SBA Issues Guidance Regarding Implementation of the Paycheck Protection Program

The Small Business Administration (“SBA”) has released Interim Final Rules (“Rules”) regarding implementation of the Paycheck Protection Program (“PPP”) under the CARES Act.  These Rules are intended to provide guidance to both borrowers and lenders in interpreting the provisions of the PPP.

This Alert provides a high-level overview of the Rules, and in certain instances highlights differences from the CARES Act and other preliminary guidance that was previously issued by the SBA.

  1. Who is eligible?
    • Businesses with fewer than 500 employees located in the United States, subject to the SBA’s existing affiliation rules. However, businesses operating under NAICS Code 72 (Accommodation and Food Services) with fewer than 500 employees per physical location are exempt from the SBA’s affiliation rules.
    • Businesses in certain industry sectors may qualify with more than 500 employees if they meet applicable SBA employee-based size standards for such industry.
    • “Businesses” include small business concerns, non-profits, sole proprietorships, self-employed individuals, independent contractors, veteran organizations and tribal business concerns that were in operation on February 15, 2020.
  1. How does an applicant apply?
    • An applicant may apply only once through any FDIC insured bank that is accepting applications (as of the time of this Alert, not all banks were accepting applications).
    • In addition to the form application (a copy of which can be found here), an applicant needs to provide payroll processor records, payroll tax filings, Form 1099-MISC, income and expenses (for sole proprietors), or other supporting documentation sufficient to demonstrate qualifying payroll amounts.
    • PPP loans are made on a “first-come, first served” basis.
  2. What are some of the businesses that meet the criteria set forth above but are still ineligible for a PPP loan?
    • A business that is engaged in any activity that is illegal under federal, state or local laws.
    • An individual that employees household employees such as nannies or housekeepers.
    • A business that is owned 20% or more by someone that (i) is incarcerated, (ii) on probation, (iii) on parole, (iv) subject to an indictment, criminal information, arrangement, or by which criminal chares are brought, or (v) has been convicted of a felony in the last five years.
    • A business owned or controlled by the applicant or any of its owners that is currently delinquent or has defaulted within the last seven years on a direct or guaranteed loan from the SBA or any other Federal agency that has caused a loss to such government agency.
    • Businesses that have filed or are presently involved in any bankruptcy proceeding.
  1. How is the maximum loan amount calculated?
    • Loans will be in the amount of 2.5 times an applicant’s average monthly payroll costs for the last twelve months, capped at $10 million plus the outstanding amount of an Economic Injury Disaster Loan (“EIDL”) made between January 31, 2020 and April 3, 2020 less the amount of any advance made under an EIDL COVID-19 loan.
    • Aggregate payroll costs are calculated based on the trailing 12 months for employees whose principal residence is the United States. This differs from prior guidance, which proposed a 2019 measurement period.
    • Independent contractors are not included in the employee calculation.
  1. What constitutes “payroll costs”?
    • Compensation to U.S. employees in the form of salary, wages, commissions or similar compensation, and cash tips or the equivalent (based on employer records of past tips or a reasonable good-faith employer estimate)
    • Payment for vacation, parental, family, medical, or sick leave
    • Allowance for separation or dismissal
    • Payment for group health care benefits (including insurance premiums) and retirement
    • Payment of state and local taxes assessed on compensation of employees
    • For independent contractors and sole proprietors only: wages, commissions, income or net earnings from self-employment or similar compensation
  1. What is excluded from “payroll costs”?
    • compensation to non-U.S. employees
    • compensation in excess of $100,000 per employee (annualized). Although still uncertain, it appears that for purposes of calculating whether or not an employee’s compensation exceeds $100,000, the SBA has included all of the items set forth above in making such a determination, not just the employee’s salary.
    • Federal employment taxes imposed or withheld between February 15, 2020 and June 30, 2020.
    • qualified sick and family leave wages for which a credit is allowed under Sections 7001 and 7003 of the Families First Coronavirus Response Act.
  2. How can PPP loan proceeds be used?

PPP loan proceeds can be used to cover the following operational expenses:

    • Payroll costs (see above).
    • Costs related to continuation of group health care benefits during periods of paid sick, medical, or family leave, and insurance premiums.
    • Mortgage interest payments.
    • Rent payments.
    • Utility payments.
    • Interest payments on any other debt obligations incurred prior to February 15, 2020.
    • Refinancing an EIDL loan made from January 31, 2020 through April 3, 2020.

An applicant who received a EIDL from January 31, 2020 through April 3, 2020, can apply for a PPP loan. If the proceeds of an EIDL were used for payroll costs, the PPP loan must be used to refinance the EIDL.  Proceeds from any advance (up to $10,000) on the EIDL will be deducted from the forgiveness amount on the PPP loan.

  1. What are the terms of a PPP loan?
    • Interest Rate: 1.0% (increased from 0.5%)
    • Term: 2 years
    • No prepayment penalties or premiums
    • Loan is unsecured, uncollateralized and is not required to be personally guaranteed.
    • Payment is deferred for 6 months following the date of disbursement of the PPP loan (however, interest will accrues from the date of disbursement).
  1. How is the forgiveness amount calculated?
    • PPP loans are eligible for forgiveness up to the full principal amount of the loan and any accrued interest. Not more than 25% of loan forgiveness may be attributable to non-payroll costs (i.e., interest on mortgage obligations, rent and utilities).
    • Forgiveness amounts are subject to decrease in the event that an applicant (i) reduces its full-time employee headcount, or (ii) decreases salaries and wages by more than 25% for employees making less than $100,000 per year. Employers have until June 30, 2020 to restore workforce numbers and/or salary amounts, in order to regain eligibility for forgiveness of the entire loan amount.
    • Independent contractors do not count as employees for purposes of PPP loan forgiveness.
  1. What certifications are required to apply?

Among other certifications, an applicant is required to certify as follows:

    • The applicant was in operation on February 15, 2020 and had employees for whom it paid salaries and payroll taxes or paid independent contractors, as reported on Form 1099-MISC.
    • Current economic uncertainty makes the loan request necessary to support ongoing operations.
    • The loan proceeds will be used to retain workers and maintain payroll or make mortgage interest payments, lease payments and utility payments.
    • During the period beginning on February 15, 2020 and ending on December 31, 2020, the applicant has not and will not receive another loan under the PPP.
    • Applicant affirms that all tax documentation submitted to lender are identical to those submitted to the Internal Revenue Service.
  1. What if the proceeds of a PPP loan are used for an unauthorized purpose?
    • The amount of the loan proceeds that were used for an unauthorized purpose has to be repaid.
    • It the funds were knowingly used for an unauthorized purpose, the applicant will be subject to additional liability, including charges for fraud.
    • If the funds were used for an unauthorized purpose by a shareholder, member or partner, the SBA will have recourse against such shareholder, member or partner for the unauthorized use.

We are continuing to monitor as additional guidance is released by the SBA and will provide new Alerts as appropriate.  Our attorneys are available to answer any questions and assist with EIDL and PPP applications.

As the law continues to evolve on these matters, please note that this article is current as of date and time of publication and may not reflect subsequent developments. The content and interpretation of the issues addressed herein is subject to change. Cole Schotz P.C. disclaims any and all liability with respect to actions taken or not taken based on any or all of the contents of this publication to the fullest extent permitted by law. This is for general informational purposes and does not constitute legal advice or create an attorney-client relationship. Do not act or refrain from acting upon the information contained in this publication without obtaining legal, financial and tax advice. For further information, please do not hesitate to reach out to your firm contact or to any of the attorneys listed in this publication.

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