Paycheck Protection Program: SBA interim final rule guidance for borrowers

published in McAfee & Taft LINC | April 3, 2020

The Small Business Administration issued an Interim Final Rule related to “Business Loan Program Temporary Changes; Paycheck Protection Program.” This Rule is effective on publication in the Federal Register and applies until June 30, 2020, or the funds allocated are exhausted. It is available here.

The SBA also published its Paycheck Protection Program Lender’s Application for 7(a) Loan Guaranty (Form 2484). It is available here.

Based on a preliminary review, we highlight the following for borrowers. More to come for lenders.

  1. The Interim Final Rule adopts the designation of ineligible industries generally applicable to 7(a) programs. As a result, banks, insurance companies and passive businesses and landlords, among others, are not eligible.
    See Q&A2.d. It says: “Businesses that are not eligible for PPP loans are identified in 13 CFR 120.110…” Banks are listed in 120.110(b) and insurance companies in (d) and “(c) Passive businesses owned by developers and landlords that do not actively use or occupy the assets acquired or improved with the loan proceeds (except Eligible Passive Companies under §120.111)”.
    §120.111 can be found here. Even though this regulation would exclude non-profits (sub a), they are specifically made eligible by the CARES Act, and the Rule recognizes that.
  2. No more that 25% of the loan proceeds may be expended on eligible expense other than payroll costs. The lender’s application requires the borrower to have a pro forma of how the proceeds will be utilized over the eight-week period after the loan with no more than 25% being allocated to non-payroll costs.
  3. Payroll costs exclude federal employment taxes imposed or withheld between February 15, 2020, and June 30, 2020, including the employee’s and employer’s share of FICA (Federal Insurance Contributions Act), and income taxes required to be withheld from employees. It appears that payroll costs include any federal employment taxes imposed or withheld prior to February 15, 2020. Assuming an April application, that would mean 10.5 months count towards the maximum loan amount, but, again assuming an April application, they will not be a forgivable cost.
  4. Payments to independent contractors do not count toward the maximum loan amount. Independent contractors must apply on their own.
  5. The SBA will “promptly” publish guidance about the application of the affiliation rules. That could mean more eligible businesses.
  6. Accrued interest is eligible for forgiveness. We await additional guidance on forgiveness.
  7. The interest rate has increased to 1% per annum.
  8. Aggregate payroll costs just include U.S. employees.
  9. If an Economic Injury Disaster Loan (EIDL) was received between January 31, 2020, and April 3, 2020, applicants are eligible for a PPP loan, but if the EIDL was used for payroll costs, the PPP loan must be used to refinance the EIDL. If an EIDL received during that time was not used for payroll, it will have no impact on qualifying under PPP.