On April 2, 2020, the Small Business Administration (SBA) issued its Interim Final Rule on the Paycheck Protection Loan Program (PPP) from the recent CARES legislation. This lays out the SBA formal guidance for implementing the PPP loans. The latest developments in this guidance are summarized below.
Highlights of the Paycheck Protection Loan Program Guidance
This SBA guidance in these regulations applies to loan applications submitted under the PPP through June 30, 2020, or until funds made available for this purpose are exhausted. The effective date of the interim final rules is immediate and without notice. Comments received in the next 30 days may cause the SBA to enact revisions.
Loans will be 100% guaranteed by the SBA. The full principal amount may be forgiven if certain requirements are met.
Lenders are not required to comply with Section 120.150, “What are SBA’s lending criteria?” Lenders are allowed to rely on specified documents provided by the borrower and certifications of borrowers to determine eligibility and use of loan proceeds.
What Borrowers Need to Know and Do
Eligible covered businesses include any business concern, not-for-profit organization, veteran organization, or Tribal business concern, with no more than 500 employees whose principal place of residence is in the U.S. – or those in a specified industry that meet the SBA employee-based size standards. The business must have been in operation on February 15, 2020 and either had employees for whom salaries are paid or independent contractors for whom a 1099-MISC was issued. Sole proprietors and independent contractors are also eligible.
Specific payroll documentation requirements include payroll processor records and payroll tax filings. Sole proprietorships are required to submit Form 1099 or income and expenses that sufficiently demonstrates the qualifying payroll amount. The SBA intends to issue additional guidance on applicability of affiliation rules.
Ineligible borrowers include:
- Those engaged in illegal activities under federal, state, or local law
- Household employers
- Any business with a 20% or more owner that is indicted, incarcerated, or on probation within the last five years
- Anyone who is delinquent or previously defaulted on an SBA loan within the last seven years
Maximum Loan Amount
The maximum amount borrowed is still the lesser of: (1) $10 million; or (2) a calculated Maximum Loan Amount. The Maximum Loan Amount is 2.5 times the average monthly payroll costs defined as all compensation and certain benefit costs, including health insurance, retirement benefits, and unemployment benefits. Compensation in excess of $100,000 is excluded from the calculation. Any outstanding Disaster Loan amount for loans made between January 31 and April 3, 2020, less the amount of any “advance” up to $10,000, is added to the PPP loan amount.
Interest Rate
The interest rate is now 1% with a maturity of two years. Borrowers receive a six-month deferment of payments following the date of the loan. They can only apply one time for a PPP loan, and the loan is on a “first-come-first-served” basis.
Loan Forgiveness Amount
The Loan Forgiveness Amount can be up to the full principal amount AND any accrued interest. The amount forgiven will depend on the total amount of payroll costs, payments of interest, rent payments, and utility payments over the eight-week period following the date of the loan. Payroll costs included in the forgiveness amount will be reduced for the amount of Social Security taxes withheld and federal taxes withheld for each employee during the period of April 3 through June 30, 2020. Further SBA guidance may be needed to explain this adjustment.
If the non-payroll costs, as defined, are in excess of 25% of the total, the forgiveness amount will be reduced by that amount of non-payroll costs for the Loan Forgiveness Amount. Independent contractors do not count as employees for purposes of the PPP loan forgiveness. Proceeds from any advance from a Disaster Loan obtained between January 31 and April 3, 2020 will be deducted from the loan forgiveness amount.
Applicants must submit SBA Form 2483, Paycheck Protection Program Application Form, and payroll documentation.
Misuse of Funds
Misuse of the PPP funds can result in the SBA requiring immediate payback of the loan; if knowingly being misused, the borrower can be subject to additional liabilities.
Required Certifications by Borrowers
The applicant must certify to the following:
- Being in operation and having employees to whom they paid salaries and payroll taxes or independent contractors that were reported on a 1099 MISC
- Current economic uncertainty makes the loan request necessary
- Funds will be used to retain workers and maintain payroll or make mortgage interest payments, lease and utility payments, as well as acknowledging that the misuse of funds for unauthorized purposes could result in adverse consequences
- Documentation of all amounts eligible for loan forgiveness for the eight-week period following the loan will be provided to the lender
- During the period beginning on February 15 and through December 31, 2020, the applicant will not receive another loan under this program
- The accuracy of the information and that the lender will confirm amounts against tax documents identical to those submitted to the IRS
What Lenders Need to Know and Do
All SBA 7(a) lenders are automatically approved to make PPP loans on an approved basis. The types of lenders that meet criteria and are eligible to make PPP loans are as follows:
- Any federally insured depository institution or credit union
- Any Farm Credit System institution
- Any depository or non-depository financing provider that originates, maintains, and services business loans or other commercial financial receivables and participation interests that meets other regulatory requirements under SBA
An additional requirement for these lenders includes that they originated at least $50 million of loans during a consecutive 12-month period in the last 36 months.
- Confirm borrower certifications in the application form
- Confirm receipt of information demonstrating that a borrower had employees for whom they paid salaries and payroll taxes on or around February 15, 2020
- Confirm the dollar amount of average monthly payroll costs for the preceding calendar year by reviewing documentation provided
Loan Terms for Borrowers and Lenders
The following loan terms are addressed in the guidance:
- The loan guarantee percentage is 100%
- No collateral will be required
- No personal guarantees will be required
- The interest rate will be 100 basis points or 1%
- All loans will be processed by all lenders under delegated authority and lenders will be permitted to rely on certifications of the borrower in order to determine eligibility of the borrower and the use of loan proceeds
It was helpful the SBA provided this guidance, and further developments are likely. This is a rapidly changing environment. Please contact your Sikich advisor with any questions. For more information and to find additional resources related to COVID-19, please visit our Resource Center.
About the Authors
Tom Bayer
Thomas E. Bayer, CPA, CExP, has more than 25 years of experience providing a broad range of accounting, tax, and business advisory services to commercial clients across various industries and Sikich offices. Tom has specialized expertise in the areas of business succession planning, tax planning and compliance, and business advisory. He puts his business succession planning abilities and knowledge to work firm-wide, serving clients in advisory services across the country.
Jim Brandenburg
Jim Brandenburg, CPA, has extensive experience and knowledge in corporate and partnership tax law, mergers and acquisitions and tax legislation. His expertise includes working with owners of closely held businesses to identify tax planning opportunities and assist them in implementing these strategies.
