The Treasury Department and Small Business Administration (SBA) have released Interim Final Rules (IFR) regarding the recent extension and expansion of the Paycheck Protection Program (PPP) as authorized by the Consolidated Appropriations Act, 2021 (CAA 2021).

BACKGROUND

CARES Act

The CARES Act provided the original legislation authorizing the Small Business Administration (SBA) to make loans to qualified businesses under certain circumstances. The provision established the Payroll Protection Program (PPP), which provides up to 24 weeks of cash-flow assistance through 100% federally guaranteed loans to eligible recipients for the purpose of maintaining payroll during the coronavirus (COVID-19) pandemic and to cover certain other expenses.

Paycheck Protection Program Flexibility (PPPF) Act

The Paycheck Protection Program Flexibility (PPPF) Act made significant modifications to the PPP, including:

• reducing the percentage of loan proceeds require to be used on payroll costs from 75% to 60%, and in so doing, increasing the percentage that may be used for non-payroll costs such as rent, mortgage interest and utilities from 25% to 40%.

• Additionally, the PPPF Act increased the deferral date that borrowers were required to begin payments of principal, interest, and fees to 10 months after the last day of the covered period (the earlier of 24 weeks or December 31, 2020) from the previous deferral period of six months.

The application period for the original PPP closed on 8/8/20, and the SBA began approving PPP forgiveness applications and remitting forgiveness payments to PPP lenders beginning 10/2/20.

Consolidated Appropriations Act 2021

On 12/27/20, President Trump signed the Consolidated Appropriations Act 2021 (CAA 2021) into law. Included CAA 2021 is the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (the Economic Aid Act) which:

• authorizes $806.5 billion towards the PPP, and
• extends the PPP until 3/31/21.

The Act extended the program to other entities, increased additional eligible expenses and clarified terms.

Further, the CAA 2021 permits certain smaller businesses who received a PPP loan and experienced a 25% reduction in gross receipts to take a second draw loan from the PPP of up to $2 million.

Also see related article: SBA Releases Interim Final Rules on PPP Second Draw Loans.

 

SBA INTERIM FINAL RULE (IFR)
Extension and Expansion of the PPP

Because this section provides only a summary of the IFR, the complete guidance is linked here for further reference/clarification:

SBA, Interim Final Rule, Business Loan Program Temporary Changes; Paycheck Protection Program as Amended by Economic Aid Act, 13 CFR Parts 113, 120, 121

The IFR (Consolidated First Draw PPP IFR) incorporates the new rules under CAA 2021, as well as consolidating prior IFRs and guidance issued thus far in the areas of:

• borrower eligibility,
• lender eligibility,
• PPP application and origination requirements for new PPP loans, and
• rules on loan increases and loan forgiveness.

It is the intention that this IFR serves as the one-stop point of reference for PPP lenders and borrowers.

IFR FAQs

Contained in the IFR are three categories of FAQs on the following subjects:

• What Do Borrowers Need to Know and Do?
• What Do Lenders Need to Know and Do?
• What Do Both Borrowers and Lenders Need to Know and Do?

Highlights of the IFR

Following are some highlights of the IFR:

Loan eligibility

The following are some of the businesses, organizations, and individuals identified as eligible for a PPP loan:

• a small business concern (as defined); 
• an independent contractor, eligible self-employed individual, or sole proprietor;
• a business concern, a tax-exempt non-profit organization (as defined), a tax-exempt veterans organization (as defined), a Tribal business concern (as defined):

• • which employ no more than the greater of 500 employees or, if applicable,
  • the size standard in number of employees established by SBA in 13 CFR. 121.201;

• an entity that was in operation on 2/15/20, and either had employees for whom were paid salaries and payroll taxes or paid independent contractors, as reported on a Form 1099-MISC or an eligible self-employed individual, independent contractor, or sole proprietorship with no employees. 

To establish eligibility and substantiate the qualifying payroll amount, documentation must be submitted which may include:

• payroll records,
• payroll tax filings,
• Form 1099-MISC,
• Schedule C or F,
• income and expenses from a sole proprietorship, or
• bank records.

Loan ineligibility

The following are some of the businesses, organizations, and individuals identified as ineligible for a PPP loan: 

• businesses, organizations, and individuals engaged in illegal activities; 
• household employers;
• applicant with an owner of >=20% of the equity that is currently incarcerated for a felony, subject to criminal charges, convicted of a felony, or has previously plead guilty to charges of fraud or related charges within the last five years or any felony within the last year; 
• applicant that is currently delinquent, or has defaulted on a SBA or other federal loan in the last 7 years;
• applicants that were not in operation on 2/15/20; 
• applicants receiving a grant under the “Shuttered Venue Operator Grant Program”;
• applicant where the President, the Vice President, the head of an Executive Department, a Member of Congress, or the spouse of such person has a controlling interest;
• businesses that have permanently closed and have no intention of reopening.

Furthermore, the IFR notes that applicants in a bankruptcy proceeding at the time the application is submitted, or before the loan is disbursed, will not be approved for a PPP loan. 

Maximum Loan Amount on First Draw PPP Loans

The maximum loan amount for a first draw PPP loan continues to be:

• $10 million, or
• the amount calculated by the payroll-based formula (see next section).

“Payroll-Based Formula” Defined

Step 1: Aggregate payroll costs:

• Payroll costs include: (1) salary, wages, commissions, or similar compensation (up to $100,000 on an annualized basis or prorated for the payment period); (2) cash tips; (3) paid leave, (4) severance pay; (5) payment for group health care (including vision or dental insurance), life insurance and disability; (6) retirement; and (7) state and local taxes on compensation. Independent contractors or sole proprietors base payroll costs on wages, commissions, income, or net earnings from self-employment, or similar compensation.

• Payroll costs do not include compensation to an employee whose principle place of residence is outside of the U.S; federal employment taxes; and qualified sick and family leave wages that qualify for a credit under FFCRA.

Step 2: Calculate the average monthly amount

• Step 1 ÷ 12

Step 3: Multiply the average monthly amount from Step 2 by 2.5

Step 4: Add the outstanding amount of any Economic Injury Disaster Loan (EIDL) made between 1/31/20 and 4/3/20 which you seek to refinance. Do not include the amount of any advance under an EIDL COVID-19 loan (because it does not have to be repaid).

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The IFR provides a separate method to determine the following:

Base period of maximum loan amount

The IFR permits new PPP borrowers to use 2019 or 2020 for the purposes of calculating their maximum loan amount. In general, borrowers in 2020 used 2019. The reason for this option is to afford Second Draw PPP borrowers funding similar to existing PPP borrowers (i.e. to help ensure that permissible loan amounts are not reduced due to financial distress experienced in 2020). It should be noted that PPP borrowers electing to utilize this base period flexibility must follow the same process and procedures applicable to other PPP loans.

Interest rate

The interest rate will be 1%, calculated on a non-compounding, non-adjustable basis.

Maturity date

5 years.

Loan forgiveness

Applications for loan forgiveness must be submitted within 10 months after the end of the “loan forgiveness covered period” (defined below). Payment of principal and interest must begin after the loan forgiveness covered period.

Loan forgiveness covered period

The “loan forgiveness covered period” is defined as the period beginning on the date the lender disburses the PPP loan and ending on any date selected by the borrower that occurs during the period:

• beginning on the date that is 8 weeks after the date of disbursement, and
• ending on the date that is 24 weeks after the date of disbursement. 

Use of loan proceeds

A PPP loan may be used as follows:

• at least 60% of the PPP loan is used for payroll costs;

• costs for health care, life, disability, vision, or dental benefits during period of paid leave and insurance premiums;

• up to 40% of a PPP loan may be used on non-payroll costs that include:

1. • mortgage interest payments; 
   • rent payments; 
   • utility bills; 
   • interest payments on debt obligations incurred prior to 2/15/20; 
   • refinancing a SBA EIDL loan made between 1/31/20 and 4/3/20; 
   • covered operation expenses (payments for software or cloud computing services that facilitate operations, product or service delivery, payroll administration, human resources, sales and billing, or accounting or tracking of supplies, inventory, records and expenses); 
   • covered property damage costs not covered by insurance or other compensation (related to property damage, vandalisim, or looting due to protests that occurred in 2020); 
   • covered supplier costs; or
   • covered worker protection expenses (including personal protective equipment and sanitation requirements due to COVID-19).

It should be noted that PPP loan proceeds may not be used for activities or expenditures related to lobbying.

Certifications

The required certifications are now inclusive of CAA 2021 changes in regards to certain conditions of loan eligibility as listed above. Certifications note that previously issued guidance provide safe-harbor for good faith certification for borrowers of <$2 million. 

Full loan forgiveness

Full loan forgiveness requires that:

• 60% of loan proceeds must be used for payroll costs, and
• the remaining 40% used on non-payroll costs as outlined above.

Eligibility for re-application, or request of an increase in a PPP loan amount

The following borrowers may reapply or request an increase in their PPP loan amount:

• Borrowers that returned all of a PPP loan may re-apply for a PPP loan in an amount the borrower is eligible for under current PPP rules.

• Borrowers that returned part of a PPP loan, may re-apply for an amount equal to the difference between the amount retained and the amount previously approved.

• Borrowers that did not accept the full amount of a PPP loan which was approved, may request an increase in the amount of the PPP loan up to the previously approved amount.

E-Tran must be used to electronically submit increase requests, on or before 3/31/21, subject to the availability of funds. SBA will be issuing guidance in the future regarding these processes.

Reliance on IFR FAQs

In the event of any conflicting guidance in the IFR FAQs, the IFR clarifies that the provisions of CAA 2021 will take precedence. In this eventuality, the SBA will revise FAQs accordingly.

Applicability date

The IFR applies to:

• loan applications, including requests for loan increases and loan forgiveness following the enactment of CAA 2021, and

• loan forgiveness applications before the enactment of CAA 2021 in cases in which the SBA has not remitted the forgiveness payment.

(This is Blog Post #954)