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Update on CARES Act: SBA Implements Interim Final Rule for Paycheck Protection Program Loans
On Thursday, April 2, 2020, the U.S. Small Business Administration (SBA) issued an interim final rule implementing the Paycheck Protection Program (PPP) loan program under the CARES Act. The rule is effective immediately. This article summarizes key borrower provisions in the rule.
On April 2nd, the SBA also posted a new PPP loan application on its website. You can access the updated loan application here.
One Loan per Borrower
The rule clarifies that no eligible borrower can receive more than one PPP loan. Accordingly, businesses should apply for the maximum amount for which they qualify.
Although businesses can apply for and receive PPP loans from April 3, 2020 until June 30, 2020, the loans will be issued on a “first-come, first-served” basis until the $349 Billion authorized by Congress for the program is fully allocated. Businesses should therefore submit their loan application with an SBA approved lender as soon as possible.
In order to apply for a PPP loan with an SBA approved lender, an applicant will need to complete and submit the PPP loan application, together with sufficient documentation to establish eligibility and demonstrate the qualifying payroll amount. This includes payroll processor records, payroll tax filings, Form 1099-MISC, or income or expenses from a sole proprietorship.
Electronic signatures or consents can be used for loan applications regardless of the number of owners of an applicant.
Clarification of PPP Loan Terms
The rule clarifies that PPP loan amounts that are not forgiven will have a two-year repayment period, with a 6-month deferment period for all interest and principal payments; however, interest will continue to accrue during the deferment period. The interest rate will be a 1.00% fixed rate.
Limitation on use of Loan Proceeds and Forgiveness
Although the CARES Act allows loan proceeds to be used for non-payroll costs, such as mortgage interest or rent payments and utility payments, the rule requires at least 75% of the PPP loan proceeds must be used for payroll costs to be eligible for loan forgiveness. Consequently, non-payroll costs may not exceed 25% of the forgivable loan amount.
The rule defines “payroll costs” as including:
- Salary, wages, commissions or similar compensation to employees whose principal place of residence is the United States;
- Cash tips or equivalent (based on employer records of past tips or in the absence of such records, a reasonable, good faith employer estimate);
- Payment for vacation, parental, family, medical, or sick leave;
- Allowance for separation or dismissal;
- Payment for employee benefits consisting of group health coverage, including insurance premiums, and retirement;
- Payment of state and local taxes assessed on compensation of employees; and
- For independent contractor or sole proprietors, wage, commissions, income, or net earnings from self-employment.
However, payroll costs expressly exclude:
- Any compensation of an employee whose principal place of residence is outside the United States;
- Compensation of an individual employee in excess of an annual salary of $100,000;
- Federal employment taxes imposed or withheld between February 5, 2020 and June 30, 2020 including the employee’s and employer’s share of FICA and income taxes required to be withheld from employees; and
- Qualified sick and family leave wages for which a credit is allowed under the Families First Coronavirus Response Act.
The rule also states that independent contractors do not count as employees for purposes of PPP loan calculations, since they can apply for a PPP loan on their own account.
We will provide further updates following additional guidance from the SBA. Specifically, the rule states that the SBA will publish additional guidance regarding the applicability of its “affiliation” rules and loan forgiveness.