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SBA PPP April 14 Interim Final Rule Guidance

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.

Self-Employed Individuals

Eligibility

The new interim final rule makes clear that an individual may be eligible for a PPP loan if the individual:

  1. was in operation as a business on February 15, 2020;
  2. is an individual with self-employment income (such as an independent contractor or a sole proprietor);
  3. has a principal place of residence in the United States; and
  4. 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.

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PPP: Affiliation Guidelines

PPP: Affiliation Guidelines

April 9, 2020

Authored by: Jim Havel and Robert Klingler

In determining eligibility under the Paycheck Protection Program, the SBA will aggregate “affiliates” of the borrower. This post further explores what the SBA considers “affiliate” of the borrower, based on the latest guidance from the SBA as of April 9, 2010.

How does the SBA Define “Control” for Aggregation Purposes?

The SBA’s standard definition of “control” for affiliation and aggregation purposes is a facts-heavy analysis similar to a totality of the circumstances standard. The SBA generally goes as high up and across the ultimate ownership group and its controlled companies when it comes to the entity deemed to control for aggregation/ affiliation purposes.

Control is both affirmative and negative best understood through use of examples:

  • For examples of affirmative control, see all of the tests below.
  • For examples of negative control, see Example 3 of Test 1 below.

Four tests will generally apply for affiliation based on control for PPP Loans.

Test 1 – Affiliation based on ownership:

Example 1 – Equity control: The classic and easiest example to understand is equity control. If an entity controls a majority of the equity (50%+1) of another business (or multiple businesses), the SBA will aggregate all of the employees of those companies together under PPP.

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In Praise of Community and Regional Banks

Last week my partner Rob Klingler posted an impassioned plea to the SBA and bank regulators to allow banks with less than 500 employees to be borrowers under the Paycheck Protection Program, or PPP as it has become known. Rob joined a chorus of voices across the country pointing out that community banks are small businesses too, and if the jobs of employees at a community bank can be saved isn’t that as helpful to the economy as any other small business? Unfortunately, the overhang of TARP appears to continue to cloud decisions in Washington and banks were excluded from receiving loans under the PPP. Irony drips from that decision. At the beginning of the last financial crisis, when the business fortunes of some of the largest banks appeared at risk, Washington rushed to their aid with TARP. Now, at the beginning of a financial crisis that is hitting small business hard, community banks are being told they are the only small businesses in America which must soldier on without government financial assistance.

In that context, isn’t it remarkable that small and mid-sized businesses across the country are flocking to community and regional banks for responsive assistance in the PPP process? My practice has always been a mix of corporate finance and advisory work for middle market businesses and consulting and board advisory work for banks. I like the balance and the perspective that mix brings. Over the past two weeks this view into two worlds has revealed to me the true nature of relationship banking, and the absolute commitment to that concept at most community and regional banks. My clients and contacts in the middle market business world have been frequently asking for updates on the roll out of the PPP program. That was understandable and to be expected. What I did not expect was the volume of calls I’ve been receiving for referrals to smaller banks from customers of large banks. Those calls often begin with expressions of frustration at the inability to get anyone from the larger bank on a call or even to respond to an email regarding the PPP process, and that the most frequent communication received is “you need to visit our website for assistance.” In an environment where hundreds of thousands and likely millions of small to medium sized businesses across the country are suddenly struggling, and with no sense of the near term path, it really matters to the persons running those businesses that they receive support, encouragement and, if possible, assistance from their bankers. It is in the difficult times when relationship banking really matters, not the boom times.

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Tax Effects on Paycheck Protection Program Borrowers

With regard to the interplay of various tax provisions of the CARES Act and the Paycheck Protection Program (PPP), we note the following:

  • If a borrower takes a PPP loan, they are restricted from claiming the employee retention credit, even if the PPP loan is not forgiven.
  • If any portion of a borrower’s PPP loan is forgiven, the borrower is restricted from taking advantage of the deferred payment of the employer portion of Social Security tax obligations.
  • If all or a portion of borrower’s PPP loan is forgiven, the statute provides that such forgiven amount shall be excluded from gross income.

Employee retention credit. The CARES Act provides certain eligible employers a refundable credit with respect to the employer’s share of Social Security tax for due in an amount equal to 50% of qualified wages paid after March 12, 2020 and before January 1, 2021 (up to $10,000 per employee for all calendar quarters). Eligible employers generally include those required to fully or partially suspend operations due to a COVID-19 related government order or that have a 50% decrease in gross receipts for a calendar quarter when compared to the same quarter in 2019.  Generally, all employee wages paid by employers with up to 100 full-time employees in 2019 are eligible for the credit. However, if an employer had more than 100 full-time employees in 2019, only wages paid to employees who are not providing services due to the suspension of operations or significant decrease in gross receipts are credit-eligible. If an employer takes a PPP loan, they are not eligible to take advantage of the employee retention credit.

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Lender Obligations under Paycheck Protection Program

Pursuant to the Interim Final Rule published this evening, the SBA has confirmed that banks participating as lenders will have limited liability for the bad acts of their borrowers. This assumes, however that Form 2484, when ultimately published by the SBA, will not contain additional problematic certifications required to be made by the lender.

“SBA will allow lenders to rely on certifications of the borrower in order to determine eligibility of the borrower and use of loan proceeds and to rely on specified documents provided by the borrower to determine qualifying loan amount and eligibility for loan forgiveness. Lenders must comply with the applicable lender obligations set forth in this interim final rule, but will be held harmless for borrowers’ failure to comply with program criteria; remedies for borrower violations or fraud are separately addressed in this interim final rule.”

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Community Banks Should be Encouraged to Participate (as Borrowers) in the SBA Paycheck Protection Program

Community Banks should not only be permitted, they should be encouraged, to participate as borrowers in the CARES Act SBA Paycheck Protection Program (PPP). Both the Small Business Administration and each of the federal and state banking regulators should expressly acknowledge that community banks with less than 500 employees are both permitted and encouraged to participate, as borrowers, in the PPP. 

[Update, Evening of April 2, 2020. The SBA has now published the interim final rule for the PPP. Although the guidance published under either “2(a) Am I eligible?” or “2(b) Could I be ineligible even if I meet the eligibility requirements in (a) above?” make no mention of banks being ineligible, provision 2(c) provides that “Businesses that are not eligible for PPP loans are identified in 13 CFR 120.110 and described further in SBA’s Standard Operating Procedure (SOP) 50 10.” Banks are included as non-eligible borrowers under both provisions. As discussed below, this remains in apparent disagreement with the CARES Act, but unless the SBA changes its mind, it appears we’re missing an opportunity to further expand credit for small businesses.]

[Update #2, Still Evening of April 2, 2020. The Interim Final Rule clearly contemplates that the PPP is not otherwise subject to SBA rules as it provides “The program requirements of the PPP identified in this rule temporarily supersede any conflicting Loan Program Requirement.” So, to be clear, the SBA and Treasury chose not to allow community banks to participate.]

Without this encouragement, community banks risk regulatory criticism and reputational concerns that participating in the PPP represents a warning regarding the bank’s safety and soundness.   I would argue that the truth is far different.  Participating in the PPP would demonstrate that bank management, notwithstanding the economic uncertainty, wants to fortify the bank’s safety and soundness while extending its ability to provide credit to households and business throughout the United States.

In the last week, the federal banking agencies have announced a number of regulatory actions intended to “increase banking organizations’ ability to provide credit to households and businesses,” including modifications to the supplementary leverage ratio.  These changes are both reasonable and appropriate, but only affect the largest banking institutions.  Like the aims of the Small Business Administration and the Paycheck Protection Program more broadly, efforts should also be taken to support community banks in their efforts to continue to provide credit to households and businesses as we all work through the impacts of the coronavirus.  Banking regulators could directly “increase community banking organizations’ ability to provide credit to households and businesses” by encouraging their participation in the PPP.  

The text of the CARES Act provides that “any business concern … shall be eligible to receive a covered loan” if the business concern meets the employee thresholds set forth in the CARES Act.  If law school taught me anything, it was that any should mean any. Neither the Borrower nor Lender Information Sheet on the program published by the U.S. Treasury Department discuss any additional limitations based on type of business.  In fact, the Borrowers Information sheet states that “All businesses – including nonprofits, veterans organizations, Tribal business concerns, sole proprietorships, self-employed individuals, and independent contractors – with 500 or fewer employees can apply.”  If law school taught me anything else, it was that all should mean all. Similarly, the initial application provided by the U.S. Treasury does not contemplate or provide for any collection of the type of business engaged in by the borrower.

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