Below is a synopsis of the Small Business Administration’s interim rules and regulations that were issued on April 2, 2020 and became effective on April 3, 2020.
Eligible employers, including sole proprietorships, can begin to submit applications on April 3, 2020, while independent contractors and self-employed workers can begin to submit applications on April 10, 2020. A copy of the application can be found here. Employers are required to submit sufficient documentation with their application to establish eligibility, such as:
- payroll processing records;
- payroll tax filings;
- form 1099-MISC (independent contractor/sole proprietorship)
- incomes and expenses from a sole proprietorships;
- bank records (only upon request);
- utility bills; and
- commercial leases, promissory notes, mortgages and balance statements.
Subject to a few minor exceptions, eligible employers consist of employers who have 500 or fewer employees whose principal place of residence is in the United States, or are in a business that operates in a certain industry and meet the applicable SBA employee-base size standards for the industry, and were either:
- eligible to participate in the traditional SBA loan program;
- a tax-exempt organization pursuant to Internal Revenue Code §§501(c)(3) or 501(c)(19) or a tribal business concern; or
- In operation on February 15, 2020 and either had employees for whom the employer paid salaries and payroll taxes or paid independent contractors, as reported on a 1099-MISC.
Independent contractors, individuals who operated as a sole proprietorship, and eligible self-employed individuals who were in operation on February 15, 2020 are also eligible, provided sufficient documentation is available.
All loans will be fully guaranteed by the SBA under the same term and conditions set forth in other 7(a) loans, with certain key changes, such as:
- 100% of the loan will be guaranteed by the SBA;
- no collateral will be required;
- no personal guarantees will be required;
- the interest rate will be capped at 1%;
- there will be no prepayment penalty;
- any outstanding balance following loan forgiveness must be paid within two (2) years; and
- payments will be deferred for six (6) months; however, interest will continue to accrue while payments are deferred.
The program also waives several fees that are traditionally associated with SBA loans, such as:
- no up-front guarantee fee payable to the SBA by the borrower;
- no lender’s annual service fee payable by the lender to the SBA;
- no subsidy recoupment fee; and
- no fee payable to SBA for any guarantee sold on the secondary market.
The loan can be used for the following purposes:
Payroll costs, which consist of compensation to employees (whose principal place of residence is the United States) made in any of the following forms:
- salary, wages, commissions, or similar compensation, up to a cap of $100,000 per employee;
- cash tips or the equivalent (based on employer records of past tips or, if those records are not available, a reasonable, good-faith employer estimate of such tips);
- payment for vacation, parental, family, medical, or sick leave;
- allowance for dismissal or separation;
- payment for certain employee benefits, consisting of group health care coverage, including insurance premiums, and retirement;
- payment of state and local taxes assessed on employee compensation; and
- for independent contractors or sole proprietorships, wage commissions, income, or net earnings from self-employment or similar compensation.
Interest on mortgage obligations incurred before February 15, 2020 (but no mortgage prepayments or principal payments);
Interest payments on any other debt obligation incurred before February 15, 2020;
Rent payments on leases dated before February 15, 2020;
Utility payments under service agreements dated before February 15, 2020; and
Refinancing an SBA Economic Injury Disaster Relief Program that was made between January 31, 2020 and April 3, 2020.
The following are expressly excluded from the definition of payroll costs under the Program and, therefore, should not be calculated in determining the maximum loan an employer may be eligible (note: these expenses are also not forgivable if an employer uses proceeds from a loan issued under the Program to cover):
- any compensation paid to employees who principally reside outside of the United States;
- the compensation of any individual employee in excess of $100,000, prorated as necessary;
- federal employment taxes imposed or withheld between February 15, 2020 and June 30, 2020, including employee and employer side FICA and
- income taxes required to be withheld from employees; and
- qualified sick and family leave for which a credit is allowed under the Families First Coronavirus Response Act (PL 116-127).
To maximize loan forgiveness, employers must use a minimum of 75% of the loan on payroll expenses and a maximum of 25% on other permitted expenses. Employers who spend less than 75% of the loan on payroll expenses and more than 25% on other permitted expenses will not be entitled to the full amount of loan forgiveness.
Eligible applicants can submit their application through any existing SBA lender, federally insured depository, federally insured credit union, and Farm Credit System Institution that is participating. Additional lenders are expected to participate after they are approved by the SBA. Employers can visit http://www.sba.gov for a list of approved lenders.
Proceeds that are used on eligible business expenses within an eight (8) week period will be forgiven provided the employer maintains or quickly rehires its pre-oronavirus level of employment and wages.
The amount that a loan will be forgiven will be reduced if the employer decreases salaries and wages by more than 25% for any employee that made less than $100,000 annualized during 2019. Employers have until June 30, 2020 to return to full-time employment and salary levels for changes made between February 15, 2020 and April 26, 2020.
As a condition of obtaining a loan under this Program, the applicant must certify, in good faith, that:
- 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;
- the current economic uncertainty makes the loan necessary to support the employer’s ongoing operations;
- the funds will be used to retain workers and maintain payroll or to make mortgage interest payments, lease payments, and utility payments;
- the applicant understands that if the funds are knowingly used for unauthorized purposes, the federal government may hold the employer and the applicant (e.g. shareholder, member, partner, etc.) personally liable for any funds that were improperly used.
- the applicant understands that not more than 25% of the loan proceeds can be used for non-payroll costs;
- from the period of February 15, 2020 through December 31, 2020, the applicant has not and will not receive another loan under the Program;
- the applicant will provide to the lender documentation that verifies the number of full-time equivalent employees on payroll and the dollar amounts of payroll costs, covered mortgage interest payments, covered rent payments and covered utilities for the eight weeks following disbursement of the loan;
- all information provided in the application and supporting documentation is true and accurate and identical to those submitted to the IRS; and
- the applicant understands that knowingly making a false statement to obtain a loan is punishable by criminal penalties, which can range from a fine not to exceed $5,000 and imprisonment of not more than 2 ½ years to a fine not to exceed $1,000,000 and imprisonment of not more than 30 years, depending on the specific violation.
As mentioned above, the SBA is expected to issue additional guidance and regulations as lenders begin starting to issue loans under the Program. We will provide supplemental newsletters with additional guidance as it becomes available.
A copy of the interim rules can be found here.