Certain provisions of the Coronavirus/Covid-19 economic stimulus legislation are subject to the issuance of government regulations and other government action, thus certain details regarding the legislation may be clarified or added.
Desperately awaited regulations were issued yesterday in connection with up to $349 billion in Paycheck Protection Program (PPP) loans under the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act). The new regulations were issued just in time for the expected opening of the application period that began today, April 3, 2020, and the predicted flood of applications to Small Business Administration (SBA) lenders.
Here are some of the highlights, several of which clarify matters, and others that can only be said to spin the heads of accountants, lawyers, SBA lenders, borrowers, and payroll processors who have already struggled with the statute since its enactment on March 27, 2020:
- Application Period and PPP Limits. As expected, PPP loans will be disbursed on a first-come, first-served basis and will end when the $349 billion appropriated for the program is exhausted. Attorneys and accountants have already advised their clients to do whatever they can to exploit their banking relationships with SBA lenders where possible and to prepare the SBA Form 2483 (the latest form can be found here and may be further revised) and gather whatever supporting information is required by the bank to which the borrower applies (requirements differ from bank to bank) so as to be able to submit completed applications as soon as possible.
- Limited Application Review and Approval. Perhaps the most important feature of the regulations, as reflected in the standardized application form, is that lenders may rely on borrower certifications in order to determine eligibility of the borrower and use of proceeds, and to rely on borrower documentation, without more, to determine the qualifying loan amount and projected eligibility for forgiveness. Lenders may therefore feel comfortable conducting very limited review before disbursing PPP loans, basically confirming that each borrower has correctly calculated the maximum loan amount and the amount expected to qualify for forgiveness on the basis of the borrower’s certification that the documentation submitted by it is correct. Lenders need only:
- Confirm receipt of the borrower certification, which is set forth on the SBA Form 2483
- Confirm receipt of documentation demonstrating that the borrower had employees for whom the borrower paid salaries and payroll taxes on or around February 15, 2020
- Confirm the dollar amount of average monthly payroll costs for the “preceding calendar year”1 by reviewing the payroll documentation submitted with the application.
We hope that this extremely limited underwriting process (if it can even be called that) will have the following salutary effects: (i) more lenders will rush to qualify as SBA lenders (by submitting SBA Form 3506) within the next week or two and (ii) borrowers will find that their relationship banks now qualify as SBA lenders, eliminating the need for anti-money laundering “know your customer” procedures, together resulting in (iii) a massive increase in the number of loans processed and funded.
- Affiliation Rules. On April 3, 2020, the SBA advised in two separate updates to the Interim Final Rule that entities may be considered affiliates based on factors including ownership, overlapping management, and identity of interest and such determination should be made under 13 CFR § 121.301(f) as described here. (Note: This is consistent with how we had read the law, see our publication on the Lowenstein Sandler LLP site on March 31 & in Forbes on April 1). In order to help potential borrowers identify other businesses with which they may be deemed to be affiliated under the common management standard, the Borrower Application Form, SBA Form 2483, released on April 2, 2020, requires applicants to list other businesses with which they have common management. The information supplied by the applicant in response to that information request should be used by applicants as they assess whether they have affiliates that should be included in their number of employees reported on SBA Form 2483.
- The Application Package. There are basically three (3) elements to a complete application by a borrower that already has a relationship with an SBA lender:
- The SBA Form 2483, which contains the certification and which may be e-signed
- Documentation of average monthly payroll cost (and, therefore, the amount of the PPP loan), which varies from bank to bank
- Submission of information demonstrating that a borrower had employees for whom the borrower paid salaries and payroll costs on or around February 15, 2020
- Determining Loan Amount. Here, the regulations fall far short of expectations. Per the regulations, average monthly payroll is computed as follows:
- Aggregate payroll costs (defined in detail below in 6) from the “last twelve months” (see footnote 1, above) for employees whose principal place of residence is the United States.
- Subtract any compensation paid to an employee in excess of an annual salary of $100,000 and/or any amounts paid to an independent contractor or sole proprietor in excess of $100,000 per year. [The CARES Act provides for proration but gives no guidance how to accomplish this; see “Payroll Costs” below. Also, this regulation seems to say compensation paid to independent contractors up to $100,000 is included, however, the regulations expressly state otherwise in another section -- see 7, below, which we believe governs]
- Calculate average monthly payroll costs (divide the amount from Step ii by 12).
- Multiply the average monthly payroll costs from Step iii by 2.5.
- Add the outstanding amount of an Economic Injury Disaster Loan (EIDL), if any, made between January 31, 2020 and April 3, 2020, less the amount of any “advance” under an EIDL COVID-19 loan (because it does not have to be repaid).
- Payroll Costs. For a qualifying business that is neither an independent contractor nor a sole proprietor, payroll costs include compensation to employees (whose principal place of residence is the United States) in the form of salary, wages, commissions, or similar compensation; cash tips or the equivalent (based on employer records of past tips or, in the absence of such records, a reasonable, good-faith employer estimate of such tips); payment for vacation, parental, family, medical, or sick leave; allowance for separation or dismissal; payment for the provision of employee benefits consisting of group health care coverage, including insurance premiums, and retirement; and payment of state and local taxes assessed on compensation of employees. Payroll costs exclude any compensation of an employee whose principal place of residence is outside of the United States; the compensation of an individual employee in excess of an annual salary of $100,000, prorated as necessary; federal employment taxes imposed or withheld between February 15, 2020 and June 30, 2020,2 including the employee’s and employer’s share of FICA (Federal Insurance Contributions Act) and Railroad Retirement Act taxes, and income taxes required to be withheld from employees; and qualified sick and family leave wages for which a credit is allowed under sections 7001 and 7003 of the Families First Coronavirus Response Act (Public Law 116–127).
- Payments to Independent Contractors. “Independent contractors have the ability to apply for a PPP loan on their own so they do not count for purposes of a borrower’s PPP loan calculation.” This is inconsistent in the regulations wherein it states that independent contractors' compensation is included for purposes of calculating “payroll costs”.
- Use of Proceeds. SBA Loans can be used for many purposes, and it was thought that PPP loans could be used for uses not generating forgiveness. The regulations muddies the waters since it states on page 16 that you may use PPP proceeds for other SBA 7(a) allowable uses provided you use 75 percent on payroll costs, and in another it states you may only use proceeds for the seven items outlined on page 15. These are both in contrast with the SBA Form 2483 (which has the borrower certify that the proceeds will be used for the four categories of forgivable expenses: “documented payroll costs, covered mortgage interest payments, covered rent payments, and covered utilities.”). This leaves another inconsistency, because the applicant needs to certify the use of proceeds, subjecting it to criminal sanctions for any false statements. Not only that, at least 75 percent of the PPP loan must be used for payroll during the eight-week period following loan disbursement. We are hoping there will be further clarification on this point.
- Confirmation of Interest Rate, Deferral Period and Maturity Date. The regulations confirms that the interest rate on PPP loans will be one percent (1%) (the CARES Act allowed up to 4 percent), the deferral period on principal and interest is six (6) months (the CARES Act permitted up to a year), and the maturity date will be two (2) years (the CARES Act provided a 10-year maturity date).
- Ineligible Businesses. The regulations clarify that certain types of businesses will not be eligible to receive PPP loans. The regulations state the following:
"You are ineligible for a PPP loan if, for example:
- You are engaged in any activity that is illegal under federal, state, or local law;
- You are a household employer (individuals who employ household employees such as nannies or housekeepers);
- An owner of 20 percent or more of the equity of the applicant is incarcerated, on probation, on parole; presently subject to an indictment, criminal information, arraignment, or other means by which formal criminal charges are brought in any jurisdiction; or has been convicted of a felony within the last five years; or
- You, or any business owned or controlled by you or any of your owners, has ever obtained a direct or guaranteed loan from SBA or any other Federal agency that is currently delinquent or has defaulted within the last seven years and caused a loss to the government."
Also, the SBA has determined that household employers are ineligible because they are not businesses. 13 CFR 120.100.
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, Subpart B, Chapter 2, except that nonprofit organizations authorized under the Act are eligible. (SOP 50 10 can be found here.)
1 The term “preceding calendar year” appears to conflict directly with the instruction that the maximum amount of the PPP loan is calculated on the basis of average payroll costs “from the last twelve months,” which latter term corresponds to the provision in 15 USC § 636(a)(36)(E)(1)(I) (added by Section 1102(a)(2) of the CARES Act) that the measuring period for payroll costs is “the 1-year period before the date on which the loan is made.” Until clarification of this item (which may never be forthcoming), SBA’s and Treasury’s overriding interest in funding loans as quickly as possible justifies the use of either the trailing 12 months or calendar year 2019 (using the 2019 calendar year may be most amenable to generation by commercial payroll processors of reports that facilitate calculation of the maximum loan amount by the borrower).
2 This period makes little sense because, among other reasons, it requires calculation of taxes for a period that will, at least in part, occur after the application is submitted.
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