On April 2, 2020, the Small Business Administration ("SBA") released an immediately effective Interim Final Rule for borrowers and lenders seeking to provide further clarification on the implementation of the Paycheck Protection Program ("PPP") created by the CARES Act.
Though largely providing technical clarification, the latest rule also made a substantive modification to the PPP loan program to increase the interest rate from 0.5% to 1.0% per annum. The term of all PPP loans remains 2 years. Any amounts not forgiven shall be repaid according to these terms. The SBA also released an updated application form that can be viewed
here
.
The rule also provides a sample methodology for calculating the maximum amount available to a borrower:
- Step 1: Aggregate payroll costs from the last twelve (12) months for employees whose principal place of residence is in the United States;
- 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; and
- Step 5: Add the outstanding amount of an Economic Injury Disaster Loan (EIDL) made between January 31, 2020 and April 3, 2020, if applicable, less the amount of any "advance" under an EIDL COVID-19 loan (because it does not have to be repaid).
The rule further provides an expanded definition of "payroll costs": compensation to employees (whose principal place of residence is in 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 any independent contractor or sole proprietor, wage, commissions, income, or net earnings from self-employment or similar compensation.
The following items are expressly excluded from "payroll costs":
- Any compensation of an employee whose principal place of residence is outside of the United States;
- The compensation of an individual employee in excess of an annual salary of $100,000, prorated as necessary;
- The employer's share of FICA (Federal Insurance Contributions Act) and Railroad Retirement Act taxes; and
- Qualified sick and family leave wages for which a credit is allowed under Sections 7001 and 7003 of the Families First Coronavirus Respond Act (FFCRA).
The latest guidance reinforces that at least 75% of PPP loan proceeds should be used for a business's payroll costs. Although other "forgivable" uses include utilities, rent or mortgage interest expenses, the SBA is clear that at least 75% of the funds are to be used for maintaining payroll.
Additionally, the SBA advises that PPP loan funds can be used for each of the following, but businesses should be aware that not all of these expenses will qualify for loan forgiveness:
- Costs related to the continuation of group health care benefits during the periods of paid sick, medical, or family leave, and insurance premiums;
- Mortgage interest payments (but not mortgage prepayments or principal payments);
- Interest payments on any other debt obligations that were incurred before February 15, 2020; and /or
- Refinancing an SBA EIDL loan made between January 31, 2020 and April 3, 2020.
If PPP loan funds are used for unauthorized purposes, the SBA will direct borrowers to repay those amounts and businesses may be subject to additional liability, including charges for fraud, if funds are knowingly misused.
Each lender may have distinct requirements, but borrowers should be expected to provide the following documents in addition to the PPP application form when applying for a PPP loan:
- Articles of Incorporation/Certificates of Formation;
- Bylaws/Operating Agreement/Partnership Agreement;
- All owners' drivers' licenses;
- IRS forms 940, 941 and 944;
- Payroll summary report with corresponding bank statement (If not available, employee pay stubs as of February 15, 2020 with corresponding bank statement and breakdown of payroll benefits);
- 1099s (for independent contractors); and
- Certifications regarding employees.
On Friday, April 3, 2020, the SBA issued additional guidance on the impact of affiliated businesses on PPP loan eligibility. The latest interim rule provides that numbers of employees for purposes of qualifying for a PPP loan will be calculated as the aggregation of employees for all affiliated entities. Affiliation can be found as follows:
- Affiliation based on ownership - a concern is an affiliate of an individual, concern, or entity that owns or has the power to control more than 50 percent of the concern's voting equity;
- Affiliation arising under stock options, convertible securities, and agreements to merge;
- Affiliation based on management - affiliation arises where the CEO or President of the applicant concern (or other officers, managing members, or partners who control the management of the concern) also controls the management of one or more other concerns. Affiliation also arises where a single individual, concern or entity controls the management of the applicant concern through a management agreement; or
- Affiliation based on identity of interest - affiliation arises when there is an identity of interest between close relatives, as defined in 13 CFR 120.10, with identical or substantially identical business or economic interests (such as where the close relatives operate concerns in the same or similar industry in the same geographic area). Where SBA determines that interests should be aggregated, an individual or firm may rebut that determination with evidence showing that the interests deemed to be one are in fact separate.
The SBA further clarified that religious organizations are exempted from the affiliation rules for PPP loans if the relationship of a faith-based organization to another organization is not considered an affiliation with the other organization, if the relationship is based on a religious teaching or belief or otherwise constitutes a part of the exercise of religion. The existing affiliation waivers for the hospitality industry and franchises also remain in effect.
Additional guidance on PPP loans can be found in the attached list of
