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Alerts and Updates

SBA's Interim Final Rule Clarifies Paycheck Protection Program Loan Eligibility Requirements

April 17, 2020

SBA's Interim Final Rule Clarifies Paycheck Protection Program Loan Eligibility Requirements

April 17, 2020

Read below

Many of the concepts addressed in the interim final rule are applicable to all loan applicants and the use of PPP loans in general.

Note: This Alert has been updated to reflect updated guidance in a subsequent interim final rule released on June 17, 2020, in connection with changes to the Paycheck Protection Program under the Paycheck Protection Program Flexibility Act (PPP Flexibility Act).

On April 14, 2020, the Small Business Administration (SBA) released an additional interim final rule applicable to Paycheck Protection Program (PPP) loans. The interim final rule covers eligibility criteria for self-employed individuals and partnerships, as well as clarifications for businesses affiliated with a PPP lender and businesses operating in the legal gaming industry. However, many of the concepts addressed in the interim final rule are also applicable to all loan applicants and the use of PPP loans in general. This interim final rule has been updated by the interim final rule issued on June 17, 2020.

Self-Employed Individuals

Eligibility of Self-Employed Individuals

A self-employed individual is eligible for a PPP loan if:

  • The applicant was in operation on February 15, 2020;
  • The applicant is an individual with self-employment income (such as an independent contractor or a sole proprietor);
  • The applicant’s principal place of residence is in the United States; and
  • The applicant filed or will file a Form 1040 Schedule C for 2019.

Eligibility of Partners in Partnerships for PPP Loans

A partner in a partnership may not submit a PPP loan application as a self-employed individual. Instead, the partnership must make the application on behalf of all the partners. This contrasts with the SBA’s prior requirement that independent contractors, who are also self-employed individuals, submit their own PPP applications and not be included in the PPP application of the business applicants that engage their services. However, it is consistent with the approach that a partnership can include in its borrowing base calculation compensation to partners of a partnership who are functioning as employees, even though they are a self-employed individual.

Maximum Loan Amount for Self-Employed Individuals

The interim final rule specifies that a sole proprietor must use its net profit amount on IRS Form 1040, Schedule C, Line 31 from 2019 (even if it hasn’t yet filed the 2019 return) to calculate its maximum loan amount.

For a self-employed individual with employees, the applicant should also include 2019 gross wages and tips to employees whose principal place of business is in the United States (subtracting any amount paid to employees outside the U.S. and any amounts paid to any individual employee in excess of $100,000) and any pretax contributions for health insurance and other fringe benefits and 2019 employer health contributions, retirement contributions, and state and local taxes assessed on employee compensation.

Permitted Use of PPP Loan Proceeds for Self-Employed Individuals

The PPP Flexibility Act extends the amount of time that borrowers have to use their PPP loans. “Covered Period,” as used in Section 1106 of the CARES Act, was defined as the eight-week period beginning on the date of origination of a PPP loan. Section 3(b) of the PPP Flexibility Act extends the length of the Covered Period from eight weeks to the earlier of (i) 24 weeks or (ii) December 31, 2020, while allowing borrowers receiving PPP loans before June 5, 2020, to elect to use the original eight-week covered period.

The owner compensation replacement is calculated based on 2019 net profits.

All other permitted uses for PPP loan proceeds, such as rent and utilities, were specified in prior interim rules. With respect to these expenses, however, if they were not claimed as expenses on the self-employed person's 2019 tax return, the loan proceeds cannot be used for those expenses.

The interim final rule clarified that self-employed individuals will need to rely on 2019 documentation to verify expenses, even though the CARES Act makes businesses in operation as of February 15, 2020, eligible for PPP loans. Additional guidance will be provided on this issue.

Guidance on Necessity Certification

Notably, for the first time in issuing guidance on the CARES Act, the SBA offered insight into the meaning of the certification on the form of the loan application that: “Current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.”

The SBA stated that the loan proceeds issued to a sole proprietor should be used to “to support the ongoing operations” and that the administrator and the secretary believe that this limitation is consistent with the design of the CARES Act, which is to use the proceeds to maintain existing operations and payroll, and not for business expansion.

Amount of PPP Loan Eligible for Forgiveness

The amount of loan forgiveness is the amount spent on the following:

  • Payroll costs including salary, wages and tips, up to $100,000 of annualized pay per employee (for 24 weeks, a maximum of $46,154 per individual, or for eight weeks, a maximum of $15,385 per individual), as well as covered benefits for employees (but not owners), including healthcare expenses, retirement contributions and state taxes imposed on employee payroll paid by the employer (such as unemployment insurance premiums);
  • Owner compensation replacement, calculated based on 2019 net profit, with forgiveness of such amounts limited to eight weeks’ worth (eight divided by 52) of 2019 net profit for an eight-week covered period or two and a half months’ worth (2.5 divided by 12) of 2019 net profit (up to $20,833) for a 24 week covered period, excluding any qualified sick leave equivalent amount for which a credit is claimed under section 7002 of the Families First Coronavirus Response Act (FFCRA); and
  • Payments of interest on mortgage obligations, rent payments and utility payments to the extent deductible on Form 1040.

Note that prior to passage of the PPP Flexibility Act, borrowers were required to spend 75% of their PPP loans on payroll costs to be eligible for maximum loan forgiveness. The PPP Flexibility Act has lowered this requirement to 60%.

Documentation to Be Submitted in Connection with a PPP Loan Application

In addition to other required forms, applicants should submit a Form 941 and state quarterly wage unemployment insurance tax reporting forms or equivalent payroll processor records.

Specified Affiliates of PPP Lenders and Eligibility for PPP Loans

Businesses owned by directors or shareholders of a PPP lender are permitted to apply for a PPP loan if the business meets the existing eligibility criteria for a PPP loan and the director or shareholder holds less than 30% “equity interest” in the PPP lender.

This exception does not apply to a business where a director or owner of a PPP lender is also an officer or key employee of such PPP lender; such individuals may obtain a PPP loan from a different lender, but not from the PPP lender with which they are associated.

Eligibility for Legal Gaming Businesses

As previously discussed in our April 15 Alert, a business that receives revenues from gaming businesses, and is otherwise eligible for a PPP loan, is eligible if one of the following is satisfied:

  • The existing standard in 13 CFR 120.110(g) (i.e., a business that derives more than one-third of its gross annual revenue from legal gaming activities is not eligible) is met; or
  • The following two conditions are satisfied:
    • The business’ legal gaming revenue (net of payouts but not other expenses) did not exceed $1 million in 2019; and
    • Legal gaming revenue (net of payouts but not other expenses) comprised less than 50 percent of the business’s total revenue in 2019.

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