Last night, the Small Business Administration (“SBA”) issued an interim final rule to announce the implementation of the “Paycheck Protection Program” created by the CARES Act and to provide some much-anticipated guidance on the program’s requirements. A few hours later, after midnight on April 3, 2020, the SBA released a revised version of its PPP borrower application in light of the interim final rule. The newest version 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 rule was made effective immediately to facilitate the expeditious relief to America’s small businesses. This rare move dispensed with the 30-day delayed effective date ordinarily provided by the Administrative Procedure Act. Below is a summary of some notable clarifications and additional guidance on the Paycheck Protection Program, as set forth in the interim final rule and revised application:
- You are eligible for a PPP loan if you (1) are a small business with fewer than 500 employees in the United States; and (2) you were in operation on February 15, 2020 and either had employees for whom you paid salaries and payroll taxes or paid independent contractors as reported on a Form 1099-MISC.
- You are also eligible for a PPP loan if you are an individual who operates under a sole proprietorship or as an independent contractor or eligible self employed individual, and you were in operation on February 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;
- Step 3: Calculate average monthly payroll costs by dividing the amount from the first two steps by twelve (12);
- Step 4: Multiply the average monthly payroll costs by 2.5
- 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);
What qualifies as payroll costs?
- Payroll costs consist of:
- Compensation to employees whose principal place of residence is in the Untied 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 coverage, including insurance premiums and retirement;
- Payment of state and local taxes assessed on compensation of employees;
- For independent contractors or sole proprietors applying, wages, commissions, income, or net earnings from self-employment or similar compensation.
What is excluded from the definition of payroll?
- Compensation of high earning employees, but only to the extent the annual compensation exceeds $100,000 (prorated as necessary);
- Federal employment taxes imposed or withheld between February 15, 2020 and June 30, 2020;
- Qualified sick leave and family leave wages for which a credit is allowed under the Families First Coronavirus Response Act;
Do Independent Contractors Count as Employees?
- No. Since independent contractors can apply for a PPP loan on their own, they do not count for purposes of a borrower’s PPP loan 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 not forgiven is two years.
Can I e-sign my Application?
- Yes. E-signatures and e-consents can be used regardless of the number of owners.
Is the PPP first-come, first-served?
Is there a deferment of payments under the PPP?
- Yes. A borrower will not have to make any payments 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 loan proceeds?
- You should use at least 75% of your loan proceeds for payroll costs (defined above). Not more than 25% of the loan forgiveness amount may be attributable to non-payroll costs.
- In effect, you should use your loan proceeds to pay for all of your payroll costs for the eight weeks following loan approval. Any excess proceeds should be used for the other forgivable purposes immediately below.
What are the other forgivable purposes?
- Payroll costs (as defined above);
- Costs related to continuation of group health care benefits during periods of paid sick, medical, or family leave, and insurance premiums;
- Mortgage interest (but not principal) payments;
- Rent payments
- Utility payment
- Interest payments on debt obligations incurred before February 15, 2020.
- Refinancing an EIDL loan obtained between January 31, 2020 and April 3, 2020.
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 working around the clock to ensure that our clients are well informed on the PPP loan program and other aspects of the coronavirus relief effort. Please reach out to one of our attorneys if you have any questions whatsoever.