On Thursday, April 2, 2020, the Small Business Administration (SBA) issued a rule implementing the Payroll Protection Program (PPP) under the Coronavirus Aid, Relief and Economic Security Act (CARES Act). this regulation becomes effective upon publication in the Federal Register. The SBA has stated that eligible lenders can begin accepting applications from small businesses and sole proprietorships Friday April 3rd and may begin accepting applications from independent contractors and the self-employed April 10, 2020. The SBA has also published a new version of the application form here. Earlier versions should not be used. Notable information about the new rule and application form follows.
The rule confirms that the PPP is first-come, first-served, which presumably means applications will begin processing on April 3 until all funds allocated to the program (which runs through June 30, 2020) are exhausted are.
Businesses are eligible if they have 500 or fewer employees or meet the applicable employee-based size standard for their industry and are either a “small business” subject to the SBA’s affiliation rules unless waived by law, or a tax-exempt, non-profit, or veterans’ organization or a tribal small business, provided that such unit was in operation on February 15, 2020 and had employees or independent contractors as of that date. Each Eligible Borrower may only borrow one PPP Loan.
Under the PPP, the maximum amount of credit available is the lesser of $10 million or an amount calculated using a payroll-based formula established by law. The SBA provided a sample calculation of the maximum eligible loan amount: total labor costs minus any compensation paid to an employee in excess of $100,000 in annual salary to calculate an average monthly payroll multiplied by 2.5 plus any EIDL (Economic Injury Disaster Loan) granted between January 31, 2020 and April 3, 2020, less an advance of $10,000. This example caps the annual salary at $100,000 while allowing other non-salary payrolls above that number per person.
Previous guidance indicated that all federal employee withholding taxes (e.g., FICA) would be excluded from payroll. The rules state that only withholding is excluded from February 15th to June 30th, 2020.
The application form guidance published by the SBA states that most applicants will use the average monthly payslip for 2019 to calculate the loan amount. However, the rule states that wage costs should be calculated for the last 12 months prior to the loan, which is consistent with the CARES Act. Whilst we believe it is advisable to follow the new rules in any case where there is ambiguity between the rules and the application form, the most important thing for applicants is to ensure that their application is transparent and clear in relation to the particular method chosen and what is specific is guidance they rely on. Applicants can check with their lender to see what the lender is asking for.
The rules state that 75 percent of the loan proceeds must be used for payroll costs, and the application form requires the borrower to certify that they will use the loan proceeds in accordance with the rules. To determine the amount of waiver, no more than 25 percent may be based on incidental expenses. Funds used for an unauthorized purpose must be returned.
Any company that received an EIDL between January 31, 2020 and April 3, 2020 can apply for a PPP loan, but if such an EIDL was used for labor costs, it must be included in the PPP loan, and any advance $10,000 must be deducted from forgiveness. The amount of such a refinanced EIDL loan is included in determining the use of proceeds for payroll costs. If the EIDL loan has not been used for labor costs, the PPP loan will not be affected.
Independent contractors of a company shall not be included on an Eligible Company’s payroll and shall not be considered employees for the purposes of its PPP loan calculations since they can get their own PPP loan.
The interest rate on the loan is set at 1 percent, instead of the 0.5 percent stated in SBA’s previous guidance. The SBA confirmed that the loan term is two years with no payments until 6 months after loan disbursement. Interest accrues during the deferral period.
Certain businesses are not eligible even if they would otherwise be considered small businesses for the purposes of this regulation, including any business engaged in illegal activity, a domestic employer, a business owned 20 percent or more with a defined criminal background, and a A person or entity affected by an owner who is currently in default or defaulting on a direct or guaranteed loan within the last seven years, causing the government to suffer a loss.
Previous versions of the application form stated that all 20 percent or more of the applicant’s owners must be either US citizens or lawful permanent residents (green card holders). The version released for use in the program on April 3 removed this limitation.
The rule allows the use of electronic signatures and requires electronic filing of SBA Form 2483 (Paycheck Protection Program Application Form) and SBA Form 2484 (Paycheck Protection Program Lender’s Application for 7(a) Loan Guarantee).
The rule extends lender eligibility to specific lenders upon completion of a CARES Act Section 1102 Lender Agreement (SBA Form 3506). To underwrite a loan, lenders must confirm the following:
- Receipt of certificates in the application;
- Receive information showing that the Borrower had employees for whom it paid salaries and payroll taxes on or about February 15, 2020; and
- The dollar amount of the average monthly salary expense for the prior year by reviewing the payroll documents submitted with the borrower’s application.
Borrowers must prove that they are eligible for a loan. The SBA said it will allow lenders to rely on applicants’ certifications to determine eligibility for loans and rely on documents provided by borrowers to determine loan amounts and eligibility for forgiveness. The SBA expects banks to follow existing Bank Secrecy Act requirements to monitor financial crimes, but they will not require lenders to re-screen existing customers for BSA purposes.
Borrowers must submit the documentation needed to establish eligibility, e.g. B. Payroll records, income tax returns, or Form 1099-MISC or income and expenses of a sole proprietorship. For borrowers who do not have such documentation, the borrower must provide other supporting documentation such as: B. Bank records sufficient to show qualifying salary amount.
Lenders may require the SBA to purchase the expected forgiveness amount of a PPP loan or pool of PPP loans at the end of the seventh week of the Covered Period in an amount that the lender reasonably expects the borrower to spend in accordance with the forgiveness requirements, along with a narrative and analysis explaining the basis for such an anticipated request for forgiveness and including any supporting documentation of the borrower then in the possession of the lender.
The SBA says it will do so in a timely manner Adopting additional rules on affiliation and loan forgiveness. For now, this means businesses are subject to the SBA’s general affiliation rules, except for those classified under NAICS Sector 72 (Lodging and Dining). The rule therefore addresses concerns from private equity and venture capital firms, which have asked the SBA to relax affiliation rules so companies in their portfolios qualify for the loans and their employees aren’t counted overall.