[co-author: Joseph Kadlec]

We have been monitoring the implementation of the Paycheck Protection Program (PPP) since it was created as part of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) on March 27. (Read our overview of the program, information for lenders, and analysis of the impact of the affiliation regulations on PPP eligibility.)

With PPP applications set to open today, April 3, new information has been released by the Department of the Treasury and the Small Business Administration (SBA). Below we summarize these new developments.

PPP loan applicants should carefully review the information below before submitting their applications. Loan applicants should also consult with their bank as to when applications can be submitted; while the program was scheduled to open today, some banks have advised that they will not accept applications until Monday, April 6 or even later.

Changes to the PPP Loan Application

Treasury and the SBA issued a revised loan application on the evening of April 2. If you began working on a version earlier in the week, it may not reflect the latest changes to the application.

The most relevant changes to the application are:

• Only a representative of the applicant needs to sign; all 20 percent owners no longer need to sign.

• The “affiliate” language was removed from question 3.

• The application puts the onus on the borrower to certify eligibility.

PPP loan applicants are advised to visit Treasury’s website for the latest application and confirm with their bank that they are using the appropriate form. Applicants should not rely on previously saved versions or applications posted to other websites. SBA has indicated that it will not accept applications using prior versions of the form.

SBA Interim Final Rule

In addition, the SBA released the interim final rule in the evening of April 2. The key changes are summarized below:

• The rule is effective immediately, but comments are still invited.

• The rule confirmed that the PPP will loan money on a “first-come, first-served” basis.

• At least 75 percent of the loan proceeds from a PPP loan must be used to pay payroll costs, and no more than 25 percent of the loan forgiveness amount may be attributable to nonpayroll costs.

• The interim final rule states that you should exclude federal employment taxes imposed or withheld between February 15, 2020 and June 30, 2020, including the employees’ and employer’s share of FICA (Federal Insurance Contributions Act) and Railroad Retirement Act taxes, and income taxes required to be withheld from employees. It remains uncertain whether you do include in “payroll costs” (based on the definition) the employer portion of federal FICA for other periods in determining the loan amount.

• The SBA stated its intent to issue additional guidance on the applicability of the affiliation rules and on the loan forgiveness feature.

  • Additional affiliation rules may mean that there may be additional waivers of these rules to come, as many groups have been lobbying for such waivers, but this is uncertain.

• The rule clarifies that the PPP loan amount is calculated by looking at the applicant’s trailing 12 months’ worth of payroll costs.

  • Note that, despite this, the new application says: “For purposes of calculating ‘Average Monthly Payroll,’ most Applicants will use the average monthly payroll for 2019, excluding costs over $100,000 on an annualized basis for each employee.”

  • Notwithstanding that the CARES Act said the SBA would clarify what was a “seasonal employer,” the SBA did not do so here.

• PPP loans will charge interest at 1 percent.

• The maturity period for PPP loans will be two years, although the CARES Act would have permitted up to 10 years, and the payment deferral period is six months, although the CARES Act would have allowed up to one year.

• “Payroll costs” do not include compensation to employees whose principal place of residence is outside the United States.

• For a company that hires independent contractors, “payroll costs” do not include amounts paid to them. These independent contractors can apply for a PPP loan themselves. In addition, forgiveness amounts do not include payments to independent contractors.

• If an applicant for a PPP loan received an economic injury disaster loan (EIDL) between January 31, 2020 and April 3, 2020 and did not use the proceeds for payroll costs, the applicant is eligible to receive a PPP loan. However, if an applicant used the proceeds of an EIDL received during this period for payroll costs, then the applicant must refinance the EIDL into a PPP loan.

• An entity is ineligible for a loan if an owner of 20 percent or more of the equity of the applicant is incarcerated, on probation, on parole; presently subject to an indictment, criminal information, arraignment or other means by which formal criminal charges are brought in any jurisdiction; or has been convicted of a felony within the last five years.

• Businesses not eligible for a PPP loan include financial businesses primarily engaged in the business of lending (such as banks, finance companies and factors); life insurance companies; businesses deriving more than one-third of gross annual revenues from legal gambling activities; and private clubs or businesses that limit the number of memberships for reasons other than capacity.

• Borrowers must submit the necessary documentation to establish eligibility, such as payroll processor records, payroll tax filings, Form 1099-MISC, or income and expenses from a sole proprietorship.

• Lenders may rely on the certifications made by borrowers and the documents provided by the borrower in order to determine loan eligibility, use of proceeds, qualifying loan amount, and eligibility for loan forgiveness.
• Borrowers will be subject to liability, including fraud charges, if they knowingly use PPP funds for unauthorized purposes. Furthermore, if a borrower’s shareholders, members or partners use PPP funds for unauthorized purposes, the SBA will have recourse against them for the unauthorized use.

• The interim final rule clarified that businesses that are not eligible for PPP loans are identified in 13 C.F.R. 120.110 and described further in SBA’s Standard Operating Procedure (SOP) 50 10, Subpart B, Chapter 2, except that nonprofit organizations authorized under the Act are eligible.