be 5-10% of the loan proceeds over a two-month period.  Combine this with an uncertain reopening time period and casinos may find themselves battling employees to forfeit higher unemployment benefits.  Since forgiveness will be partially based on retaining a similar head count as pre-COVID times, casinos must document their efforts and any refusals for rehire to ensure that this will not affect them.  Casinos may also need to implement hazard pay or similar policies to increase their payroll spend during the 8-week forgiveness period to make up the gap between their qualifying non-payroll expenses and the loan amount.
  3. Non-payroll eligible expenses include utilities, rent, and mortgage interest.  While the latter two are self-explanatory, utilities are more subjective.  Further guidance may emerge from the SBA on the exact definition of utilities, but a good rule of thumb is to include basic services that keep your physical location operable.  These might include electricity, water/sewer, trash collection, telephone, internet services, gas, and cable TV.  Wireless phone plans should also qualify.  If the utility was in place prior to the pandemic, and bill amounts are substantially the same (or less, due to less usage), the cost will likely qualify as a forgivable use of proceeds.  Read more on how to account for the loan and the use of proceeds.

Other programs

  1. The Employee Retention Credit is a tax credit available to employers for retaining workers.  There are two items to note here for Tribal casinos.  First, the credit is not permitted for governmental employers.  This specifically excludes State and Local governments, but the IRS issued an FAQ document on April 29 that Tribal entities are eligible.  The IRS has cautioned that this guidance is not final and may not be relied upon for legal purposes.  The second item to note is that employers may not receive a PPP loan and claim the Employee Retention Credit.
  2. The Main Street Lending program is a lesser talked about program available to mostly larger enterprises.  We are not aware of any ineligibility issues with Tribal casinos participating in this program.  However, this is a loan program without the forgiveness component that is a primary feature of Paycheck Protection Program loans.  Read more about the Main Street Lending program here.

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