In a recent article, we discussed the Paycheck Protection Program (“PPP”), which created a $350B loan program for eligible small businesses that allows them to pay and retain their employees and contractors using an interest free and forgivable loan that is wholly backed by the Small Business Administration (“SBA”).
On April 14, 2020, the SBA published a new interim final rule that provides guidance on the eligibility requirements for sole proprietors and self-employed individuals, outlines how loan proceeds can be used, and provides formulas that can be used to determine the maximum loan amount that an eligible borrower can receive. The rule also provides clear instructions on the information borrowers must provide when seeking loan forgiveness.
This is intended merely as a general overview of this interim rule. We encourage you to contact our office if you have any questions about this article or if you need any legal services or advice on solutions to issues that may impact your business, your customers, or your employees. Additional information on the SBA’s interim final rules which pertain to other eligible entities can be found here.
SBA Interim Final Rule – April 14, 2020
Sole Proprietors and Independent Contractors.
Individuals are eligible for a PPP loan if they filed or will be filing a 2019 IRS Form 1040, showing self-employment income on Schedule C; remained self-employed as of February 15, 2020; and are living in the United States. Because of reliability concerns, the SBA will not consider any expenses incurred between January 1, 2020 and February 14, 2020 in determining eligibility or the maximum loan amount. Because of reliability concerns, the SBA will not consider any expenses incurred between January 1, 2020 and February 14, 2020 in determining eligibility or the maximum loan amount.
Individuals who are interested in applying for a loan are encouraged to review their state and federal unemployment benefits as those may be impacted by participating in the PPP program.
Partners and Partnerships.
The rule provides guidance to partnerships as well, directing the partnership, and not the individual partners, to apply for the PPP loan. The rationale is that most of expenses that are intended to be covered by the PPP loan, such as rent, mortgage interest, utilities, and interest on other debt services, are incurred at the partnership level. The self-employment income of general active partners may be reported as payroll costs and included for purposes of the loan and loan forgiveness, up to the cap of $100,000 per general active partner.
Method of Calculating Maximum Loan Amount/Required Documents
For individuals with no employees, the following formula should be used to calculate the maximum loan available under the PPP program:
The amount reported on Line 31 on Schedule C of the applicant’s 2019 1040 (capped at $100,000) ÷ 12 x 2.5 + value of any Economic Injury Disaster Loan Emergency Loan (EIDL) that the applicant intends on refinancing.
The following documents must be provided with the PPP application: 1) 2019 Form 1040 Schedule C; 2) a 2019-MISC detailing non-employee compensation received (box 7); 3) an invoice, bank statement, or accounting records showing the applicant is self-employed; and 4) an invoice, bank statement, or accounting records showing the applicant was in operation on or around February 15, 2020.
For individuals with employees, the following formula should be used to calculate the maximum loan available under the PPP program:
The amount reported on Line 31 on Schedule C of the applicant’s 2019 1040 (capped at $100,000) + the gross wages and tips paid to the applicants U.S. employees per quarter plus any pretax employee contributions for health insurance or fringe benefits (capped at $100,000 per employee) + the applicant’s employer side health insurance contributions, retirement contributions, and state and local taxes assessed on employee compensation ÷ 12 x 2.5 + value of any Economic Injury Disaster Loan Emergency Loan (EIDL) that the applicant intends on refinancing.
The rule provides that use of the PPP loan is limited to the following: 1) replacement of the applicant’s/owner’s compensation; 2) payroll costs for U.S. based employees; 3) mortgage interest payments; 4) interest on debt that was incurred before February 15, 2020; 5) utility payments; and 6) refinancing an EIDL loan that was issued from January 31, 2020 to April 3, 2020. To maximize loan forgiveness, at least 75% of the loan must be used on payroll related expenses. Only expenses incurred during the first eight weeks following the date of disbursement of the loan will be included in the amount forgiven even though applicant’s may obtain a loan up to 2.5 times their average monthly expenses.
Required Documents for Loan Forgiveness.
In addition to providing information that shows the proceeds of the loan were used to reimburse applicants for self-employment income, applicants who have employees should submit the following with their application for loan forgiveness: 1) Form 941 and state quarterly wage unemployment insurance tax reporting forms (including evidence of retirement and healthcare contributions); and 2) receipts showing payment of rent, mortgage interest, utilities, and interest on other debts.
Waiver of Certain Restrictions on Lenders.
Because all of the loan terms are the same, the SBA waived a regulation that prohibits a director or holder of less than 30% equity interest in a PPP lender from obtaining a PPP loan from the board on which the director serves or holder owns. Lenders are prohibited from showing preferential treatment or favoritism. Officers and key employees employed by a lender are prohibited from obtaining a loan through their employer.
The complete text of the SBA interim final rule can be found here.