Last night, the Small BusinessAdministration (“SBA”) issued an interim final rule to announce the implementationof the “Paycheck Protection Program” created by the CARES Act and to providesome much-anticipated guidance on the program’s requirements. A few hourslater, after midnight on April 3, 2020, the SBA released a revised version ofits PPP borrower application in light of the interim final rule. The newestversion of the application can be accessed here .
The CARES Act allocated $349,000,000,000 to the SBA to administer the Paycheck Protection Program, a new loan program under Section 7(a) of the Small Business Administration Act. The CARES Act provides for forgiveness of up to the full principal amount of qualifying loans guaranteed under the Paycheck Protection Program.
Notably, this interim final rulewas made effective immediately to facilitate the expeditious relief toAmerica’s small businesses. This rare move dispensed with the 30-day delayedeffective date ordinarily provided by the Administrative Procedure Act. Below is a summary of some notable clarifications andadditional guidance on the Paycheck Protection Program, as set forth in theinterim final rule and revised application:
Who Qualifies?
- You are eligible for a PPP loan if you (1) are asmall business with fewer than 500 employees in the United States> and (2) youwere in operation on February 15, 2020 and either had employees for whom youpaid salaries and payroll taxes or paid independent contractors as reported ona Form 1099-MISC.
- You are also eligible for a PPP loan if you arean individual who operates under a sole proprietorship or as an independentcontractor or eligible self employed individual, and you were in operation onFebruary 15, 2020.
How much can I borrow?
- Under the PPP, the maximum loan amount is the LESSER of (1) $10,000,000 or (2) the amount as calculated using the following formula.
- Formula for calculating loan amount: Step 1: Add payroll costs from the last 12 months for employees only (not independent contractors) who reside in the United States>
- Step 2: Subtract compensation paid to an employee to the extent it exceeds $100,000 per year>
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- Step 3: Calculate average monthly payroll costs by dividing the amount from the first two steps by twelve (12)>
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- Step 4: Multiply the average monthly payroll costs by 2.5
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- Step 5: Add the outstanding amount of any 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 (because it doesn’t have to be repaid)>
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What qualifies as payrollcosts?
- Payroll costs consist of: Compensation to employees whose principal placeof residence is in the Untied States in the form of salary, wages, commissions,or similar compensation>
- Cash tips or the equivalent>
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- Payment for vacation, parental, family, medical,or sick leave>
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- Allowance for separation or dismissal>
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- Payment for the provision of employee benefitsconsisting of group health coverage, including insurance premiums andretirement>
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- Payment of state and local taxes assessed oncompensation of employees>
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- For independent contractors or sole proprietorsapplying, wages, commissions, income, or net earnings from self-employment orsimilar compensation.
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What is excluded from thedefinition of payroll?
- Compensation of high earning employees, but onlyto the extent the annual compensation exceeds $100,000 (prorated as necessary)>
- Federal employment taxes imposed or withheldbetween February 15, 2020 and June 30, 2020>
- Qualified sick leave and family leave wages forwhich a credit is allowed under the Families First Coronavirus Response Act>
Do Independent ContractorsCount as Employees?
- No. Since independent contractors can apply fora PPP loan on their own, they do not count for purposes of a borrower’s PPPloan calculations.
What is the Interest Rate?
- The interest rate on a PPP loan will be 1.00%.This is a change from the 0.50% interest rate initially released by the SBA.
What is the maturity date?
- The maturity date for the portion that is notforgiven is two years.
Can I e-sign my Application?
- Yes. E-signatures and e-consents can be usedregardless of the number of owners.
Is the PPP first-come,first-served?
Is there a deferment ofpayments under the PPP?
- Yes. A borrower will not have to make anypayments for six months following the date of disbursement of the loan.However, interest will continue to accrue during the six month deferment.
Is the loan forgivable?
- Yes. The amount of the loan forgiveness can be up to the full principal amount of the loan and any accrued interest.
- In other words, the borrower will not be responsible for ANY loan payment so long as the borrower uses all of the loan proceeds for forgivable purposes (described below) and compensation levels are maintained.
How should I use my loanproceeds?
- You should use at least 75% of your loanproceeds for payroll costs (defined above). Not more than 25% of the loanforgiveness amount may be attributable to non-payroll costs.
- In effect, you should use your loan proceeds topay for all of your payroll costs for the eight weeks following loan approval.Any excess proceeds should be used for the other forgivable purposesimmediately below.
What are the other forgivablepurposes?
- Payroll costs (as defined above)>
- Costs related to continuation of group healthcare benefits during periods of paid sick, medical, or family leave, andinsurance premiums>
- Mortgage interest (but not principal) payments>
- Rent payments
- Utility payment
- Interest payments on debt obligations incurredbefore February 15, 2020.
- Refinancing an EIDL loan obtained betweenJanuary 31, 2020 and April 3, 2020.
Conclusion:
This interim final rule provides some important clarifications needed for the expeditious implementation of this loan program. The SBA has acknowledged that the PPP loan program will be administered on a “first come, first served” basis, so all borrowers should be in close contact with their SBA 7(a) approved lenders to ensure that their applications can be submitted timely.
We at Rembolt Ludtke are workingaround the clock to ensure that our clients are well informed on the PPP loanprogram and other aspects of the coronavirus relief effort. Please reach out toone of our attorneys if you have any questions whatsoever.
Max Rodenburg
