Late during the evening of April 2, 2020, the U.S. Treasury, which is jointly administering the Paycheck Protection Program (“PPP”) along with the Small Business Administration (“SBA”), released this Interim Final Rule (the “Rule”) that contains several material changes to the initial guidance published by the SBA and U.S. Treasury on March 31, 2020 as well as other guidance. In addition to the Rule, the SBA also released the final, official version of the PPP Loan Application (“Loan Application”) (linked below).
The PPP was to “go-live” as of 12:01 AM on April 3, 2020. However, as a result of the SBA’s last-minute release of the Rule, the Loan Application process has been slow to get off the ground because many lenders were simply unprepared to implement such a massive program in such a short amount of time and elected to delay implementation until they are adequately prepared. As a result, as of the time of this writing, we still see that several lenders have yet to activate their e-portals to receive Loan Applications and have yet to determine the manner in which borrowers will be asked to submit documentation to support their loan requests. No doubt, much of this will be done behind the scenes and “on-the-fly” in coordination with the SBA once the Loan Applications are submitted. It’s predicted that most, if not all, of the major banks will be ready to launch no later than early next week.
In our commitment to bring you the most current information related to available COVID‑19 related financial resources, we want to highlight how the Rule has changed and clarify some of the details on which we previously reported.
Paycheck Protection Program
About the PPP
The PPP is a lending program created by the Coronavirus, Aid, Relief, and Economic Security Act (“CARES Act”), authorizing the SBA, approved banks, credit unions and other approved lenders to extend up to $10 million in forgivable loans, at an interest rate of 1%, to small businesses for the purpose of maintaining employees and business operations during the COVID-19 crisis. On March 31, 2020, the government released this helpful guidance related to the PPP.
Eligibility
All businesses – including 501(c)(3) and 501(c)(19) tax-exempt, nonprofits organizations, veteran organizations and tribal businesses – with 500 or fewer employees, with such employees having a principal place of residence in the U.S., are eligible to apply. Additionally, self‑employed individuals and independent contractors are also eligible to apply. Lastly, certain businesses with more than 500 employees may also apply, provided the businesses meet the applicable SBA size standards for their particular industries. For example, certain manufacturing businesses (e.g., textile mills, window and door manufacturers and breweries) with more than 1,000 employees are still considered small according to the SBA’s size standards.
Grounds for Ineligibility
Even if the above eligibility standards are met, an entity or individual will be ineligible for the PPP if any of the following are true:
- If you are engaged in any activity that is illegal under federal, state or local law;
- If you are a household employer (individuals who employ household employees such as nannies or housekeepers);
- If an owner of 20% or more of the equity of the applicant is incarcerated, on probation, on parole, presently subject to an indictment, criminal information, arraignment or other means by which formal criminal charges are brought in any jurisdiction or has been convicted of a felony within the last 5 years; or
- If you, or any business owned or controlled by you or any of your owners, have ever obtained a direct or guaranteed loan from the SBA or any other federal agency that is currently delinquent or has defaulted within the last 7 years and caused a loss to the government.
Businesses that are not eligible for PPP loans are identified in 13 CFR 120.110 and described further in the SBA’s Standard Operating Procedure (“SOP”) 50 10, Subpart B, Chapter 2, except that nonprofit organizations authorized under the CARES Act are eligible. (SOP 50 10 can be found here).
Allowable Uses
PPP funds may be used toward (1) payroll costs, including benefits; (2) most mortgage interest; (3) rent; and (4) utility costs.
Loan Amounts
Loans can be for up to 2 months of the businesses’ average monthly payroll costs from the last year plus an additional 25% of that amount. The maximum loan amount is capped at $10 million. For seasonal or new business, different standards of calculation may be applied. The following methodology, which is one of the methodologies contained in the CARES Act, will be most useful for many applicants when calculating the maximum amount for which the applicant is eligible.
- Step 1: Aggregate payroll costs (defined in detail below) from the last 12 months for employees whose principal place of residence is the U.S. Note that it is not clear which 12 month period the SBA will use. Therefore, we recommend submitting a Loan Application containing the payroll data for both (a) 1/1/2019 to 12/31/2019; and (b) 4/1/2019 to 3/30/2020 to avoid a delay in the Loan Application process. It is especially important to submit an accurate Loan Application given that PPP loans are on a first-come-first-served basis for only as long as the funds are available.
- Step 2: Subtract any compensation paid to an employee in excess of an annual salary of $100,000 and/or any amounts paid to an independent contractor or sole proprietor in excess of $100,000 per year.
- Step 3: Calculate average monthly payroll costs (divide the amount from Step 2 by 12).
- Step 4: Multiply the average monthly payroll costs from Step 3 by 2.5.
- Step 5: Add 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” under an EIDL COVID-19 loan (because it does not have to be repaid).
Defining “Payroll”
Payroll costs consist of compensation to U.S.‑based employees 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.
For businesses that contract with independent contractors, the independent contractors cannot be counted as “employees” for purposes of the PPP loan, on the basis that such independent contractors are separately eligible for the loan.
Payroll expressly does not include the following:
- Any compensation of an employee whose principal place of residence is outside of the U.S.;
- The compensation of an individual employee in excess of an annual salary of $100,000, prorated as necessary;
- Federal employment taxes imposed or withheld between February 15, 2020 and June 30, 2020, including the employee’s and employer’s share of Federal Insurance Contributions Act 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 (Public Law 116–127).
When to Apply
Small businesses and sole proprietorships were to begin applying on April 3, 2020, but this did not happen as intended. Independent contractors and self-employed individuals may begin applying on April 10, 2020.
Other Key Dates
The Loan Application must be submitted to an approved lender by June 30, 2020. Additionally, the full loan will be due in 2 years, but there are no prepayment penalties.
Where and How to Apply
The SBA does not directly lend the money. Rather, the SBA guarantees 100% of the loan and works with lenders who provide the funds. The Loan Application is available through an SBA approved lender or through any federally insured depository institution, federally insured credit union and Farm Credit System institution that is participating. Additional lenders are expected to start participating over time. The applicant must submit SBA Form 2483. A list of approved lenders is available on the SBA website.
Certification
Borrowers must make a good faith certification that (1) the uncertainty of current economic conditions makes it necessary for the loan request to support ongoing operations; and (2) the loan proceeds will be used (i) to retain workers and maintain payroll; or (ii) to make mortgage, lease and utility payments.
Deferment
Payments will be deferred for at least 6 months. The CARES Act authorizes the SBA to defer loan payments for up to 1 year. The SBA determined, in consultation with the U.S. Treasury, that a 6-month deferment period is appropriate in light of the modest interest rate on PPP loans and the loan forgiveness provisions contained in the CARES Act, so we do not anticipate that borrowers will be able to defer payments for any more than the 6 month period. Additionally, note that interest will continue to accrue on PPP loans during this 6-month deferment. The SBA and the U.S. Treasury have until April 27, 2020 to issue guidance so there might be additional information yet to come.
Loan Forgiveness
Funds extended under the PPP will be fully forgiven upon request if such funds were used for payroll costs, interest on mortgages, rent and utilities. At least 75 percent of all the funds must have been used for payroll. Additionally, the funds must be used during the 8-week period after the loan is made. Furthermore, to receive full loan forgiveness, the employer must have maintained employee and compensation levels for the period between February 15, 2020 and April 26, 2020. Employers who experienced any reductions in employees or wages and salaries may still qualify for full loan forgiveness if they quickly rehire by June 30, 2020 to eliminate those reductions. Otherwise, loan forgiveness amounts will be reduced where employee numbers declined or if salaries and wages decreased between February 15, 2020 and April 26, 2020 and where the employer failed to rehire by June 30, 2020. An employer who submits a request for loan forgiveness will also be required to submit documents that verify the number of full‑time equivalent employees and pay rates, as well as the payments on eligible mortgage, lease and utility obligations. Per the Rule, up to the full amount of the loan and accrued interest are forgivable. This is different from the CARES Act, which states the amount of loan forgiveness cannot exceed the principal amount of the loan. Furthermore, the Rule confirms that loan forgiveness amounts will be reduced by any $10,000 advance received by the borrower under an EIDL.
The CARES Act requires the SBA to issue additional guidance relating to loan forgiveness by April 27, 2020, so more information is to come.
Affiliation Rules
With regard to determining the size of the business and calculating appropriate employee numbers across businesses consisting of multiple locations or entities, the SBA’s affiliation rules under 13 CFR 121.301(f) apply to all businesses except small businesses (1) in the hotel and food services industries; (2) that are franchises in the SBA’s Franchise Directory; and (3) that receive financial assistance from small business investment companies licensed by the SBA. The exclusion rules are applicable when one business controls, is controlled by, is under common control by another entity, whether or not exercised, or has the power to control another business. The SBA, in conjunction with the borrower’s lender, should work together to consider the totality of the circumstances when determining whether affiliation is present. Finally, the SBA has stated that it intends to promptly issue additional guidance with regard to the applicability of affiliation rules at 13 CFR §§ 121.103 and 121.301 to PPP loans. Affiliation rules continue to be perhaps the single biggest hurdle for most applicants. We will continue to provide as much clarity as possible as additional guidance is released.
Please refer to Hall Render’s COVID-19 Resource Center and hotline at 317-429-3900 for any questions, as well as up-to-date information regarding the coronavirus. If you have any questions on the issues discussed in or related to this article, please contact:
- Jim Willey at (317) 977-1409 or jwilley@wp.hallrender.com;
- Victoire Iradukunda at (317) 429-3658 or viradukunda@wp.hallrender.com; or
- Jerimi Ullom at (317) 977-1488 or jullom@wp.hallrender.com;
- Your regular Hall Render attorney.
Hall Render’s attorneys and professionals continue to maintain the most up-to-date information and resources at our COVID-19 Resource page, through our 24/7 COVID‑19 Hotline at (317) 429-3900 or by contacting your regular Hall Render attorney.
Hall Render blog posts and articles are intended for informational purposes only. For ethical reasons, Hall Render attorneys cannot—outside of an attorney-client relationship—answer specific questions that would be legal advice.
