April 16, 2020
Authored by: Matt Macia and Samantha Goldberg-Seder
On April 14, 2020, the SBA published an interim final rule that provides additional guidance regarding topics of confusion among both Payroll Protection Program (“PPP”) lenders and borrowers. This new rule supplements the first interim final rule, which was issued by the SBA on April 2, 2020, and specifically addresses the eligibility of self-employed individuals, partnerships, director-owned businesses, and legal gambling businesses. This post covers the updates detailed in the new interim final rule, based on the latest guidance from the SBA as of April 16, 2020.
The new interim final rule makes clear that an individual may be eligible for a PPP loan if the individual:
- was in operation as a business on February 15, 2020;
- is an individual with self-employment income (such as an independent contractor or a sole proprietor);
- has a principal place of residence in the United States; and
- filed or will file a Form 1040 Schedule C for 2019.
The SBA has communicated that it will issue additional guidance for those individuals with self-employment income who: (i) were not in operation in 2019 but who were in operation on February 15, 2020, and (ii) will file a Form 1040 Schedule C for 2020.
We note that individuals should be aware that participation in the PPP may affect eligibility for state-administered unemployment compensation or unemployment assistance programs.
Amount of Loan and Use of Proceeds
The new interim final rule provides two separate calculations for the maximum loan amount, depending on whether the business employs individuals other than the owner.
- For businesses with employees, the maximum loan amount is monthly average of net profit plus gross wages and tips plus certain benefit contributions, times 2.5, plus the amount of any Economic Injury Disaster Loan made between January 31 and April 3, 2020 that the business wishes to refinance, minus the amount of any advance of a COVID-19 Economic Injury Disaster Loan.
- For businesses without employees, the maximum loan amount is monthly average net profit, times 2.5, plus the amount of any Economic Injury Disaster Loan made between January 31 and April 3, 2020 that the business wishes to refinance, minus the amount of any advance of a COVID-19 Economic Injury Disaster Loan.
The proceeds of a PPP loan may be used for owner compensation replacement (based on 2019 net profit), employee payroll costs, mortgage interest payments, business rent payments, business utility payments, interest payments on any other debt obligations that were incurred before February 15, 2020, and refinancing an SBA EIDL loan made between January 31, 2020 and April 3, 2020. Importantly, the SBA highlights that the use of proceeds is limited to those types of allowable uses for which the borrower made expenditures in 2019. This is consistent with the general aim of the PPP: to support ongoing operations and payroll, rather than facilitate business expansion.
Like other business entities, self-employed individuals are subject to the restriction that at least 75 percent of the PPP loan proceeds must be used for payroll costs.
A PPP loan may be eligible for forgiveness up to the full principal amount of the loan plus accrued interest. The amount of loan forgiveness depends, in part, on the total amount spent over the covered period on: payroll costs, owner compensation replacement (limited to eight weeks of net profit), payments of interest on mortgage obligation on real or personal property incurred before February 15, 2020, rent payments on lease agreements in force before February 15, 2020, and business utility payments under agreements dated before February 15, 2020.
At least 75 percent of the amount forgiven must be attributable to payroll costs, with the additional limitation on owner compensation replacement of eight weeks of net profit.
Although partnerships are eligible for PPP loans, the new interim final rule provides that a partner in a partnership may not submit a separate PPP loan application for herself as a self-employed individual. Instead, the self-employment income of general active partners may be reported as a payroll cost, up to $100,000 annualized, on a PPP loan application filed by or on behalf of the partnership.
Due to the unique terms of PPP loans, the SBA has determined that typical SBA regulations (including 13 CFR 120.110 and 13 CFR 120.140), which would prohibit otherwise eligible director-owned businesses, do not apply to PPP loans. This means eligible businesses owned in whole or part by an outside director or holder of less than 30 percent equity interest in a PPP lender may be able to obtain a PPP loan from the PPP lender on whose board the director serves or in which the equity owner holds an interest.
The new interim final rule provides that directors who are also officers or key employees of the PPP lender are ineligible for PPP loans from such lender. Officers and key employees of a PPP lender may obtain a PPP loan from a different lender, but not from the PPP lender with which they are associated.
The SBA makes clear that the director or equity holder must follow the same process as any ordinary customer of the PPP lender and that favoritism of any kind is prohibited. PPP lenders should consult internal policies and review applicable regulations, such as Regulation O, before making PPP loans to directors.
Legal Gambling Businesses
The new interim final rule provides that a business that is otherwise eligible for a PPP Loan is not rendered ineligible due to its receipt of legal gaming revenues if the existing standard in 13 CFR 120.110(g) is met or the following two conditions are satisfied:
- the business’s 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.
As should be expected, the SBA highlights that businesses that received illegal gaming revenue are categorically ineligible.
Requirements for Certain Pledges of PPP Loans
The SBA has determined that for PPP loans, the requirements set forth in 13 CFR 120.434 do not apply to loans pledged for borrowing from a Federal Reserve Bank or advances by a Federal Home Loan Bank.