SBA Modifies Paycheck Protection Program Guidelines

Late on April 2nd, the SBA released its playbook for issuance of loans under the Paycheck Protection Program (PPP) on the Federal Register in the form of an “Interim Final Rule.” This means that banks are now authorized to proceed with the program while SBA undergoes a 30-day comment period while still adhering to these rules. What we are hearing from banks is a mixed bag – some banks have indicated they plan to start taking applications sometime on April 3rd, while other banks say they are not ready.

Meanwhile, the SBA has again changed some of the rules for everyone who plans to apply under this program. We’ve listed the general parameters for participation in this program – as now published by SBA – and highlighted the changes with the updated SBA provisions. You can see the SBA’s interim final rules on their website HERE.

Small Business Loans

Under the CARES Act, the SBA is authorized to provide loans to small businesses that are fully guaranteed by the SBA, do not require collateral or personal guarantees, and are subject to potential full forgiveness based on payroll and certain other expenses.

Under the new SBA provisions, it is permissible for banks to rely on certifications from the borrower to determine: eligibility, qualifying loan amount, use of the loan proceeds and eligibility for the forgiveness of the loan. But if the bank or SBA determines that the borrower has supplied false information, significant penalties to the borrower can be levied.

Eligibility is based on being an employer that is/has:

  • For-profit or nonprofit without Medicaid expenditures
  • In operation on February 15, 2020
  • 500 or fewer employees for whom they paid salaries and payroll taxes or paid independent contractors
  • Sole proprietorships and independent contractors or eligible self-employed individuals.

Documentation needs to be provided to the bank to demonstrate this eligibility, such as payroll tax filings, payroll processor records and/or 1099-MISC forms or other such documentation the bank may require.

Some larger entities in the hotel, restaurant, casinos and other travel and entertainment industries (NAICS Codes starting with 72) and franchises or licensed small business investment capital companies are expressly permitted to participate if they have 500 or fewer employees per location. Borrowers need to certify that they have been substantially impacted by COVID-19, whether in terms of actual impacts incurred or by the significant economic uncertainty. There are some entities that might be ineligible, such as household employers or businesses with 20% or more ownership by someone who was convicted of a felony within the last year or is currently in the criminal justice system.

The amount of a loan that can be taken (up to a maximum of $10M) is based on 2.5 times the average payroll from the last twelve months for employees whose principal residence is in the USA. There is a lack of consistency between whether the average payroll was for calendar 2019 or the last twelve months. You should verify with your banker as to which period should be applied.

Payroll costs are defined as salary, wages, commissions, cash tips, cash payments for vacation, parental, family, medical or sick leave, severance compensation, payment of group healthcare coverage, retirement benefits paid, and state and local taxes paid which are assessed on the compensation of employees. Payments to an independent contractor cannot be included in the borrower’s application, but an independent contractor may apply themselves for loans under this program.

Payroll does not include:

  • Compensation for anyone whose principal place of residence is outside the USA
  • Annual compensation for an individual in excess of $100,000 (prorated as needed)
  • Federal employment taxes imposed or withheld between February 15, 2020, and June 30, 2020 (including FICA and Railroad Retirement Act taxes and income taxes required to be withheld from employees)
  • Qualified sick and family leave wages under the Families First Coronavirus Response Act for which credit to the company is allowed

The terms of borrowings under this program are:

  • Interest at 1.0%, maturing in two years
  • Both the loan and interest accrued under a six-month deferral is eligible for forgiveness.
  • Interest on the loan will accrue during the six-month deferral.

The loan principal and interest accrued are subject to potential forgiveness, based on the total over the eight weeks following the issuance of the loan of payroll costs (as defined above), payments of mortgage interest, rents payments on leases and utility payments, all of which had to have service or agreements that commenced before February 15, 2020. At least 75% of the forgiveness amount must be payroll costs.

The loan proceeds can be used for these costs as well as to refinance an SBA EIDL loan made between January 31, 2020, and April 3, 2020. Uses of these funds for any other reason can subject a company or its owners to the risk of significant penalties including the potential for criminal charges. Loan forgiveness is subject to potential reduction if the levels of payroll during the eight weeks after the loan is funded are not maintained. The amount forgiven will be reduced proportionally if there is a reduction in retained employees compared to the prior. To encourage employers to rehire any employees who have already been laid off due to the COVID-19 crisis, borrowers that re-hire workers previously laid off will not be penalized for having a reduced payroll at the beginning of the period.

The statute explicitly indicates that these funds cannot be used for stock buybacks or executive bonuses and that the borrower takes steps to protect workers. The statute also specifically provides that forgiveness of the loan will not be considered taxable income.

Under the program, lenders have an obligation to confirm the borrower’s assertions of payroll costs back to the documentation that the borrower will submit to the lender. Fees will be paid to the lender by the SBA but will not be charged to the borrowers. There is no requirement that the lender needs to evaluate whether the borrower has available credit elsewhere.

Important: There are still several areas that are unclear and subject to interpretation – the most significant of these being whether employees in a consolidated company group are treated as one company or whether each company in the group should apply for their own loan. Where the rules are unclear, we recommend you obtain input from the lender and seek legal counsel to ensure that the funds borrowed are subject to forgiveness.


Visit our COVID-19 Resource Center for the latest updates and resources for you and your business.

About the Authors

Dale A. Ruther
Dale A. Ruther
Partner Emeritus,
James E. Merklin
James E. Merklin
Partner, Assurance and Advisory


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