SBA Issues Interim Final Rule for Paycheck Protection Program Loans

By Eric L. Kintner and Victor J. Roehm III

On April 3, the Small Business Administration (SBA) issued its Interim Final Rule (IFR) for the Paycheck Protection Program (PPP) just a few hours before borrowers were allowed to start submitting PPP loan applications to lenders.  The IFR included some important changes and clarifications to the PPP, but other issues remain open.

IFR clarified the following issues:

1. PPP loans will be made on first come, first served basis. 

The IFR made clear that PPP loans will be made available to those borrowers who first apply.  The CARES Act included a “Sense of the Senate” provision that the SBA “should” issue guidance to give priority for PPP loans to small business concerns in underserved and rural markets, including veterans and members of the military community, and small business concerns owned and controlled by socially and economically disadvantaged individuals, women, and businesses in operation for less than two years.

2. 75/25 rule for use of PPP loan proceeds.

The IFR includes a new 75/25 requirement that requires at least 75 percent of the PPP proceeds to be used to cover payroll costs and no more than 25 percent can be used for non-payroll costs.  There was no such express requirement in the CARES Act, although Treasury’s recent Information Sheet for Borrowers  stated that “[d]ue to likely high subscription, it is anticipated that not more than 25 percent of the forgiven amount may be for non-payroll costs.”

3. Independent contractor 1099 compensation should not be counted for small business loan qualification or forgiveness purposes.

The IFR included FAQs that state independent contractors should not be counted as “employees” for purposes of a borrower’s PPP loan calculation as well as a borrowers’ PPP loan forgiveness.  This could be read to mean that small businesses (which are not sole proprietorships or independent contractors) should exclude any 1099 compensation paid by such small businesses to such independent contractors for purposes of calculating its “payroll costs.”

4. PPP loans with balances will have two-year term at one percent interest with six month deferment.

With respect to a PPP loan that has a remaining balance after reduction for loan forgiveness, the IFR confirmed that loan balances will have a two-year term and will accrue interest at one percent.  The CARES Act permitted these loans to have a maximum term of ten years and an interest rate no greater than four percent.

Borrowers with loans with unforgiven balances will not have to make any payments for six months following the date of disbursement of the loan. However, interest will continue to accrue on PPP loans during this six-month deferment.

The IFR did not provide guidance regarding some important issues.

• The IFR indicates further guidance is forthcoming on affiliation rules. We understand there are efforts to provide additional exemptions to the affiliate rules for small businesses, including those owned by venture capital or private equity investors.
• While the IFR does suggest self-employed individuals may apply for PPP loans, it does not make it clear what self-employed individuals will be eligible to receive PPP loans.
• No definition provision for “full-time equivalent employees,” which is important to determining the amount of the loan that can be forgiven if there is a reduction in FTEs during the covered period as compared to prior periods.
• No discussion regarding how to count 500 employees (i.e., whether based on average employees over 12 months, which would be the typical SBA rules, or whether the employee count should be on date of application or date of disbursal).
• The IFR indicates that the borrower must have “had employees for whom it paid salaries and payroll taxes or paid independent contractors, as reported on a Form 1099-MISC.”  Not clear if that would include borrowers who paid a management fee on Form 1099-MISC that covered payroll expenses for the management company.