From April 6 through April 10, the Small Business Administration has released additional guidance on the Paycheck Protection Program. This updated LawFlash covers the key updates included in the guidance and provides a comprehensive background on the PPP.

UPDATE: As of the morning of April 16, the SBA has exhausted its $349 billion PPP funding capacity and no additional applications will be accepted. Lawmakers remain in a stalemate over additional allocations. Per the SBA’s report delivered on April 13, it had distributed approximately $247 billion of the $349 billion allocated (71%) through 1,035,086 loans to applicants made by 4,664 lenders.

Key Updates Contained in the Guidance

• 75% Rule: 75% of loan proceeds must be used toward payroll costs. The remaining 25% may be used toward both forgivable and non-forgivable eligible uses.
• Partnerships:
  • Partnerships (and LLCs filing taxes as partnerships) are eligible for PPP loans to cover costs, including compensation for partners; however, only one application should be submitted per partnership (which should cover the costs of the partnership and the partners).
  • Self-employment income of a general active partner (Schedule K-1 income) may be reported as a payroll cost up to $100,000.
  • A partner in a partnership may not submit a separate PPP loan application for himself/herself as a self-employed individual.
• Foreign Employees: Businesses with 500 or fewer employees whose principal place of residence is in the United States may qualify for the PPP despite a foreign employee headcount that, combined with the United States headcount, exceeds 500 employees.
• Affiliation Rule and Minority Shareholders: If a minority shareholder irrevocably waives or relinquishes its existing rights, subject to certain conditions, such minority shareholder would no longer be considered an affiliate of the business for purposes of determining small business size status.
• $100,000 Payroll Cost Threshold: The CARES Act excludes from “payroll costs” any employee compensation in excess cash compensation of $100,000; however, that exclusion does not apply to non-cash benefits (e.g., retirement plan contributions, healthcare benefits, insurance premiums, and state and local taxes).
• Professional Employer Organizations (PEOs)/Payroll Providers: Businesses that contract with third-party payers such as PEOs may use payroll documentation from the payroll provider as acceptable PPP loan payroll documentation.
• 12-Month Payroll Cost Calculation: Businesses may calculate their aggregate payroll costs using data either from the previous 12 months or from calendar year 2019.

Additional SBA guidance on the PPP can be found here:

• Interim Final Rule
• Interim Final Rule on Affiliation
• Applicable Affiliation Rules

Background

The US Senate’s vote to enact the Coronavirus Aid, Relief, and Economic Security (CARES) Act includes extraordinary public health spending to confront the coronavirus (COVID-19) pandemic, immediate cash relief for individual citizens, a broad lending program for small businesses, and targeted relief for hard-hit industries. Title I of the CARES Act—the Keeping Workers Paid and Employed Act—includes paycheck protection and loan forgiveness, and small business contracting relief.

The Keeping Workers Paid and Employed Act (the Act) supports workers and small businesses weathering the economic impacts of the COVID-19 crisis. The Act provides for $349 billion in new and increased federally guaranteed Paycheck Protection Program (PPP) loans through the Small Business Administration (SBA) targeted to small businesses to help keep their workers employed.

By maintaining employees on their payroll through the duration of the crisis, these small businesses can qualify for PPP loan forgiveness. The Act is also retroactive, incentivizing small businesses to rehire employees that have recently been laid off.

PAYCHECK PROTECTION PROGRAM LOANS

The PPP offers 2-year loans of up to $10 million with an interest rate of 1.00% on a first-come, first-served basis. The total amount of the loan will be the lesser of the $10 million maximum and 2.5 times the borrower’s average monthly payroll for the past 12 months (excluding any compensation over $100,000). During the period of February 15, 2020 through June 30, 2020 (the Covered Period), the SBA will guarantee 100% of issued PPP loans. Loan proceeds may be used by small businesses to cover payroll costs (excluding individual employee compensation over $100,000), group healthcare benefits, mortgage interest payments, rent, utilities, and interest on other debt incurred prior to the Covered Period.

• Collateral and Fee Waivers: Collateral requirements, borrower and lender fees, prepayment penalties, personal guarantee requirements, and certain other traditional SBA loan requirements are waived.
• Optional Deferment: Automatic deferment of principal, interest, and fees for a period of six months and may be extended for up to 1 year.
• Increased Lender Pool and Flexibility: The SBA is delegating to lenders the authority to make determinations on borrower eligibility and creditworthiness without going through traditional SBA channels. Furthermore, the SBA administrator and the secretary of the US Department of the Treasury have the authority to add additional lenders to the PPP.
• Loan Limitations. Loan proceeds may not be used for employee compensation in excess of an annual salary of $100,000 or for certain taxes or other employee payments covered under other recent COVID-19 federal legislation. However, the $100,000 salary exclusion only applies to cash compensation above $100,000, not to non-cash benefits (e.g., retirement plan contributions, healthcare benefits, insurance premiums and state and local taxes). Additionally, Economic Injury Disaster Loans and SBA loans may not be used for the same purposes.

BORROWER ELIGIBILITY

Under the PPP, small businesses (including sole proprietors, paid independent contractors, and other self-employed individuals), nonprofits, and other specified businesses that have been operational since February 15, 2020 are all eligible for PPP loans. Additionally, the legislation has expanded the current definitions of “small business” to allow access to a greater number of borrowers.

“Small Business”: Borrowers must either be small businesses under current SBA rules for financial assistance (generally based on NAICS code limitations or an “alternative size standard”[1]) or they must qualify under any of the additional categories applicable to the PPP, and the SBA “affiliation rules” apply unless noted below:

• Fewer than 500 employees whose principal place of residence is in the United States (full- or part-time, but not including independent contractors/individuals who receive 1099s) regardless of revenue
• Hospitality and restaurant businesses that ordinarily would not be small but that have (1) more than one physical location and (2) no more than 500 employees per physical location (the “affiliation rule” is waived for these businesses)
• Franchises assigned a franchise identifier code by the SBA
• A business that receives financial assistance from a Small Business Investment Company
• Sole-proprietors, paid independent contractors, and other self-employed individuals

Certification: In order to secure a loan, borrowers must provide a good faith certification that

• the loan is necessary due to the uncertainty of current economic conditions caused by COVID-19;
• the business will use the funds to retain workers and maintain payroll or make mortgage interest payments, lease payments, and utility payments; and the business is not applying for or already receiving duplicative funds from another SBA program.

Prioritized Borrowers: The SBA will encourage lenders to prioritize loans for small businesses in underserved and rural markets, including veteran-owned businesses, businesses owned by socially and economically disadvantaged individuals, women-owned businesses, and businesses in operation for less than two years.

LOAN FORGIVENESS

This powerful feature of the PPP makes borrowers eligible for loan forgiveness on all loan proceeds used during the period that is eight weeks following the origination of the loan on (1) payroll costs, (2) mortgage interest payments, (3) rent payments and (4) and utility payments. Forgiveness applies to both principal and any accrued interest.

The amount forgiven cannot exceed the principal amount of the loan, and the amount forgiven will be reduced based upon reductions in employees or employee salaries (in excess of 25%) during the eight-week forgiveness period—rehiring and/or normalizing salaries for recently impacted employees, however, will negate certain loan forgiveness reductions.

• Tax Treatment: Amounts forgiven will be treated as non-taxable cancelled indebtedness.
• Process: Borrowers will submit an application to the lender that will originate the loan, and the lender must issue a decision on the application within 60 days (although a shorter turnaround is expected), with a significantly shorter turnaround expected. Lenders will process loan forgiveness applications directly, and the SBA will purchase the forgiven loan from the lender within 90 days of forgiveness—lenders are granted safe harbor to protect them from liability when facilitating this process. Any loan amounts not forgiven at the end of one year are carried forward as an ongoing loan, with the 100% loan guarantee remaining in place.

CORONAVIRUS COVID-19 TASK FORCE

For our clients, we have formed a multidisciplinary Coronavirus COVID-19 Task Force to help guide you through the broad scope of legal issues brought on by this public health challenge. We also have launched a resource page to help keep you on top of developments as they unfold.