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SBA Issues Interim Final Rule for the Paycheck Protection Program

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NOTE—The Paycheck Protection Program Flexibility Act of 2020 amends the CARES Act and this article updates the information below>> click here to read more. 


The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was enacted and signed into law by the President on March 27, 2020.  The principal program for small business economic relief under the CARES Act is the Paycheck Protection Program (“PPP”).  The CARES Act provides the general framework for the loans available to businesses under the PPP and on April 2, 2020 the Small Business Administration (“SBA”) issued its Interim Final Rule (13 CFR Part 120) (the “Rule” or the “Guidelines”) providing additional guidance and clarification.

Who is eligible to receive a PPP Loan?

The Rule specifies that the following eligible for a PPP Loan:

    1. A business with 500 or fewer employees whose principal place of residence is in the U.S., and

the business was in operation on February 15, 2020, and

the business is a small business concern as defined in the Small Business Act (15 USC § 632 or

a tax-exempt nonprofit organizations under section 501(c)(3) of the Internal Revenue Code (“IRC”) or

a tax-exempt veterans organization under section 501(c)(19) of the IRC or

a Tribal business concern under section 31(b)(2)(C) of the Small Business Act or

any other business.

    1. An individual who operates under a sole proprietorship or as an independent contractor or eligible self-employed individual who was in operation on February 15, 2020.

Can an eligible business get a PPP Loan if it already has an SBA loan or loan from another Federal agency?

Currently having an SBA loan or a loan from another Federal agency does not disqualify a business from being eligible for a PPP Loan except where the business or an owner of the business has an SBA loan or loan from another Federal agency that is currently in default or has defaulted within the last 7 years.

How much can an eligible business borrow?

The Rule provides the following determining the amount of a PPP Loan:  The lesser of

        A. $10 million or

        B. The amount arrived at by the following calculation:

Step 1: Aggregate “Payroll Costs” (defined in detail below) 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 (divide the amount from Step 2 by 12).

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).

The example calculations in the Rule clarify that for employees who earn more than $100,000 annually, only the compensation amount in excess of $100,000 is excluded from the calculation.

What is included in “Payroll Costs”?

Payroll costs consist of 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; 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.

But the following are not included as Payroll Costs:

    1. Any compensation of an employee whose principal place of residence is outside of the United States;
    2. The compensation of an individual employee in excess of an annual salary of $100,000, prorated as necessary;
    3. Federal employment taxes imposed or withheld between February 15, 2020 and June 30, 2020, 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;
    4. 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); and
    5. Payments made to independent contractors (they have the ability to apply for a PPP loan on their own).

What are the PPP Loan terms?

The SBA has directed that all PPP Loans shall have a 2-year term and charge interest at the rate of 1% per annum.  All borrowers shall receive a six-month deferment on making any payments of principal and interest, but interest will accrue during the six-month deferment period.  No collateral is required. No personal guarantees will be required.

What amount of a PPP Loan will be forgiven?

The amount of loan forgiveness can be up to the full principal amount of the PPP Loan and any accrued interest provided the borrower uses all of the loan proceeds for forgivable purposes and employee and compensation levels are maintained. The actual amount of loan forgiveness will depend, in part, on the total amount of payroll costs, payments of interest on mortgage obligations incurred before February 15, 2020, rent payments on leases dated before February 15, 2020, and utility payments under service agreements dated before February 15, 2020, over the eight-week period following the date of the PPP Loan. However, not more than 25 percent of the loan forgiveness amount may be attributable to non-payroll costs.

How can PPP Loan proceeds be used?

The proceeds of a PPP loan are to be used for:

    1. “payroll costs”;
    2. costs related to the continuation of group health care benefits during periods of paid sick, medical, or family leave, and insurance premiums;
    3. mortgage interest payments (but not mortgage prepayments or principal payments);
    4. rent payments;
    5. utility payments;
    6. interest payments on any other debt obligations that were incurred before February 15, 2020; and/or
    7. refinancing an SBA EIDL loan made between January 31, 2020 and April 3, 2020.[1]

For purposes of loan forgiveness, the borrower will have to document the proceeds used for Payroll Costs in order to determine the amount of forgiveness.

If you use PPP Loan funds for unauthorized purposes, the SBA will direct you to repay those amounts. If you knowingly use the funds for unauthorized purposes, you will be subject to additional liability such as charges for fraud. If one of your shareholders, members, or partners uses PPP Loan funds for unauthorized purposes, SBA will have recourse against the shareholder, member, or partner for the unauthorized use.

What documentation is required to apply for a PPP Loan?

    1. A completed Paycheck Protection Program Borrower Application Form, which can be obtained here; and
    2. Documentation verifying:
      1. the number of full-time equivalent employees on payroll as well as the dollar amounts of payroll costs;
      2. documents to establish eligibility, such as payroll processor records, payroll tax filings (or form 1099-MISC), income and expense statements of a sole proprietorship;
      3. covered mortgage interest payments, covered rent payments, and covered utilities for the eight-week period following the loan; and
      4. Other documents requested by the Lender.

Further, on the Paycheck Protection Program application, an authorized representative of the applicant must certify in good faith to all of the below:

    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 this 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; I understand that if the funds are knowingly used for unauthorized purposes, the federal government may hold me legally liable such as for charges of fraud.
    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. I further certify that the information provided in this application and the information provided in all supporting documents and forms is true and accurate in all material respects. I understand that knowingly making a false statement to obtain a guaranteed loan from SBA is punishable under the law, including under 18 USC 1001 and 3571 by imprisonment of not more than five years and/or a fine of up to $250,000; under 15 USC 645 by imprisonment of not more than two years and/or a fine of not more than $5,000; and, if submitted to a federally insured institution, under 18 USC 1014 by imprisonment of not more than thirty years and/or a fine of not more than $1,000,000.
    8. I acknowledge that the lender will confirm the eligible loan amount using tax documents I have submitted. I affirm that these tax documents are identical to those submitted to the Internal Revenue Service. I also understand, acknowledge, and agree that the Lender can share the tax information with SBA’s authorized representatives, including authorized representatives of the SBA Office of Inspector General, for the purpose of compliance with SBA Loan Program Requirements and all SBA reviews.

Where can a business apply for a PPP Loan?

The Rule provides that the following are authorized lenders for PPP Loans:

    1. All current SBA 7(a) lenders;
    2. Any federally insured depository institution or credit union;
    3. Any farm Credit System institution; and
    4. Any depository or non-depository financing provider that originates, maintains and services business loans.

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[1] If you received an SBA EIDL loan from January 31, 2020 through April 3, 2020, you can apply for a PPP Loan. If your EIDL loan was not used for payroll costs, it does not affect your eligibility for a PPP Loan. If your EIDL loan was used for payroll costs, your PPP loan must be used to refinance your EIDL loan.  Proceeds from any advance up to $10,000 on the EIDL loan will be deducted from the loan forgiveness amount on the PPP loan.  For purposes of determining the percentage of use of proceeds for payroll costs, the amount of any EIDL refinanced will be included.

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