Last week, the Small Business Administration (SBA) published its Interim Final Rule providing formal guidance on the implementation of the Paycheck Protection Program (PPP) authorized by the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). Under the PPP, the SBA is authorized to guarantee a total of $349 billion in loans through June 30, 2020. PPP loans will be guaranteed at 100% and the full principal amount of the loans, plus accrued interest, may be eligible for forgiveness. This article provides a summary of important information contained in the Rule that potential applicants may find useful.
Who Is Eligible?
- For the period of February 15 through June 30, 2020, in addition to “small” business concerns, any business concern, nonprofit organization, veterans organization, or tribal business concern can receive a loan of as much as $10 million under this program if the concern or organization employs 500 or fewer employees, or a higher number if that higher number is permitted under the SBA size standards. In other words, a concern or organization can qualify for a 7(a) loan either if it is already considered “small,” as defined by the SBA’s size standards using the employee or annual receipts cap dictated by the concern’s or organization’s specific North American Industry Classification System (NAICS) code, or a concern or organization can qualify if it has 500 or fewer employees.
- Individuals operating as sole proprietorships, independent contractors, or eligible self-employed individuals that were in operation on February 15, 2020 are eligible.
- The following are ineligible under the PPP: Household employers; owners who own 20% or more of the equity of an applicant and are incarcerated, on probation, or parole, are presently subject to an indictment, criminal information, arraignment, or other means of bringing formal charges, or have been convicted of a felony within the last five years; and those who have obtained a direct or guaranteed loan from the SBA or another federal agency that is currently delinquent or has defaulted within the last seven years and caused a loss to the government.
- An eligible borrower that is granted a PPP loan may not apply for another PPP loan and the SBA cautions that “if you apply for a PPP loan you should consider applying for the maximum amount.”
With respect to “affiliation” rules, the Rule references the requirements at 13 CFR Sec. 121.103 and 121.301 and states that additional guidance will be forthcoming. On April 3, 2020, the SBA then issued additional guidance regarding the application of certain affiliation rules applicable to the PPP. Notably, this additional guidance states that “qualified faith-based organizations” are exempt from the SBA’s affiliation rules “where the application of the affiliation rules would substantially burden those organizations’ religious exercise.”
How Much Can Be Borrowed?
- The PPP authorizes loans up to $10 million as determined by a payroll-based formula.
- Under the payroll-based formula, an applicant must aggregate its payroll costs from the last 12 months for employees whose principal place of residence is the United States. Then, an applicant must subtract compensation paid to any employees, independent contractors, or sole proprietor in excess of an annual salary of $100,000. An applicant can use the following formula to determine the eligible loan amount: (Reduced Aggregate Payroll / 12) x 2.5 = Eligible Amount. (If an applicant received relief under the Economic Injury Disaster Loan (EIDL) program from January 31 to April 3, 2020, an additional adjustment may be required).
- “Payroll costs” are defined as “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 . . . ; 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 earning from self-employment or similar compensation.” However, the Rule indicates that payments to independent contractors may not be included in “payroll costs.” This requirement appears to be inconsistent with the CARES Act, and further clarification on this issue will be required from the SBA.
- The Rule excludes from the meaning of “payroll costs”:
- Compensation of employees residing outside the U.S.;
- Compensation of individual employees in excess of an annual salary of $100,000;
- Federal employment taxes imposed or withheld between February 15, 2020 and June 30, 2020, including the employee’s and employer’s share of FICA and Railroad Retirement Act taxes, and income taxes required to be withheld from employees; and
- Qualified sick and family leave wages for which a credit is allowed under sections 7001 and 7003 of the Families First Coronavirus Response Act.
- Independent contractors do not count as employees for purposes of PPP loan calculations.
What Are the Loan Terms?
- There is no up-front fee payable to the SBA by the borrower, and no collateral or personal guarantees will be required to obtain a loan.
- The administrator determined that the interest rate on PPP loans will be 1%.
- PPP loans mature in two years, which was determined to be sufficient “in light of the temporary economic dislocations caused by the coronavirus.”
- Loan payments must be made beginning six months following the loan disbursement date; however, interest will continue to accrue during the six-month deferment period.
- The loan may be forgiven up to the full principal amount plus accrued interest if the loan is used for the limited purposes prescribed in the Rule.
For What Purposes May the Loan Proceeds Be Used to Be Eligible for Loan Forgiveness?
- Most importantly, “not more than 25 percent of the loan forgiveness amount may be attributable to non-payroll costs.” The Rule indicates that “the Administrator has determined that the non-payroll portion of the forgivable loan amount should be limited to effectuate the core purpose of the statute and ensure finite program resources are devoted primarily to payroll.” This determination is not necessarily consistent with the text of the PPP in the CARES Act, and it is not clear whether the administrator has the authority to make this determination.
- Authorized uses of the loan proceeds include payroll costs; health insurance premiums and costs related to the continuation of group health care benefits during periods of paid sick, medical, or family leave; mortgage interest payments; rent payments; utility payment; interest payments on any other debt obligations that were incurred before February 15; and refinancing an SBA EIDL loan made between January 31, 2020, and April 3, 2020.
- The borrower must document how loan proceeds are used for payroll costs in order to determine the amount of forgiveness.
- Loan proceeds used for unauthorized purposes must be repaid. If a borrower knowingly uses funds for unauthorized purposes, the Rule warns that the borrower may be subject to additional liability for charges such as fraud and the “SBA will have recourse against [a] shareholder, member, or partner for the unauthorized use” of loan proceeds.
To eliminate the risk that some or all of PPP loan proceeds will not be forgiven, borrowers will need to be careful to monitor use of the funds and maintain good documentation accounting for expenditure of the loan proceeds. Although use of funds is permitted for the specific non-payroll expenses mentioned above, the SBA intends to cap forgiveness of those amounts at 25% of the forgivable amount. If the cap is later determined to be invalid or additional funds are made available to support the program, borrowers may not have to worry about this limitation, but, because of the current uncertainty, borrowers should plan accordingly.
How Does an Applicant Apply?
In addition to the guidance provided in the Rule, the SBA has issued the PPP loan application. Lenders started accepting applications for PPP loans to small business concerns and sole proprietorships on April 3, 2020. Applications for independent contractors and self-employed individuals will be accepted beginning April 10, 2020. The PPP loan application can be accessed at here.
Applicants may wish to contact their preferred financial institution directly to determine whether PPP loans are offered, but the SBA’s website provides a platform to identify nearby eligible lenders. The tool is available here.
While the PPP and CARES Act offer welcome relief to small businesses, the SBA’s Final Interim Rule on implementation of the PPP shows the complexities involved in actually obtaining that relief. Applicants and borrowers must stay mindful of the limitations imposed on the use of the loan proceeds and the potential consequences for violating these restrictions. Additionally, some small businesses may face nuanced affiliation issues that delay submission of a loan application or slow the loan approval process.
If you have any questions about the SBA’s Final Interim Rule on the Paycheck Protection Program or any related issues, please do not hesitate to contact Aron Beezley, Frederic Smith, Elizabeth Boone, or Alex Thrasher.