The SBA is set to release two interim final rules on the Paycheck Protection Program (PPP). While much of the SBA’s guidance and procedure for these loans has already been discussed and released on SBA’s website, this is SBA’s formal rulemaking that aggregates all of the rules on eligibility and how to apply. The rulemaking also provides a chance for businesses to provide feedback to SBA on what is and isn’t working the program.
The SBA issued two interim final rules. A main rule implementing the Paycheck Protection Program as part of the SBA’s 7(a) Loan Program as well as a supplement on how affiliation rules apply that we discussed here. I’ll summarize some of the main points below. But please review the rules for all the details.
The rules are effective upon publication. Comments will be due by Friday, May 15, as the rules are scheduled to be formally published on April 15 and there is a 30-day comment period. As this program is affecting a lot of people, be sure to let SBA how it’s impacting your company. Submit comments here.
The rules summarize the main eligibility requirements to apply for a PPP loan. Eligible business have “500 or fewer employees whose principal place of residence is in the United States, or are a business that operates in a certain industry and meet the applicable SBA employee-based size standards for that industry.” As we’ve discussed, there are exceptions for certain industry categories.
Some businesses are ineligible, including
- A household employer
- A business where a 20% or more owner is subject to criminal charges or “has been convicted of a felony within the last five years”;
- If the business or another business of the owner has “a direct or guaranteed loan from SBA or any other Federal agency that is currently delinquent or has defaulted within the last seven years and caused a loss to the government”
Importantly, to establish eligibility, a business “must also submit such documentation as is necessary to establish eligibility such as payroll processor records, payroll tax filings, or Form 1099-MISC, or income and expenses from a sole proprietorship.”
Generally, the maximum amount a business can get is the lower of $10 million or an amount that calculated using a payroll-based formula explained in the rule.
There is a detailed explanation of how to calculate the maximum amount each business can borrow based on aggregating payroll costs, subtracting compensation of certain employees over $100,000, and calculating the average monthly payroll and then multiplying that by 2.5. Then, you add the amount of certain Economic Injury Disaster Loans and subtract the amount of any advance under an EIDL COVID-19 loan.
Here’s an example provided in the rules:
- Some employees make more than $100,000, outstanding
EIDL loan of $10,000
- Annual payroll: $1,500,000
- Subtract compensation amounts in excess of an annual salary of
- Average monthly qualifying payroll: $100,000
- Multiply by 2.5 = $250,000
- Add EIDL loan of $10,000 = $260,000
- Maximum loan amount is $260,000
Some things are excluded from the definition of “payroll costs.” This includes both compensation of an employee whose principal place of residence is outside of the United States and compensation of an individual employee in excess of $100,000 annual salary, as well as other exclusions.
The rules also note that independent contractors don’t count as employees for purposes of PPP loan calculations. This is consistent with SBA’s other rules on counting employees, such as for purposes of the limitations on subcontracting.
You can only get one PPP loan, so SBA helpfully states that “you should consider applying for the maximum amount.” This will “help ensure that as many eligible borrowers as possible may obtain a PPP loan.”
While parts of the loan can be forgiven, “not more than 25 percent of the loan forgiveness amount may be attributable to non-payroll costs.” Non-payroll items include mortgage interest, rent, and utilities. There will be additional guidance on loan forgiveness.
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The Paycheck Protection Program can be a massive help for many businesses. Be sure to review the full details of the guidelines for the program.