The Small Business Administration (“SBA”) issued an Interim Final Rule that provides further guidance on the Paycheck Protection Program (“PPP”), which will provide up to $349 billion in fully forgivable loans to assist small businesses if they maintain payrolls during the COVID-19 pandemic. The SBA confirms that eligible businesses are those businesses that: (1) have 500 or fewer employees whose principal place of residence is in the United States; (2) qualify as a small business concern as defined in section 3 of the Small Business Act or a tax exempt nonprofit organization; and (3) were in business on February 15, 2020 and either had employees for whom salaries were paid and payroll taxes or paid independent contractors. In addition, individuals who operate a sole proprietorship or as an independent contractor are eligible.
The SBA provides that a business is ineligible if the business: (1) is engaged in any activity that is illegal under federal, state, or local law; (2) is a household employer; (3) has an owner (of 20 percent or more) that is incarcerated, on probation, on parole, or presently subject to indictment, criminal information, arraignment, or other means by which formal criminal charges are brought, or has been convicted of a felony within the last five years; or (4) has obtained a direct or guaranteed loan from the SBA or any other Federal agency that is currently delinquent or has defaulted within the last seven years and caused loss to the government.
The Interim Rule also provides the calculation for the amount a small business may borrow. The calculation is as follows:
Step 1: Aggregate payroll costs from the last twelve months for employees whose principal place of residence is the United States.
Step 2: 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.
Step 3: Calculate average monthly payroll costs.
Step 4: Multiply the average monthly payroll costs from Step 3 by 2.5.
Step 5: Add the outstanding amount of an Economic Injury Disaster Loan (EIDL) 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).
While the PPP loan may be used for payroll costs, costs to the continuation of group health care benefits during periods of paid sick, medical, or family leave, and insurance premiums, mortgage interest payments, rent payments, and utility payments, at least 75% of the PPP loan must be used for payroll costs.
Payroll costs under the PPP consist of compensation to employees in the form of salary, wages, commissions, or similar compensation; cash tips or the equivalent; payment for vacation, parental, family, medical, or sick leave; allowance of separation or dismissal; payment for benefits consisting of group health care coverage, including insurance premiums, and retirement; payment of state and local taxes assessed on compensation of employees; and for an independent contractor or sole proprietor, wage, commissions, income, or net earnings from self-employment or similar compensation
Payroll costs under the PPP cannot include any compensation for an employee whose principal place of residence is outside the United States, compensation in excess of $100,000, prorated as necessary; federal employment taxes imposed or withheld between February 15, 2020 and June 30, 2020; 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.
The interest rate for a PPP loan is 1.00% and the maturity date is two years from the issuance of the loan. However, for any amount not forgiven, there is a six-month deferment from the date of issuance for any payment on the loan (interest will accrue during this six-month period). Moreover, all loans are on a “first-come, first-served” basis.
In order to receive the PPP loan, the borrower must also certify in good faith that:
(1) The applicant was in operation on February 15, 2020 and had employees for whom it paid salaries and payroll taxes or paid independent contractors, as reported on a Form 1099-MISC;
(2) Current economic uncertainty makes the loan request necessary to support the ongoing operations of the applicant;
(3) The funds will be used to retain workers and maintain payroll or make mortgage interest payments, lease payments, and utility payments; that if the funds are knowingly used for unauthorized purposes, the federal government may hold the borrower legally liable such as for charges of fraud; and that not more than 25 percent of loan proceeds may be used for non-payroll costs;
(4) Documentation verifying the number of full-time equivalent employees on payroll as well as the dollar amounts of payroll costs, covered mortgage interest payments, covered rent payments, and covered utilities for the eight-week period following this loan will be provided to the lender;
(5) Loan forgiveness will be provided for the sum of documented payroll costs, covered mortgage interest payments, covered rent payments, and covered utilities;
(6) During the period beginning on February 15, 2020 and ending on December 31, 2020, the applicant has not and will not receive another loan under this program;
(7) The information provided in the application and the information provided in all supporting documents and forms is true and accurate in all material respects; and
(8) The lender will confirm the eligible loan amount using tax documents the borrower submits. submitted
To assist with obtaining a PPP loan, the borrower may also retain an agent, including a lawyer, accountant, and consultant, to assist with the application process. The agent cannot charge the applicant any fees, and the agent will be paid a percentage of the loan amount from the processing fee received from the lender by the SBA.
If PPP loans are misused by a small business, the SBA will direct the small business to repay those amounts. In addition, the misuse may subject the shareholders, members, or partners who knowingly misuse the funds to fraud charges and the SBA will have recourse against those shareholders, members, or partners.
For more information on the Interim Rule, please click here.
Questions
Kronick attorneys across all of the firm’s practice groups – Public Agencies, Natural Resources, Labor & Employment, and Business/Healthcare – will continue to provide clients and the community with ongoing updates and advice regarding COVID-19 related issues as developments warrant. Please feel free to contact us for assistance with issues arising from the current health crisis.
Bruce Scheidt
bscheidt@kmtg.com | 916.321.4502
Gabriel Herrera
gherrera@kmtg.com | 916.321.4334