COMPREHENSIVE GUIDE TO PPP

On March 27, 2020, the ‘‘Coronavirus Aid, Relief, and Economic Security Act’’ or the ‘‘CARES Act’’ (link) became law (PL 116-136).  The program was infused with hundreds of billions by “Paycheck Protection Program and Health Care Enhancement Act,” (link) which became law on April 24, 2020 (PL 116-139).  The PPP program was amended on June 5, 2020 by the “Paycheck Protection Program Flexibility Act of 2020” (link).

1. HISTORY

2. ELIGIBLE ENTITIES

A. $10 million Dollar Rule and Affiliates

B. Good Faith Requirement and Safe Harbor Repayment

C. Broad Approval Requirements

D. Borrower Requirements

E. Independent Contractors

3. PROGRAM

A. Application Recommended Paperwork

B. Maximum Loan Amount

C. Payroll Costs

D. Allowable Uses

4. FORGIVENESS

A. Application for Forgiveness

B. Maturity after Forgiveness

C. Non-Recourse

D. Interaction with EIDL Loan

5. LENDERS

6. RELIANCE ON PRIOR GUIDANCE

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1. HISTORY

“Keeping American Worker’s Paid and Employed Act” (§ 1101-1114 of the Act) (became law March 27, 2020)

An 800 page long bill created the Paycheck Protection Program

• 100% guaranteed by SBA. Confirmed by the 4/2 Rule.

• Loans available 2/15/2020 through 6/30/2020

• Money is first come, first served (4/2 Rule)

• $349,000,000,000 available ($349 BILLION)

Paycheck Protection Program and Health Care Enhancement Act (became law April 24, 2020)

• Increased funds available to $659,000,000,000

• Set aside certain funds for smaller banks and credit unions

Paycheck Protection Program Flexibility Act of 2020 (became law June 5, 2020)

The Flexibility Act increases the minimum term of maturity, loosens forgiveness requirements, and allows PPP borrowers to take advantage of deferred taxes. These changes are in green

• increases the minimum term of maturity,

• loosens forgiveness requirements, and

• allows PPP borrowers to take advantage of deferred taxes

Program extended through December 31, 2020.

The Department of Treasury has also issued a number of rules:

• Interim Final Rule 1(originally posted 4/2/2020)

• Interim Final Rule on Applicable Affiliation Rules (originally posted 4/3/2020)

• Interim Final Rule on Additional Eligibility Criteria and Requirements for Certain Pledges of Loans (originally posted 4/14/2020)

• Interim Final Rule on Requirements for Promissory Notes, Authorizations, Affiliation, and Eligibility (originally posted 4/24/2020)

• Interim Final Rule Additional Criterion for Seasonal Employers (originally posted 4/27/2020)

• Interim Final Rule on Disbursements (originally posted 4/28/2020)

• Interim Final Rule on Corporate Groups and Non-Bank and Non-Insured Depository Institution Lenders (originally posted 4/30/2020)

• Interim Final Rule on Nondiscrimination and Additional Eligibility Criteria (originally posted 5/5/2020)

• Interim Final Rule on Extension of Limited Safe Harbor with Respect to Certification Concerning Need for PPP Loan Request (originally posted 5/8/2020)

• Interim Final Rule on Loan Increases (originally posted 5/13/2020)

• Interim Final Rule on Eligibility of Certain Electric Cooperatives (originally posted 5/14/2020)

• Interim Final Rule on Treatment of Entities with Foreign Affiliates (originally posted 5/18/2020)

• Interim Final Rule on Second Extension of Limited Safe Harbor with Respect to Certification Concerning Need for PPP Loan and Lender Reporting (originally posted 5/20/2020)

• Interim Final Rule on Loan Forgiveness (originally posted 5/22/2020)

• Interim Final Rule on SBA Loan Review Procedures and Related Borrower and Lender Responsibilities (originally posted 5/22/2020)

• Interim Final Rule on Eligibility of Certain Telephone Cooperatives (6/5/2020)

These rules clarify (and changes) certain provisions of the law.  These are shown in red with the date of the rule shown with the statement.

Finally, the Small Business Administration (SBA), in consultation with the Department of the Treasury issued Frequently Asked Questions to provide timely additional guidance to address borrower and lender questions concerning the implementation of the Paycheck Protection Program (PPP).  These FAQs have been updated on April 3, April 6, April 8, April 13, April 14, April 15, April 17, April 23, April 34, April 26, April 28, April 29, May 3, May 5, May 6 (revised May 27), May 13, and May 19.  These FAQs clarify certain provisions of the law, but do not carry the force and effect of law independent of the statute and regulations on which they are based. These are shown in gold with the question number provided.

Reports

Top-line Overview of PPP (3/31/2020)

SBA Paycheck Protection Program Loan Report (4/16/2020)

SBA Paycheck Protection Program Loan Report Round 2 (6/7/2020)

2. ELIGIBLE ENTITIES

• Small business concerns, business concerns, nonprofit organizations, veterans organizations, or Tribal business concerns who employ not more than 500 employees or SBA standard for industry (see also Q3)

  • Employees include full time, part-time and other basis

  • Qualified Small Business Concerns are eligible: (Q2) small business concerns can be eligible borrowers even if they have more than 500 employees, as long as they satisfy the existing statutory and regulatory definition of a “small business concern” under section 3 of the Small Business Act, 15 U.S.C. 632. A business can qualify if it meets the SBA employee-based or revenue-based size standard corresponding to its primary industry. Go to www.sba.gov/size for the industry size standards. Go to www.sba.gov/size for the industry size standard.

    • (Q2) A business that qualifies as a small business concern under section 3 of the Small Business Act, 15 U.S.C. 632, may truthfully attest to its eligibility for PPP loans on the Borrower Application Form, unless otherwise ineligible.

  • Includes Each Worker: (Q36) 500 employee limit includes each fulltime or part time worker: For purposes of loan eligibility, the CARES Act defines the term employee to include “individuals employed on a full-time, part-time, or other basis.” A borrower must therefore calculate the total number of employees, including part-time employees, when determining their employee headcount for purposes of the eligibility threshold. For example, if a borrower has 200 full-time employees and 50 part-time employees each working 10 hours per week, the borrower has a total of 250 employees. By contrast, for purposes of loan forgiveness, the CARES Act uses the standard of “fulltime equivalent employees” to determine the extent to which the loan forgiveness amount will be reduced in the event of workforce reductions.

  • Includes Student Workers: (5/5 Rule) Student workers generally count as employees, unless (a) the applicant is an institution of higher education, as defined in the Department of Education’s Federal Work-Study regulations, 34 675.2, and (b) the student worker’s services are performed as part of a Federal Work-Study Program (as defined in those regulations) or substantially similar program of a State or political subdivision thereof. Institutions of higher education must exclude work study students when determining the number of employees for PPP loan eligibility, and must also exclude payroll costs for work study students from the calculation of payroll costs used to determine their PPP loan amount.

  • Alternative Size Standard: (Q2) a business can qualify for the Paycheck Protection Program as a small business concern if it met both tests in SBA’s “alternative size standard” as of March 27, 2020: (1) maximum tangible net worth of the business is not more than $15 million; and (2) the average net income after Federal income taxes (excluding any carry-over losses) of the business for the two full fiscal years before the date of the application is not more than $5 million.

• Agricultural producers, farmers, and ranchers are eligible

  • (Q34) Agricultural producers, farmers, and ranchers are eligible for PPP loans if: (i) the business has 500 or fewer employees, or (ii) the business fits within the revenue-based sized standard, which is average annual receipts of $1 million. Additionally, agricultural producers, farmers, and ranchers can qualify for PPP loans as a small business concern if their business meets SBA’s “alternative size standard.” The “alternative size standard” is currently: (1) maximum net worth of the business is not more than $15 million, and (2) the average net income after Federal income taxes (excluding any carry-over losses) of the business for the two full fiscal years before the date of the application is not more than $5 million. For all of these criteria, the applicant must include its affiliates in its calculations. Link to Applicable Affiliation Rules for the PPP.

• Non-Profit Hospital eligible: (Q42) Non-Profit Hospitals qualify: Section 1102 of the CARES Act defines the term “nonprofit organization” as “an organization that is described in section 501(c)(3) of the Internal Revenue Code of 1986 and that is exempt from taxation under section 501(a) of such Code.” The Administrator, in consultation with the Secretary of the Treasury, understands that nonprofit hospitals exempt from taxation under section 115 of the Internal Revenue Code are unique in that many such hospitals may meet the description set forth in section 501(c)(3) of the Internal Revenue Code to qualify for tax exemption under section 501(a), but have not sought to be recognized by the IRS as such because they are otherwise fully tax-exempt under a different provision of the Internal Revenue Code. Accordingly, the Administrator will treat a nonprofit hospital exempt from taxation under section 115 of the Internal Revenue Code as meeting the definition of “nonprofit organization” under section 1102 of the CARES Act if the hospital reasonably determines, in a written record maintained by the hospital, that it is an organization described in section 501(c)(3) of the Internal Revenue Code and is therefore within a category of organization that is exempt from taxation under section 501(a).16 The hospital’s certification of eligibility on the Borrower Application Form cannot be made without this determination. This approach helps accomplish the statutory purpose of ensuring that a broad range of borrowers, including entities that are helping to lead the medical response to the ongoing pandemic, can benefit from the loans provided under the PPP. This guidance is solely for purposes of qualification as a “nonprofit organization” under section 1102 of the CARES Act and related purposes of the CARES Act, and does not have any consequences for federal tax law purposes. Nonprofit hospitals should also review all other applicable eligibility criteria, including the Interim Final Rules on Promissory Notes, Authorizations, Affiliation, and Eligibility (April 28, 2020) regarding an important limitation on ownership by state or local governments. 85 FR 23450, 23451.

• Government hospital eligible: (4/24 Rule) A hospital that is otherwise eligible to receive a PPP loan as a business concern or nonprofit organization (described in section 501(c)(3) of the Internal Revenue Code of 1986 and exempt from taxation under section 501(a) of such Code) shall not be rendered ineligible for a PPP loan due to ownership by a state or local government if the hospital receives less than 50% of its funding from state or local government sources, exclusive of Medicaid.

• Electrical Cooperatives Eligible: (5/14 Rule) Electric cooperatives provide utility services and distribute savings to their member-owners. Accordingly, for purposes of the PPP, the Administrator, in consultation with the Secretary, has determined that an electric cooperative that is exempt from Federal income taxation under section 501(c)(12) of the Internal Revenue Code will be considered to be ‘‘a business entity organized for profit’’ for purposes of 13 CFR 121.105(a)(1). As a result, such entities are eligible PPP borrowers, as long as other eligibility requirements are met. To be eligible, an electric cooperative must satisfy the employee based size standard established in the CARES Act, SBA’s employee-based size standard corresponding to its primary industry, if higher, or both tests in SBA’s ‘‘alternative size standard.’’ 1 The Administrator, in consultation with the Secretary, has determined that this treatment is appropriate to effectuate the purposes of the CARES Act to provide assistance to eligible PPP borrowers, including business concerns, affected by the COVID–19 emergency.

• Telephone Cooperatives Eligible: (6/5 Rule) Telephone cooperatives provide telecommunications services and return any excess of net operating revenues over their cost of operations to their member-owners, such as through capital credits. Accordingly, for purposes of the PPP, the Administrator, in consultation with the Secretary, has determined that a telephone cooperative that is exempt from federal income taxation under section 501(c)(12) of the Internal Revenue Code will be considered to be “a business entity organized for profit” for purposes of 13 CFR 121.105(a)(1). As a result, such entities are eligible PPP borrowers, as long as other eligibility requirements are met. To be eligible, a telephone cooperative must satisfy the employee-based size standard established in the CARES Act, SBA’s employee-based size standard corresponding to its primary industry, if higher, or both tests in SBA’s “alternative size standard.” The Administrator, in consultation with the Secretary, has determined that this treatment is appropriate to effectuate the purposes of the CARES Act to provide assistance to eligible PPP borrowers, including business concerns, affected by the COVID-19 emergency.

• Individuals who operate under a sole proprietorship or as an independent contractor and eligible self-employed individuals

• Accommodation or food service businesses that employ not more than 500 employees per physical location

• Gaming Enterprises Eligible: (4/14 Rule) A business that is otherwise eligible for a PPP Loan is not rendered ineligible due to its receipt of legal gaming revenues if the existing standard in 13 CFR 120.110(g) is met or the following two conditions are satisfied: (a) The business’s legal gaming revenue (net of payouts but not other expenses) did not exceed $1 million in 2019; and (b) legal gaming revenue (net of payouts but not other expenses) comprised less than 50 percent of the business’s total revenue in 2019. Businesses that received illegal gaming revenue are categorically ineligible. The Administrator, in consultation with the Secretary, believes this test appropriately balances the longstanding policy reasons for limiting lending to businesses primarily and substantially engaged in gaming activity with the policy aim of making the PPP Loan available to a broad segment of U.S. businesses and their employees

• (4/24 Rule) A business that is otherwise eligible for a PPP Loan is not rendered ineligible due to its receipt of legal gaming revenues, and 13 CFR 120.110(g) is inapplicable to PPP loans. Businesses that received illegal gaming revenue remain categorically ineligible. On further consideration, the Administrator, in consultation with the Secretary, believes this approach is more consistent with the policy aim of making PPP loans available to a broad segment of U.S. businesses.

• Hedge funds ineligible: (4/24 Rule) Hedge funds and private equity firms are primarily engaged in investment or speculation, and such businesses are therefore ineligible to receive a PPP loan. The Administrator, in consultation with the Secretary, does not believe that Congress intended for these types of businesses, which are generally ineligible for section 7(a) loans under existing SBA regulations, to obtain PPP financing.

• Entities in bankruptcy ineligible: (4/24 Rule) If the applicant or the owner of the applicant is the debtor in a bankruptcy proceeding, either at the time it submits the application or at any time before the loan is disbursed, the applicant is ineligible to receive a PPP loan. If the applicant or the owner of the applicant becomes the debtor in a bankruptcy proceeding after submitting a PPP application but before the loan is disbursed, it is the applicant’s obligation to notify the lender and request cancellation of the application. Failure by the applicant to do so will be regarded as a use of PPP funds for unauthorized purposes. The Administrator, in consultation with the Secretary, determined that providing PPP loans to debtors in bankruptcy would present an unacceptably high risk of an unauthorized use of funds or nonrepayment of unforgiven loans. In addition, the Bankruptcy Code does not require any person to make a loan or a financial accommodation to a debtor in bankruptcy.

• Companies receiving assistance from Small Business Investor Company

• Household employers ineligible: (4/2 Rule) Ineligible if you are a household employer (individuals who employ household employees such as nannies or housekeepers.

• Illegal Activity ineligible

  • (4/2 Rule) You are ineligible for a PPP loan if You are engaged in any activity that is illegal under federal, state, or local law

• Ownership by Criminal ineligible

  • (4/2 Rule) You are ineligible for a PPP loan if An owner of 20 percent or more of the equity of the applicant is incarcerated, on probation, on parole; presently subject to an indictment, criminal information, arraignment, or other means by which formal criminal charges are brought in any jurisdiction; or has been convicted of a felony within the last five years;

  • (Q12) Businesses are only ineligible if an owner of 20 percent or more of the equity of the applicant is presently incarcerated, on probation, on parole; subject to an indictment, criminal information, arraignment, or other means by which formal criminal charges are brought in any jurisdiction; or, within the last five years, for any felony, has been convicted; pleaded guilty; pleaded nolo contendere; been placed on pretrial diversion; or been placed on any form of parole or probation (including probation before judgment).

• Loan default ineligible

  • You are ineligible for a PPP loan if You, or any business owned or controlled by you or any of your owners, has ever obtained a direct or guaranteed loan from SBA or any other Federal agency that is currently delinquent or has defaulted within the last seven years and caused a loss to the government (4/2 Rule).

• (4/2 Rule) Businesses that are not eligible for PPP loans are identified in 13 CFR 120.110 and described further in SBA’s Standard Operating Procedure (SOP) 50 10, Subpart B, Chapter 2, except that nonprofit organizations authorized under the Act are eligible.

• (Q26) The SCC has authorized a blanket approval for PPP loans to entities to any entity that would normally require approval by SBA’s Standards of Conduct Committee (SCC) for SBA Assistance (an entity where its sole proprietor, partner, officer, director, or stockholder with a 10 percent or more interest is: a current SBA employee; a Member of Congress; an appointed official or employee of the legislative or judicial branch; a member or employee of an SBA Advisory Council or SCORE volunteer; or a household member of any of the preceding individuals), so that further action by the SCC is not necessary in the PPP program. (Q27) The SCC has also determined that a written statement of no objection is not required from another Government Department or Agency for PPP loans.

• One Loan: (4/2 Rule) Only one PPP loan for eligible entity

• But can increase loan amount for partner compensation: (5/13 Rule) If a partnership received a PPP loan that only included amounts necessary for payroll costs of the partnership’s employees and other eligible operating expenses, but did not include any amount for partner compensation,2 the lender may electronically submit a request through SBA’s E-Tran Servicing site to increase the PPP loan amount to include appropriate partner compensation, even if the loan has been fully disbursed, provided that the lender’s first SBA Form 1502 report to SBA on the PPP loan has not been submitted. After the initial SBA Form 1502 report on the PPP loan has been submitted to SBA, or after the date the first SBA Form 1502 was required to be submitted to SBA, the loan cannot be increased. In no event can the increased loan amount exceed the maximum loan amount allowed under the PPP Program, which is $10 million for an individual borrower or $20 million for a corporate group. Additionally, the borrower must provide the lender with required documentation to support the calculation of the increase.

• Seasonal employers can increase loan amount: (5/13 Rule) If a seasonal employer received a PPP loan before the alternative criterion for such employers was posted on April 28, 2020, and would be eligible for a higher maximum loan amount under the alternative criterion, the lender may electronically submit a request through SBA’s E-Tran Servicing site to increase the PPP loan amount, even if the loan has been fully disbursed, provided that the lender’s first SBA Form 1502 report to SBA on the PPP loan has not been submitted. After the initial SBA Form 1502 report has been submitted to SBA, or after the date the initial SBA Form 1502 report was required to be submitted to SBA, the loan cannot be increased. In no event can the increased loan amount exceed the maximum loan amount allowed under the PPP Program, which is $10 million for an individual borrower or $20 million for a corporate group. Additionally, the borrower must provide the lender with required documentation to support the calculation of the increase.

• Entities receiving a PPP loan forgiveness may still defer the payment for applicable employment taxes for 2020 (with 50% due on December 31, 2021 and the remaining amount due December 31, 2022).

A. Eligible entities-$10 Million Dollar Rule and Affliates

• (4/30 Rule) Loan limit is $10 million for an individual borrower or $20 million for a corporate group

• Affiliation rules are waived for accommodation or food service businesses and franchises

• (4/2 Rule) SBA intends to promptly issue additional guidance with regard to the applicability of affiliation rules at 13 CFR §§ 121.103 and 121.301 to PPP loans

• Special Rule Limiting PPP for single corporate group: (4/30 Rule) To preserve the limited resources available to the PPP program, and in light of the previous lapse of PPP appropriations and the high demand for PPP loans, businesses that are part of a single corporate group shall in no event receive more than $20,000,000 of PPP loans in the aggregate.1 For purposes of this limit, businesses are part of a single corporate group if they are majority owned, directly or indirectly, by a common parent. This limitation shall be immediately effective with respect to any loan that has not yet been fully disbursed as of April 30, 2020. It is the responsibility of an applicant for a PPP loan to notify the lender if the applicant has applied for or received PPP loans in excess of the amount permitted by this interim final rule and withdraw or request cancellation of any pending PPP loan application or approved PPP loan not in compliance with the limitation set forth in this rule. Failure by the applicant to do so will be regarded as a use of PPP funds for unauthorized purposes, and the loan will not be eligible for forgiveness. A lender may rely on an applicant’s representation concerning the applicant’s compliance with this limitation. The Administrator, in consultation with the Secretary, determined that limiting the amount of PPP loans that a single corporate group may receive will promote the availability of PPP loans to the largest possible number of borrowers, consistent with the CARES Act. The Administrator has concluded that a limitation of $20,000,000 strikes an appropriate balance between broad availability of PPP loans and program resource constraints. SBA’s affiliation rules, which relate to an applicant’s eligibility for PPP loans, and any waiver of those rules under the CARES Act, continue to apply independent of this limitation. Businesses are subject to this limitation even if the businesses are eligible for the waiver-of-affiliation provision under the CARES Act or are otherwise not considered to be affiliates under SBA’s affiliation rules. This rule has no effect on lender obligations required to obtain an SBA guarantee for PPP loans.

$10 Million Rule

• (Q23) Application of $10 million rule to franchisees: If a franchise brand is listed on the SBA Franchise Directory, each of its franchisees that meets the applicable size standard can apply for a PPP loan. (The franchisor does not apply on behalf of its franchisees.) The $10 million cap on PPP loans is a limit per franchisee entity, and each franchisee is limited to one PPP loan. Franchise brands that have been denied listing on the Directory because of affiliation between franchisor and franchisee may request listing to receive PPP loans. SBA will not apply affiliation rules to a franchise brand requesting listing on the Directory to participate in the PPP, but SBA will confirm that the brand is otherwise eligible for listing on the Directory.

• (Q24) Application of $10 million rule to Hotels and Restaurants: Under the CARES Act, any single business entity that is assigned a NAICS code beginning with 72 (including hotels and restaurants) and that employs not more than 500 employees per physical location is eligible to receive a PPP loan.

In addition, SBA’s affiliation rules (13 CFR 121.103 and 13 CFR 121.301) do not apply to any business entity that is assigned a NAICS code beginning with 72 and that employs not more than a total of 500 employees. As a result, if each hotel or restaurant location owned by a parent business is a separate legal business entity, each hotel or restaurant location that employs not more than 500 employees is permitted to apply for a separate PPP loan provided it uses its unique EIN.

The $10 million maximum loan amount limitation applies to each eligible business entity, because individual business entities cannot apply for more than one loan.

Affliations

• (Q4) It is the responsibility of the borrower to determine which entities (if any) are its affiliates and determine the employee headcount of the borrower and its affiliates. Lenders are permitted to rely on borrowers’ certifications.

• (Q5) Borrowers must apply the affiliation rules set forth in SBA’s Interim Final Rule on Affiliation. A borrower must certify on the Borrower Application Form that the borrower is eligible to receive a PPP loan, and that certification means that the borrower is a small business concern as defined in section 3 of the Small Business Act (15 U.S.C. 632), meets the applicable SBA employee-based or revenue-based size standard, or meets the tests in SBA’s alternative size standard, after applying the affiliation rules, if applicable. SBA’s existing affiliation exclusions apply to the PPP, including, for example the exclusions under 13 CFR 121.103(b)(2).

• (4/15 Rule) In most cases, a borrower will be considered together with its affiliates for purposes of determining eligibility for the PPP. Under SBA rules, entities may be considered affiliates based on factors including stock ownership, overlapping management,2 and identity of interest. 13 CFR 121.301

• Treatment of Foreign Affiliates: (5/18 Rule) The CARES Act specifies that an entity is eligible for a PPP loan only if it is (1) a small business concern, or (2) a business concern, nonprofit organization described in section 501(c)(3) of the Internal Revenue Code, veterans organization described in section 501(c)(19) of the Internal Revenue Code, or Tribal business concern described in section 31(b)(2)(C) of the Small Business Act that employs not more than the greater of 500 employees, or, if applicable, SBA’s employee-based size standard for the industry in which the entity operates. SBA’s affiliation regulations provide that to determine a concern’s size, employees of the concern ‘‘and all of its domestic and foreign affiliates’’ are included. 13 CFR 121.301(f). Therefore, to calculate the number of employees of an entity for purposes of determining eligibility for the PPP, an entity must include all employees of its domestic and foreign affiliates, except in those limited circumstances where the affiliation rules expressly do not apply to the entity. Any entity that, together with its domestic and foreign affiliates, does not meet the 500-employee or other applicable PPP size standard is therefore ineligible for a PPP loan.

  • Enforcement Discretion: (5/18 Rule) As an exercise of enforcement discretion due to reasonable borrower confusion based on SBA guidance (which was later resolved through a clarifying FAQ on May 5, 2020), SBA will not find any borrower that applied for a PPP loan prior to May 5, 2020 to be ineligible based on the borrower’s exclusion of non-U.S employees from the borrower’s calculation of its employee headcount if the borrower (together with its affiliates) 2 had no more than 500 employees whose principal place of residence is in the United States. Such borrowers shall not be deemed to have made an inaccurate certification of eligibility solely on that basis. Under no circumstances may PPP funds be used to support non-U.S. workers or operations.

  • (Q44) Employees of foreign and U.S. affiliates count toward the 500 employee limit: For purposes of the PPP’s 500 or fewer employee size standard, an applicant must count all of its employees and the employees of its U.S and foreign affiliates, absent a waiver of or an exception to the affiliation rules. 13 C.F.R. 121.301(f)(6). Business concerns seeking to qualify as a “small business concern” under section 3 of the Small Business Act (15 U.S.C. 632) on the basis of the employee-based size standard must do the same.

• (4/15 Rule) An entity generally is eligible for the PPP if it, combined with its affiliates, is a small business as defined in section 3 of the Small Business Act (15 U.S.C. 632), or (1) has 500 or fewer employees whose principal place of residence is in the United States or is a business that operates in a certain industry and meets applicable SBA employee-based size standards for that industry, and (2) is atax-exempt nonprofit organization described in section 501(c)(3) of the Internal Revenue Code (IRC), a taxexempt veterans organization described in section 501(c)(19) of the IRC, a Tribal business concern described in section 31(b)(2)(C) of the Small Business Act, or any other business concern. Prior to the Act, the nonprofit organizations listed above were not eligible for SBA Business Loan Programs under section 7(a) of the Small Business Act; only forprofit small business concerns were eligible. The Act made such nonprofit organizations not only eligible for the PPP, but also subjected them to SBA’s affiliation rules. Specifically, section 1102 of the Act provides that the provisions applicable to affiliations under 13 CFR 121.103 apply with respect to nonprofit organizations and veterans organizations in the same manner as with respect to small business concerns. However, the detailed affiliation standards contained in § 121.103 currently do not apply to PPP borrowers, because § 121.103(a)(8) provides that applicants in SBA’s Business Loan Programs (which include the PPP) are subject to the affiliation rule contained in 13 CFR 121.301.

• For Faith Based Organizations: (4/14 Rule) This rule exempts otherwise qualified faith-based organizations from the SBA’s affiliation rules, including those set forth in 13 CFR part 121, where the application of the affiliation rules would substantially burden those organizations’ religious exercise. This exemption is required, or at a minimum authorized, by the Religious Freedom Restoration Act (RFRA) (Pub. L. 103– 141), which provides that the ‘‘[g]overnment shall not substantially burden a person’s exercise of religion’’ unless the government can ‘‘demonstrate[] that application of the burden’’ to the person is both ‘‘in furtherance of a compelling governmental interest’’ and ‘‘the least restrictive means of furthering that compelling governmental interest.’’ 42 U.S.C. 2000bb–1.

• (Q6) If a minority shareholder in a business irrevocably waives or relinquishes any existing rights specified in 13 C.F.R. 121.301(f)(1), the minority shareholder would no longer be an affiliate of the business (assuming no other relationship that triggers the affiliation rules).

• Eligibility of portfolio company of a private equity fund: (4/24 Rule) Borrowers must apply the affiliation rules that appear in 13 CFR 121.301(f), as set forth in the Second PPP Interim Final Rule (85 FR 20817). The affiliation rules apply to private equity-owned businesses in the same manner as any other business subject to outside ownership or control. However, in addition to applying any applicable affiliation rules, all borrowers should carefully review the required certification on the Paycheck Protection Program Borrower Application Form (SBA Form 2483) stating that ‘‘[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.’’

• Participation in ESOP does not trigger affiliate rules: (4/24 Rule) For purposes of the PPP, a business’s participation in an ESOP (as defined in 15 U.S.C. 632(q)(6)) does not result in an affiliation between the business and the ESOP. The Administrator, in consultation with the Secretary, determined that this is appropriate given the nature of such plans. Under an ESOP, a business concern contributes its stock (or money to buy its stock or to pay off a loan that was used to buy stock) to the plan for the benefit of the company’s employees. The plan maintains an account for each employee participating in the plan. Shares of stock vest over time before an employee is entitled to them. However, with an ESOP, an employee generally does not buy or hold the stock directly while still employed with the company. Instead, the employee generally receives the shares in his or her personal account only upon the cessation of employment with the company, including retirement, disability, death, or termination

B. Eligible entities- Good Faith Requirement and Safe Harbor Repayment

• (Q31) Good Faith Requirement: In addition to reviewing applicable affiliation rules to determine eligibility,

  • (Q31) all borrowers must assess their economic need for a PPP loan under the standard established by the CARES Act and the PPP regulations at the time of the loan application.

  • (Q31) Although the CARES Act suspends the ordinary requirement that borrowers must be unable to obtain credit elsewhere (as defined in section 3(h) of the Small Business Act), borrowers still must certify in good faith that their PPP loan request is necessary.

  • (Q31) Specifically, before submitting a PPP application, all borrowers should review carefully the required certification that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.”

  • (Q31) Borrowers must make this certification in good faith, taking into account their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business. For example, it is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith, and such a company should be prepared to demonstrate to SBA, upon request, the basis for its certification.

  • (Q31) Lenders may rely on a borrower’s certification regarding the necessity of the loan request.

  • (Q37) Businesses owned by private companies with adequate sources of liquidity to support the business’s ongoing operations qualify for a PPP loan are not eligible

  • (Q39) SBA reminded all borrowers of an important certification required to obtain a PPP loan. To further ensure PPP loans are limited to eligible borrowers in need, the SBA has decided, in consultation with the Department of the Treasury, that it will review all loans in excess of $2 million, in addition to other loans as appropriate, following the lender’s submission of the borrower’s loan forgiveness application. Additional guidance implementing this procedure will be forthcoming. The outcome of SBA’s review of loan files will not affect SBA’s guarantee of any loan for which the lender complied with the lender obligations set forth in paragraphs III.3.b(i)-(iii) of the Paycheck Protection Program Rule (April 2, 2020) and further explained in FAQ #1.

  • (Q46) When submitting a PPP application, all borrowers must certify in good faith that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” SBA, in consultation with the Department of the Treasury, has determined that the following safe harbor will apply to SBA’s review of PPP loans with respect to this issue: Any borrower that, together with its affiliates,20 received PPP loans with an original principal amount of less than $2 million will be deemed to have made the required certification concerning the necessity of the loan request in good faith. 20 For purposes of this safe harbor, a borrower must include its affiliates to the extent required under the interim final rule on affiliates, 85 FR 20817 (April 15, 2020).

  • (Q46) SBA has determined that this safe harbor is appropriate because borrowers with loans below this threshold are generally less likely to have had access to adequate sources of liquidity in the current economic environment than borrowers that obtained larger loans. This safe harbor will also promote economic certainty as PPP borrowers with more limited resources endeavor to retain and rehire employees. In addition, given the large volume of PPP loans, this approach will enable SBA to conserve its finite audit resources and focus its reviews on larger loans, where the compliance effort may yield higher returns.

  • (Q46) Importantly, borrowers with loans greater than $2 million that do not satisfy this safe harbor may still have an adequate basis for making the required good-faith certification, based on their individual circumstances in light of the language of the certification and SBA guidance. SBA has previously stated that all PPP loans in excess of $2 million, and other PPP loans as appropriate, will be subject to review by SBA for compliance with program requirements set forth in the PPP Interim Final Rules and in the Borrower Application Form. If SBA determines in the course of its review that a borrower lacked an adequate basis for the required certification concerning the necessity of the loan request, SBA will seek repayment of the outstanding PPP loan balance and will inform the lender that the borrower is not eligible for loan forgiveness. If the borrower repays the loan after receiving notification from SBA, SBA will not pursue administrative enforcement or referrals to other agencies based on its determination with respect to the certification concerning necessity of the loan request. SBA’s determination concerning the certification regarding the necessity of the loan request will not affect SBA’s loan guarantee.

Repayment Safe Harbor

• (4/24 Rule) Consistent with section 1102 of the CARES Act, the Borrower Application Form requires PPP applicants to certify that ‘‘[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.’’ Any borrower that applied for a PPP loan prior to the issuance of this regulation and repays the loan in full by May 7, 2020 will be deemed by SBA to have made the required certification in good faith. The Administrator, in consultation with the Secretary, determined that this safe harbor is necessary and appropriate to ensure that borrowers promptly repay PPP loan funds that the borrower obtained based on a misunderstanding or misapplication of the required certification standard.

• Any borrower that applied for a PPP loan prior to the issuance of this guidance and repays the loan in full by May 7, 2020 will be deemed by SBA to have made the required certification in good faith.

  • Extension (5/8 Rule) Good faith repayment safe harbor extended to May 14, 2020 (also Q43)

  • Second Extension: (5/20 Rule) Good faith repayment safe harbor extended to May 18, 2020 (also Q47)

  • (Q45) An employer that applied for a PPP loan, received payment, and repays the loan by the safe harbor deadline (May 18, 2020) will be treated as though the employer had not received a covered loan under the PPP for purposes of the Employee Retention Credit. Therefore, the employer will be eligible for the credit if the employer is otherwise an eligible employer for purposes of the credit.

C. Eligible Entities-Broad Approval Requirements

• In operation on 2/15/2020

  • (Q9) In evaluating a borrower’s eligibility, a lender may consider whether a seasonal borrower was in operation on February 15, 2020 or for an 8-week period between February 15, 2019 and June 30, 2019. Flexibility Act may have changed to 12/30/2020

  • (Q38) Change of Ownership does not affect PPP: As long as the business was in operation on February 15, 2020, if it meets the other eligibility criteria, the business is eligible to apply for a PPP loan regardless of the change in ownership. In addition, where there is a change in ownership effectuated through a purchase of substantially all assets of a business that was in operation on February 15, the business acquiring the assets will be eligible to apply for a PPP loan even if the change in ownership results in the assignment of a new tax ID number and even if the acquiring business was not in operation until after February 15, 2020. If the acquiring business has maintained the operations of the pre-sale business, the acquiring business may rely on the historic payroll costs and headcount of the pre-sale business for the purposes of its PPP application, except where the pre-sale business had applied for and received a PPP loan. The Administrator, in consultation with the Secretary, has determined that the requirement that a business “was in operation on February 15, 2020” should be applied based on the economic realities of the business’s operations.

• Had employees for whom the borrower paid salaries and payroll taxes; or

• Paid independent contractors, as reported on a Form 1099–MISC

• (4/2 Rule) You are also eligible for a PPP loan if you are an individual who operates under a sole proprietorship or as an independent contractor or eligible self- employed individual, you were in operation on February 15, 2020.

• (4/2 Rule) e-signature or e-consents can be used regardless of the number of owners

• (Q11) Borrowers can accept signatures from individual authorized to sign on behalf of the borrower. However, the borrower should bear in mind that, as the Borrower Application Form indicates, only an authorized representative of the business seeking a loan may sign on behalf of the business. An individual’s signature as an “Authorized Representative of Applicant” is a representation to the lender and to the U.S. government that the signer is authorized to make the certifications, including with respect to the applicant and each owner of 20% or more of the applicant’s equity, contained in the Borrower Application Form. Lenders may rely on that representation and accept a single individual’s signature on that basis.

D. Eligible Entities-Borrower Requirements

• Good Faith Certification (on application) (4/2 Rule)

  • (4/2 Rule) 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;

    • that uncertainty of current economic conditions makes necessary the loan request to support the ongoing operations of the eligible recipient;

    • acknowledging that funds will be used to retain workers and maintain payroll or make mortgage payments, lease payments, and utility payments;

  • (4/2 Rule) 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;

  • (4/2 Rule) Loan forgiveness will be provided for the sum of documented payroll costs, covered mortgage interest payments, covered rent payments, and covered utilities. As explained above, not more than 25 percent of the forgiven amount may be for non-payroll costs;

  • does not have an application pending for a loan under this subsection for the same purpose and duplicative of amounts applied for or received under a covered loan;

  • has not received amounts under this subsection for the same purpose and duplicative of amounts applied for or received under a covered loan during the period beginning on 2/15/2020 and ending on 12/31/2020;

  • (4/2 Rule) 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;

  • (4/2 Rule) 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.

• the requirement that a small business concern is unable to obtain credit elsewhere does not apply

• can be combined with economic injury disaster loan under 7(b)(2)

• (4/2 Rule) For loans made under the PPP, SBA will not require the lenders to comply with section 120.150 “What are SBA’s lending criteria?.” SBA will allow lenders to rely on certifications of the borrower in order to determine eligibility of the borrower and use of loan proceeds and to rely on specified documents provided by the borrower to determine qualifying loan amount and eligibility for loan forgiveness. Lenders must comply with the applicable lender obligations set forth in this interim final rule, but will be held harmless for borrowers’ failure to comply with program criteria; remedies for borrower violations or fraud are separately addressed in this interim final rule. The program requirements of the PPP identified in this rule temporarily supersede any conflicting Loan Program Requirement (as defined in 13 CFR 120.10.

• (4/2 Rule) You must also submit such documentation as is necessary to establish eligibility such as payroll processor records, payroll tax filings, or Form 1099- MISC, or income and expenses from a sole proprietorship. For borrowers that do not have any such documentation, the borrower must provide other supporting documentation, such as bank records, sufficient to demonstrate the qualifying payroll amount.

 E. Eligible Borrowers-Independent Contractors

• (4/2 Rule) Independent contractors have the ability to apply for a PPP loan on their own, so they do not count for purposes of a borrower’s PPP loan calculation.

• Eligibility of Self-employed filing a 1040, schedule C: (4/14 Rule) You are eligible for a PPP loan if: (i) You were in operation on February 15, 2020; (ii) you are an individual with self-employment income (such as an independent contractor or a sole proprietor); (iii) your principal place of residence is in the United States; and (iv) you filed or will file a Form 1040 Schedule C for 2019. However, if you are a partner in a partnership, you may not submit a separate PPP loan application for yourself as a selfemployed individual. Instead, the selfemployment income of general active partners may be reported as a payroll cost, up to $100,000 annualized, on a PPP loan application filed by or on behalf of the partnership. Partnerships are eligible for PPP loans under the Act, and the Administrator has determined, in consultation with the Secretary of the Treasury (Secretary), that limiting a partnership and its partners (and an LLC filing taxes as a partnership) to one PPP loan is necessary to help ensure that as many eligible borrowers as possible obtain PPP loans before the statutory deadline of June 30, 2020. This limitation will allow lenders to more quickly process applications and lower the burdens of applying for partnerships/partners. The Administrator has further determined that permitting partners to apply as selfemployed individuals would create unnecessary confusion regarding which entity, the partner or the partnership, applies for partner and LLC member income, and would generate loan proceeds use coordination and allocation issues. Rent, mortgage interest, utilities, and other debt service are generally incurred at the partnership level, not partner level, so it is most natural to provide the funds for these expenses to the partnership, not individual partners. In addition, you should be aware that participation in the PPP may affect your eligibility for state-administered unemployment compensation or unemployment assistance programs, including the programs authorized by Title II, Subtitle A of the CARES Act, or CARES Act Employee Retention Credits. SBA will issue additional guidance for those individuals with self-employment income who: (i) Were not in operation in 2019 but who were in operation on February 15, 2020, and (ii) will file a Form 1040 Schedule C for 2020.

• Maximum Amount to borrow and documentation: (4/14 Rule) How you calculate your maximum loan amount depends upon whether or not you employ other individuals. If you have no employees, the following methodology should be used to calculate your maximum loan amount: i. Step 1: Find your 2019 IRS Form 1040 Schedule C line 31 net profit amount (if you have not yet filed a 2019 return, fill it out and compute the value). If this amount is over $100,000, reduce it to $100,000. If this amount is zero or less, you are not eligible for a PPP loan. ii. Step 2: Calculate the average monthly net profit amount (divide the amount from Step 1 by 12). iii. Step 3: Multiply the average monthly net profit amount from Step 2 by 2.5. iv. Step 4: Add the outstanding amount of any Economic Injury Disaster Loan (EIDL) made between January 31, 2020 and April 3, 2020 that you seek to refinance, less the amount of any advance under an EIDL COVID–19 loan (because it does not have to be repaid). Regardless of whether you have filed a 2019 tax return with the IRS, you must provide the 2019 Form 1040 Schedule C with your PPP loan application to substantiate the applied-for PPP loan amount and a 2019 IRS Form 1099– MISC detailing nonemployee compensation received (box 7), invoice, bank statement, or book of record that establishes you are self-employed. You must provide a 2020 invoice, bank statement, or book of record to establish you were in operation on or around February 15, 2020.

• (4/14 Rule) Different rule if have employees

• Use of Proceeds: (4/14 Rule) The proceeds of a PPP loan are to be used for the following.

  • i. Owner compensation replacement, calculated based on 2019 net profit as described in Paragraph 1.b. above.

  • ii. Employee payroll costs (as defined in the First PPP Interim Final Rule) for employees whose principal place of residence is in the United States, if you have employees.

  • iii. Mortgage interest payments (but not mortgage prepayments or principal payments) on any business mortgage obligation on real or personal property (e.g., the interest on your mortgage for the warehouse you purchased to store business equipment or the interest on an auto loan for a vehicle you use to perform your business), business rent payments (e.g., the warehouse where you store business equipment or the vehicle you use to perform your business), and business utility payments (e.g., the cost of electricity in the warehouse you rent or gas you use driving your business vehicle). You must have claimed or be entitled to claim a deduction for such expenses on your 2019 Form 1040 Schedule C for them to be a permissible use during the eight-week period following the first disbursement of the loan (the ‘‘covered period’’). For example, if you did not claim or are not entitled to claim utilities expenses on your 2019 Form 1040 Schedule C, you cannot use the proceeds for utilities during the covered period.

  • iv. Interest payments on any other debt obligations that were incurred before February 15, 2020 (such amounts are not eligible for PPP loan forgiveness).

  • v. Refinancing an SBA EIDL loan made between January 31, 2020 and April 3, 2020 (maturity will be reset to PPP’s maturity of two years).

  • The Administrator, in consultation with the Secretary, determined that it is appropriate to limit self-employed individuals’ (who file a Form 1040 Schedule C) use of loan proceeds to those types of allowable uses for which the borrower made expenditures in 2019.

• Limitation on Forgiveness: (4/14 Rule) At least 75 percent of the PPP loan proceeds shall be used for payroll costs. For purposes of determining the percentage of use of proceeds for payroll costs (but not for forgiveness purposes), the amount of any refinanced EIDL will be included. (Decreased to 60 percent by Flexibility Act)

• Amount of forgiveness: (4/14 Rule) The amount of loan forgiveness can be up to the full principal amount of the loan plus accrued interest. The actual amount of loan forgiveness will depend, in part, on the total amount spent over the covered period on:

  • i. Payroll costs including salary, wages, and tips, up to $100,000 of annualized pay per employee (for eight weeks, a maximum of $15,385 per individual), as well as covered benefits for employees (but not owners), including health care expenses, retirement contributions, and state taxes imposed on employee payroll paid by the employer (such as unemployment insurance premiums);

  • ii. owner compensation replacement, calculated based on 2019 net profit as described in Paragraph 1.b. above, with forgiveness of such amounts limited to eight weeks’ worth (8/52) of 2019 net profit, but excluding any qualified sick leave equivalent amount for which a credit is claimed under section 7002 of the Families First Coronavirus Response Act (FFCRA) (Pub. L. 116–127) or qualified family leave equivalent amount for which a credit is claimed under section 7004 of FFCRA;

  • iii. payments of interest on mortgage obligations on real or personal property incurred before February 15, 2020, to the extent they are deductible on Form 1040 Schedule C (business mortgage payments);

  • iv. rent payments on lease agreements in force before February 15, 2020, to the extent they are deductible on Form 1040 Schedule C (business rent payments); and

  • v. utility payments under service agreements dated before February 15, 2020 to the extent they are deductible on Form 1040 Schedule C (business utility payments). The Administrator, in consultation with the Secretary, has determined that it is appropriate to limit the forgiveness of owner compensation replacement for individuals with self-employment income who file a Schedule C to eight weeks’ worth (8/52) of 2019 net profit

3. PROGRAM

A. Program-Recommended paperwork for application

Documentation required for a loan as shown on the application includes:

1. 2019 IRS Quarterly 940, 941 or 944 payroll tax reports.

2. Last 12 months of Payroll Reports beginning with your last payroll date and going backwards 12 months showing:

   1. Gross wages for each employee, including the officer(s) if paid W-2 wages

   2. Paid time off for each employee

   3. Vacation pay for each employee

   4. Family medical leave pay for each employee

   5. State and Local taxes assessed on the employee’s compensation for each employee

3. 1099s for 2019 for independent contractors that would otherwise be an employee of your business

   1. Do NOT include 1099s for services.

4. Documentation showing total of all health insurance premiums paid by the Company Owner under a group health plan.

   1. Include all employees and the company owners.

5. Document the sum of all retirement plan funding that was paid by the Company Owner (do not include funding that came from the employee’s out of their paycheck deferrals

   1. Include all employees, including company owners.

   2. 401K plans, Simple IRA, SEP IRAs.

B. Program-Maximum Loan Amount

• 2 ½ months of average total monthly payroll costs during prior one-year period

  • Special rules for seasonal employers

  • Special rules for a new business less than 1 year old

  • (Q14) In general, borrowers can calculate their aggregate payroll costs using data either from the previous 12 months or from calendar year 2019. For seasonal businesses, the applicant may use average monthly payroll for the period between February 15, 2019, or March 1, 2019, and June 30, 2019. An applicant that was not in business from February 15, 2019 to June 30, 2019 may use the average monthly payroll costs for the period January 1, 2020 through February 29, 2020.

  • (Q14) Borrowers may use their average employment over the same time periods to determine their number of employees, for the purposes of applying an employee-based size standard. Alternatively, borrowers may elect to use SBA’s usual calculation: the average number of employees per pay period in the 12 completed calendar months prior to the date of the loan application (or the average number of employees for each of the pay periods that the business has been operational, if it has not been operational for 12 months).

    • (Q 41) Employers can certify is use alternative period: The Borrower Application Form requires applicants to certify that “The Applicant is eligible to receive a loan under the rules in effect at the time this application is submitted that have been issued by the Small Business Administration (SBA) implementing the Paycheck Protection Program.” On April 27, 2020, Treasury issued an interim final rule allowing seasonal borrowers to use an alternative base period for purposes of calculating the loan amount for which they are eligible under the PPP. An applicant that is otherwise in compliance with applicable SBA requirements, and that complies with Treasury’s interim final rule on seasonal workers, will be deemed eligible for a PPP loan under SBA rules. Instead of following the instructions on page 3 of the Borrower Application Form for the time period for calculating average monthly payroll for seasonal businesses, an applicant may elect to use the time period in Treasury’s interim final rule on seasonal workers.

• (4/2 Rule) The Rule contains a methodology to determine the maximum payroll amount:

Step 1: Aggregate payroll costs (defined in detail below in f.) from the last twelve months for employees whose principal place of residence is the United States (4/2 Rule),

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 (4/2 Rule).

Step 3: Calculate average monthly payroll costs (divide the amount from Step 2 by 12) (4/2 Rule).

Step 4: Multiply the average monthly payroll costs from Step 3 by 2.5 (4/2 Rule).

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) (4/2 Rule).

• Outstanding amount of any (b)(2) loans made beginning on 1/31/2020

• Maximum loan of $10 million. (Confirmed by the 4/2 Rule).

Seasonal employees

• Maximum Loan Amount

  • (4/27 Rule) Under section 1102 of the CARES Act, a seasonal employer may determine its maximum loan amount for purposes of the PPP by reference to the employer’ average total monthly payments for payroll ‘‘the 12-week period beginning February 15, 2019, or at the election of the eligible [borrower], March 1, 2019, and ending June 30, 2019.’’ Under this interim final rule issued pursuant to section 1109 of the Act, a seasonal employer may alternatively elect to determine its maximum loan amount as the average total monthly payments for payroll during any consecutive 12-week period between May 1, 2019 and September 15, 2019.

• Not operating on 2/15/2020

  • (4/27 Rule) In evaluating eligibility, a seasonal business will be considered to have been in operation as of February 15, 2020, if the business was in operation for any 8-week period between May 1, 2019 and September 15, 2019. This approach aligns with guidance previously provided by the Small Business Administration concerning other seasonal businesses under section 1102

C. Program - Payroll costs are 

• salary, wage or commission

  • does not include salary at rate of over $100K per year

    • (Q7) The exclusion of compensation in excess of $100,000 annually applies only to cash compensation, not to non-cash benefits, including:

      • employer contributions to defined-benefit or defined-contribution retirement plans;

      • payment for the provision of employee benefits consisting of group health care coverage, including insurance premiums; and

      • payment of state and local taxes assessed on compensation of employees.

  • does not include certain taxes

  • does not include employees with principal place of residence outside of the United States

  • (Q8) includes payroll costs, including costs for employee vacation, parental, family, medical, and sick leave.

  • (Q8) the CARES Act excludes 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).

  • does not include qualified sick leave with credit under the Families First Coronavirus Response Act

  • does not include qualified family leave with credit under the Families First Coronavirus Response Act

  • (Q32) Payroll costs includes all cash compensation paid to employees, subject to the $100,000 annual compensation per employee limitation.

• payment of cash tips,

• dismissal/separation analysis

• group healthcare benefits

• retirement benefits

• state or local tax on compensation

• also the sum of payments of any compensation to or income of a sole proprietor or independent contractor that is a wage, commission, income, net earnings from self-employment, or similar compensation and that is in an amount that is not more than $100,000 in 1 year, as pro-rated for the covered period

• (4/2 Rule) 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.

• Excludes:

  • Independent contractors have the ability to apply for a PPP loan on their own, so they do not count for purposes of a borrower’s PPP loan calculation (4/2 Rule).

  • Any compensation of an employee whose principal place of residence is outside of the United States (4/2 Rule);

  • The compensation of an individual employee in excess of an annual salary of $100,000, prorated as necessary (4/2 Rule);

  • 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 (4/2 Rule); 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 (Public Law 116–127) (4/2 Rule).

• (Q33) PPP applicants and lenders may consider IRS regulations (26 CFR § 1.121- 1(b)(2)) when determining whether an individual employee’s principal place of residence is in the United States.

• (Q15) Any amounts that an eligible borrower has paid to an independent contractor or sole proprietor should be excluded from the eligible business’s payroll costs. However, an independent contractor or sole proprietor will itself be eligible for a loan under the PPP, if it satisfies the applicable requirements.

• (Q16) Under the Act, payroll costs are calculated on a gross basis without regard to (i.e., not including subtractions or additions based on) federal taxes imposed or withheld, such as the employee’s and employer’s share of Federal Insurance Contributions Act (FICA) and income taxes required to be withheld from employees. As a result, payroll costs are not reduced by taxes imposed on an employee and required to be withheld by the employer, but payroll costs do not include the employer’s share of payroll tax. For example, an employee who earned $4,000 per month in gross wages, from which $500 in federal taxes was withheld, would count as $4,000 in payroll costs. The employee would receive $3,500, and $500 would be paid to the federal government. However, the employer-side federal payroll taxes imposed on the $4,000 in wages are excluded from payroll costs under the statute.

• (Q10) SBA recognizes that eligible borrowers that use PEOs or similar payroll providers are required under some state registration laws to report wage and other data on the Employer Identification Number (EIN) of the PEO or other payroll provider. In these cases, payroll documentation provided by the payroll provider that indicates the amount of wages and payroll taxes reported to the IRS by the payroll provider for the borrower’s employees will be considered acceptable PPP loan payroll documentation. Relevant information from a Schedule R (Form 941), Allocation Schedule for Aggregate Form 941 Filers, attached to the PEO’s or other payroll provider’s Form 941, Employer’s Quarterly Federal Tax Return, should be used if it is available; otherwise, the eligible borrower should obtain a statement from the payroll provider documenting the amount of wages and payroll taxes. In addition, employees of the eligible borrower will not be considered employees of the eligible borrower’s payroll provider or PEO.

D. Program-Allowable uses

• existing allowable uses for 7(a) loans

  • the Administrator believes that finite appropriations and the structure of the Act warrant a requirement that borrowers use a substantial portion of the loan proceeds for payroll costs, consistent with Congress’ overarching goal of keeping workers paid and employed (4/2 Rule).

• payroll costs

  • must be at least 75% used for payroll (4/2 Rule).

• costs related to the continuation of group health care benefits during periods of paid sick, medical, or family leave, and insurance premiums

• employee salaries, commissions, or similar compensations

• payments of interest on mortgage, but not payment of principal)

• rent

• utilities

• interest on other debt obligations incurred before the covered period

• if misused: 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 funds for unauthorized purposes, SBA will have recourse against the shareholder, member, or partner for the unauthorized use (4/2 Rule).

4. FORGIVENESS 

• For 8 weeks 24 weeks beginning on date of origination of loan

• (Q20) The eight-week 24 week period begins on the date the lender makes the first disbursement of the PPP loan to the borrower. The lender must make the first disbursement of the loan no later than ten calendar days from the date of loan approval. (It is unclear whether the Flexibility Act overruled the disbursement date language from the FAQs).

• (5/22 Rule) Payroll costs paid or incurred during the eight consecutive week (56 days) covered period are eligible for forgiveness.

• Flexibility Act extended to 24 weeks after date of origination or December 31, 2020

• Flexibility Act also allowed recipients of a covered loan before this date to end on a date 8 weeks after origination.

  • Payroll costs including

    • Costs related to the continuation of group health care benefits during periods of paid sick, medical, or family leave, and insurance premiums (4/2 Rule);

    • 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) (5/22 Rule);

    • payment for vacation, parental, family, medical, or sick leave (5/22 Rule);

    • allowance for separation or dismissal (5/22 Rule);

    • 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 (5/22 Rule); and

    • for an independent contractor or sole proprietor, wages, commissions, income, or net earnings from self-employment, or similar compensation (5/22 Rule)

    • Hazard Pay and payment to furloughed employees included: (5/22 Rule) The CARES Act defines the term ‘‘payroll costs’’ broadly to include compensation in the form of salary, wages, commissions, or similar compensation. If a borrower pays furloughed employees their salary, wages, or commissions during the covered period, those payments are eligible for forgiveness as long as they do not exceed an annual salary of $100,000, as prorated for the covered period. The Administrator, in consultation with the Secretary, has determined that this interpretation is consistent with the text of the statute and advances the paycheck protection purposes of the statute by enabling borrowers to continue paying their employees even if those employees are not able to perform their day-to-day duties, whether due to lack of economic demand or public health considerations. This intent is reflected throughout the statute, including in section 1106(d)(4) of the Act, which provides that additional wages paid to tipped employees are eligible for forgiveness. The Administrator, in consultation with the Secretary, has also determined that, if an employee’s total compensation does not exceed $100,000 on an annualized basis, the employee’s hazard pay and bonuses are eligible for loan forgiveness because they constitute a supplement to salary or wages, and are thus a similar form of compensation.

  • Payment of mortgage interest (not principal) (4/2 Rule)

  • Payment of rent

  • Utility payments (electricity, gas, water, transportation, telephone, or internet access for which service began before February 15, 2020)

    • Non payroll costs are Payment of mortgage interest, Payment of rent, and Utility payments (5/22 Rule)

Requirements for Payroll costs

• Date of Payroll: (5/22 Rule) Borrowers may seek forgiveness for payroll costs for the eight weeks beginning on either: i. The date of disbursement of the borrower’s PPP loan proceeds from the Lender (i.e., the start of the covered period); or ii. the first day of the first payroll cycle in the covered period (the ‘‘alternative payroll covered period’’). Payroll costs are considered paid on the day that paychecks are distributed or the borrower originates an ACH credit transaction. Payroll costs incurred during the borrower’s last pay period of the covered period or the alternative payroll covered period are eligible for forgiveness if paid on or before the next regular payroll date; otherwise, payroll costs must be paid during the covered period (or alternative payroll covered period) to be eligible for forgiveness. Payroll costs are generally incurred on the day the employee’s pay is earned (i.e., on the day the employee worked). For employees who are not performing work but are still on the borrower’s payroll, payroll costs are incurred based on the schedule established by the borrower (typically, each day that the employee would have performed work)

  • (5/22 Rule) For administrative convenience of the borrower, a borrower with a bi-weekly (or more frequent) payroll cycle may elect to use an alternative payroll covered period that begins on the first day of the first payroll cycle in the covered period and continues for the following eight weeks. If payroll costs are incurred during this eight-week alternative payroll covered period, but paid after the end of the alternative payroll covered period, such payroll costs will be eligible for forgiveness if they are paid no later than the first regular payroll date thereafter.

• Owners-Employees Compensation Capped: (5/22 Rule) The amount of loan forgiveness requested for owner-employees and selfemployed individuals’ payroll compensation can be no more than the lesser of 8/52 of 2019 compensation (i.e., approximately 15.38 percent of 2019 compensation) or $15,385 per individual in total across all businesses. See 85 FR 21747, 21750. In particular, owner-employees are capped by the amount of their 2019 employee cash compensation and employer retirement and health care contributions made on their behalf. Schedule C filers are capped by the amount of their owner compensation replacement, calculated based on 2019 net profit.3 General partners are capped by the amount of their 2019 net earnings from self-employment (reduced by claimed section 179 expense deduction, unreimbursed partnership expenses, and depletion from oil and gas properties) multiplied by 0.9235. No additional forgiveness is provided for retirement or health insurance contributions for self-employed individuals, including Schedule C filers and general partners, as such expenses are paid out of their net selfemployment income.

Requirements Non-payroll Costs

• Non payroll costs eligible: (5/22 Rule) A nonpayroll cost is eligible for forgiveness if it was:

  • i. Paid during the covered period; or

  • ii. incurred during the covered period and paid on or before the next regular billing date, even if the billing date is after the covered period.

• Advance Payments and Principal ineligible: (5/22 Rule) Advance payments of interest on a covered mortgage obligation are not eligible for loan forgiveness because the CARES Act’s loan forgiveness provisions regarding mortgage obligations specifically exclude ‘‘prepayments.’’ Principal on mortgage obligations is not eligible for forgiveness under any circumstances.

• Considered cancelled indebtedness

Reduction explained: (5/22 Rule) Section 1106 of the CARES Act specifically requires certain reductions in a borrower’s loan forgiveness amount based on reductions in full-time equivalent employees or in employee salary and wages during the covered period, subject to an important statutory exemption for borrowers who have rehired employees and restored salary and wage levels by June 30, 2020 (with limitations). In addition, SBA and Treasury are adopting a regulatory exemption to the reduction rules for borrowers who have offered to rehire employees or restore employee hours, even if the employees have not accepted.

• Exception for Employees who decline offer of re-employment: (5/22 Rule) Employees whom the borrower offered to rehire are generally exempt from the CARES Act’s loan forgiveness reduction calculation. This exemption is also available if a borrower previously reduced the hours of an employee and offered to restore the employee’s hours at the same salary or wages. Specifically, in calculating the loan forgiveness amount, a borrower may exclude any reduction in full-time equivalent employee headcount that is attributable to an individual employee if:

  • i. The borrower made a good faith, written offer to rehire such employee (or, if applicable, restore the reduced hours of such employee) during the covered period or the alternative payroll covered period;

  • ii. the offer was for the same salary or wages and same number of hours as earned by such employee in the last pay period prior to the separation or reduction in hours;

  • iii. the offer was rejected by such employee;

  • iv. the borrower has maintained records documenting the offer and its rejection; and

  • v. the borrower informed the applicable state unemployment insurance office of such employee’s rejected offer of reemployment within 30 days of the employee’s rejection of the offer.

  • To the extent any portion of this rule contradicts the Flexibility Act, the Act would apply.

• Effect of reduction of FTE employees: (5/22 Rule) In general, a reduction in FTE employees during the covered period or the alternative payroll covered period reduces the loan forgiveness amount by the same percentage as the percentage reduction in FTE employees. The borrower must first select a reference period:

  • (i) February 15, 2019 through June 30, 2019;

  • (ii) January 1, 2020 through February 29, 2020; or

  • (iii) in the case of a seasonal employer, either of the two preceding methods or a consecutive 12-week period between May 1, 2019 and September 15, 2019 If the average number of FTE employees during the covered period or the alternative payroll covered period is less than during the reference period, the total eligible expenses available for forgiveness is reduced proportionally by the percentage reduction in FTE employees.

  • For example, if a borrower had 10.0 FTE employees during the reference period and this declined to 8.0 FTE employees during the covered period, the percentage of FTE employees declined by 20 percent and thus only 80 percent of otherwise eligible expenses are available for forgiveness.

• What is a FTE? (5/22 Rule) Full-time equivalent employee means an employee who works 40 hours or more, on average, each week. The hours of employees who work less than 40 hours are calculated as proportions of a single full-time equivalent employee and aggregated, as explained further below in subsection d. The CARES Act does not define the term ‘‘full-time equivalent employee,’’ and the Administrator, in consultation with the Secretary, has determined that full-time equivalent is best understood to mean 40 hours or more of work each week. The Administrator considered using a 30 hour standard, but determined that 40 hours or more of work each week better reflects what constitutes full-time employment for the vast majority of American workers.

• How do you calculate FTE? (5/22 Rule) Borrowers seeking forgiveness must document their average number of FTE employees during the covered period (or the alternative payroll covered period) and their selected reference period. For purposes of this calculation, borrowers must divide the average number of hours paid for each employee per week by 40, capping this quotient at 1.0. For example, an employee who was paid 48 hours per week during the covered period would be considered to be an FTE employee of 1.0. For employees who were paid for less than 40 hours per week, borrowers may choose to calculate the full-time equivalency in one of two ways. First, the borrower may calculate the average number of hours a part-time employee was paid per week during the covered period. For example, if an employee was paid for 30 hours per week on average during the covered period, the employee could be considered to be an FTE employee of 0.75. Similarly, if an employee was paid for ten hours per week on average during the covered period, the employee could be considered to be an FTE employee of 0.25. Second, for administrative convenience, borrowers may elect to use a full-time equivalency of 0.5 for each part-time employee. The Administrator recognizes that not all borrowers maintain hours-worked data, and has decided to afford such borrowers this flexibility in calculating the full-time equivalency of their part-time employees. Borrowers may select only one of these two methods, and must apply that method consistently to all of their parttime employees for the covered period or the alternative payroll covered period and the selected reference period. In either case, the borrower shall provide the aggregate total of FTE employees for both the selected reference period and the covered period or the alternative payroll covered period, by adding together all of the employee-level FTE employee calculations. The borrower must then divide the average FTE employees during the covered period or the alternative payroll covered period by the average FTE employees during the selected reference period, resulting in the reduction quotient.

• Effect of reduction in salary or wages: (5/22 Rule) Under section 1106(d)(3) of the CARES Act, a reduction in an employee’s salary or wages in excess of 25 percent will generally result in a reduction in the loan forgiveness amount, unless an exception applies. Specifically, for each new employee in 2020 and each existing employee who was not paid more than the annualized equivalent of $100,000 in any pay period in 2019, the borrower must reduce the total forgiveness amount by the total dollar amount of the salary or wage reductions that are in excess of 25 percent of base salary or wages between January 1, 2020 and March 31, 2020 (the reference period), subject to exceptions for borrowers who restore reduced wages or salaries (see g. below). This reduction calculation is performed on a per employee basis, not in the aggregate.

• Relationship of diminished FTE and diminished wages: (5/22 Rule) To ensure that borrowers are not doubly penalized, the salary/wage reduction applies only to the portion of the decline in employee salary and wages that is not attributable to the FTE reduction. The Act does not address the intersection between the FTE employee reduction provision in section 1106(d)(2) and the salary/wage reduction provision in section 1106(d)(3). To help ensure uniformity across all borrowers in applying the FTE reduction provision and the salary/wage reduction provision, the Administrator, in consultation with the Secretary, has determined that the salary/wage reduction applies only to the portion of the decline in employee salary and wages that is not attributable to the FTE reduction. This approach will help ensure that borrowers are not doubly penalized for reductions.

• Reduced if employees or wages are reduced

  • Forgiveness amount is reduced by a formula based on the reduction in number of FTE employees during the 8 week covered period after origination

  • Employer chooses reference period (2/15/2019-6/30/2019 or 1/1/2020-2/29/2020)

  • Only reduced if greater than 25% loss of FTE

  • Special rules for seasonal employees

  • Average per pay period

• “Original Safe harbor”: No reduction if return to full employment by 6/30/2020 (now 12/31/2020).

• Can avoid reduction if restore wages or FTE: (5/22 Rule) Section 1106(d)(5) of the CARES Act provides that if certain employee salaries and wages were reduced between February 15, 2020 and April 26, 2020 (the safe harbor period) but the borrower eliminates those reductions by June 30, 2020 or earlier, the borrower is exempt from any reduction in loan forgiveness amount that would otherwise be required due to reductions in salaries and wages under section 1106(d)(3) of the CARES Act. Similarly, if a borrower eliminates any reductions in FTE employees occurring during the safe harbor period by June 30, 2020 or earlier, the borrower is exempt from any reduction in loan forgiveness amount that would otherwise be required due to reductions in FTE employees.

• Employee who is fired for cause, voluntarily resigns, or voluntarily requests a schedule reduction: (5/22 Rule) When an employee of the borrower is fired for cause, voluntarily resigns, or voluntarily requests a reduced schedule during the covered period or the alternative payroll covered period (FTE reduction event), the borrower may count such employee at the same full-time equivalency level before the FTE reduction event when calculating the section 1106(d)(2) FTE employee reduction penalty. The Administrator and the Secretary have decided to exempt such employees from the calculation of the FTE reduction penalty. Section 1106 is silent concerning how to account for employees who are fired for cause, voluntarily resign, or voluntarily request a reduced schedule. The Administrator and the Secretary have determined that such an exemption is de minimis, because a limited number of borrowers will face an FTE reduction event during the covered period or the alternative payroll covered period. Further, borrowers should not be penalized for changes in employee headcount that are the result of employee actions and requests. Borrowers that avail themselves of this de minimis exemption shall maintain records demonstrating that each such employee was fired for cause, voluntarily resigned, or voluntarily requested a schedule reduction. The borrower shall provide such documentation upon request.

• Flexibility Act Safe Harbor:

  • No reduction if able to document:

    • “(i) an inability to rehire individuals who were employees of the eligible recipient on February 15, 2020; and

    • “(ii) an inability to hire similarly qualified employees for unfilled positions on or before December 31, 2020; or

  • No reduction if able to document inability to return to same level of business activity, due to compliance with requirements established or guidance issued by the Secretary of Health and Human Services, the Director of the Centers for Disease Control and Prevention, or the Occupational Safety and Health Administration during the period beginning on March 1, 2020, and ending December 31, 2020, related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID–19.

• Wages paid to tipped employees included

• De minimis exception

  • (Q40) Includes workers who decline rehire: As an exercise of the Administrator’s and the Secretary’s authority under Section 1106(d)(6) of the CARES Act to prescribe regulations granting de minimis exemptions from the Act’s limits on loan forgiveness, SBA and Treasury intend to issue an interim final rule excluding laid-off employees whom the borrower offered to rehire (for the same salary/wages and same number of hours) from the CARES Act’s loan forgiveness reduction calculation. The interim final rule will specify that, to qualify for this exception, the borrower must have made a good faith, written offer of rehire, and the employee’s rejection of that offer must be documented by the borrower. Employees and employers should be aware that employees who reject offers of re-employment may forfeit eligibility for continued unemployment compensation.

• Excluded from gross income for tax purposes

  • But see IRS Notice 2020-32 (payments of eligible expenses paid through covered PPP loan forgiveness will not be deductible as expenses.)

• Forgiveness of non-payroll expenses will be capped at 25% (4/2 Rule) at 40% (Flexibility Act)

• Non-Discrimination: (5/5 Rule) With respect to any loan or loan forgiveness under the PPP, the nondiscrimination provisions in the applicable SBA regulations incorporate the limitations and exemptions provided in corresponding Federal statutory or regulatory nondiscrimination provisions for sexspecific admissions practices at preschools, non-vocational elementary or secondary schools, and private undergraduate higher education institutions under Title IX of the Education Amendments of 1972 (20 U.S.C. 1681 et seq.), for sex-specific emergency shelters and coreligionist housing under the Fair Housing Act of 1968 (42 U.S.C. 3601 et seq.), and for adoption or foster care practices giving child placement preferences to Indian tribes under the Indian Child Welfare Act of 1978 (25 U.S.C. 1901 et seq.). In addition, for purposes of the PPP, SBA regulations do not bar a religious nonprofit entity from making decisions with respect to the membership or the employment of individuals of a particular religion to perform work connected with the carrying on by such nonprofit of its activities.

A. Forgiveness-Application for Forgiveness

• Documentation verifying FTE and pay rates

  • Payroll tax filings to IRS

  • State income, payroll, and unemployment insurance filings

  • cancelled checks, payment receipts, transcripts of accounts, or other documents verifying payments on covered mortgage obligations, payments on covered lease obligations, and covered utility payments

  • Certification for repetitive of borrower that information is correct and was used to retain employees, make mortgage interest payments, pay rent or pay utilities

• Must have documentation

• Decision made in 60 days

• The amount of loan forgiveness can be up to the full principal amount of the loan and any accrued interest (4/2 Rule)

• Process for forgiveness

  • (5/22 Rule) To receive loan forgiveness, a borrower must complete and submit the Loan Forgiveness Application (SBA Form 3508 or lender equivalent) to its lender (or the lender servicing its loan).

  • (5/22 Rule) As a general matter, the lender will review the application and make a decision regarding loan forgiveness. The lender has 60 days from receipt of a complete application to issue a decision to SBA.

  • (5/22 Rule) If the lender determines that the borrower is entitled to forgiveness of some or all of the amount applied for under the statute and applicable regulations, the lender must request payment from SBA at the time the lender issues its decision to SBA. SBA will, subject to any SBA review of the loan or loan application, remit the appropriate forgiveness amount to the lender, plus any interest accrued through the date of payment, not later than 90 days after the lender issues its decision to SBA. If applicable, SBA will deduct EIDL Advance Amounts from the forgiveness amount remitted to the Lender as required by section 1110(e)(6) of the CARES Act.

  • (5/22 Rule) If SBA determines in the course of its review that the borrower was ineligible for the PPP loan based on the provisions of the CARES Act, SBA rules or guidance available at the time of the borrower’s loan application, or the terms of the borrower’s PPP loan application (for example, because the borrower lacked an adequate basis for the certifications that it made in its PPP loan application), the loan will not be eligible for loan forgiveness.

  • (5/22 Rule) The lender is responsible for notifying the borrower of the forgiveness amount. If only a portion of the loan is forgiven, or if the forgiveness request is denied, any remaining balance due on the loan must be repaid by the borrower on or before the two year maturity of the loan. If the amount remitted by SBA to the lender exceeds the remaining principal balance of the PPP loan (because the borrower made scheduled payments on the loan after the initial deferment period), the lender must remit the excess amount, including accrued interest, to the borrower. The general loan forgiveness process described above applies only to loan forgiveness applications that are not reviewed by SBA prior to the lender’s decision on the forgiveness application. In a separate interim final rule on SBA Loan Review Procedures and Related Borrower and Lender Responsibilities, SBA will describe its procedures for reviewing PPP loan applications and loan forgiveness applications.

  • Documentation: (5/22 Rule) The loan forgiveness application form details the documentation requirements; specifically, documentation each borrower must submit with its Loan Forgiveness Application (SBA Form 3508 or a lender equivalent), documentation each borrower is required to maintain and make available upon request, and documentation each borrower may voluntarily submit with its loan forgiveness application. Section 1106(e) of the Act requires borrowers to submit to their lenders an application, which includes certain documentation, and section 1106(f) provides that the borrower shall not receive forgiveness without submitting the required documentation. For purposes of administrative convenience for both lenders and borrowers, the Administrator, in consultation with the Secretary, has determined that requiring borrowers to submit certain documentation, maintain certain documentation, and choose whether to submit additional documentation will reduce initial reporting burdens on borrowers and reduce initial recordkeeping burdens on lenders.

B. Forgiveness-Maturity after Forgiveness

• remaining balance continues to be guaranteed

• covered loan with maximum maturity of 10 years Regulations set maturity at 2 years (4/2 Rule). Flexibility Act lengthened minimum maturity to 5 years and allows lenders and borrowers to modify maturity terms of covered loan to conform to this section.

• interest rate less than 4%. Treasury initially set the interest rate at 0.5% but on 4/2/2020 raised the rate to 100 basis points or one per after banks protested (4/2 Rule).

• no prepayment penalty

• Loan deferment

  • Presumed to have been adversely impacted

  • Deferment relief for 6 months to 1 year

    • You 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 (4/2 Rule).

  • Deferral does not end until after determined forgiveness is remitted to the lender (Flexibility Act)

  • If borrower does not apply for forgiveness within 10 months after December 31, 2020, such eligible recipient shall make payments of principal, interest, and fees on such covered loan beginning on the day that is not earlier than the date that is 10 months after the last day of such covered period. (Flexibility Act)

  • Applies to loans sold on secondary market

C. Forgiveness-Non-recourse

• any individual shareholder, member, or partner of an eligible recipient of a covered loan for non-payment of any covered loan,

• except to the extent that such shareholder, member, or partner uses the covered loan proceeds for a purpose not authorized

• No personal guarantee (confirmed by 4/2 rule)

• No collateral (confirmed by 4/2 rule)

• Pledges of Loans (4/14 Rule) Pursuant to SBA regulations at 13 CFR 120.435(d) and (e), a pledge of 7(a) loans to a FRB or FHLB does not require SBA’s prior written consent or notice to SBA. SBA, in consultation with Treasury, has determined that for purposes of loans made under the PPP, the additional requirements set forth in 120.434 shall also not apply. This would mean, for example, that SBA would not have to approve loan documents or require a multi-party agreement among SBA, the lender, and others.

D. Forgiveness-Interaction with EIDL Loan (4/2 Rule)

• (4/2 Rule) PPP proceeds can be used for refinancing an SBA EIDL loan made between January 31, 2020 and April 3, 2020. 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.

5. LENDERS

• delegates approval authority to lender

• (4/2 Rule) Each lender shall:

  • Confirm receipt of borrower certifications in application (4/2 Rule); but do not have to replicate every calculation (Q1)

    • Accurate calculation borrowers responsibility (Q1) Providing an accurate calculation of payroll costs is the responsibility of the borrower, and the borrower attests to the accuracy of those calculations on the Borrower Application Form. Lenders are expected to perform a good faith review, in a reasonable time, of the borrower’s calculations and supporting documents concerning average monthly payroll cost. For example, minimal review of calculations based on a payroll report by a recognized third-party payroll processor would be reasonable. In addition, as the PPP Interim Final Rule indicates, lenders may rely on borrower representations, including with respect to amounts required to be excluded from payroll costs.
      If the lender identifies errors in the borrower’s calculation or material lack of substantiation in the borrower’s supporting documents, the lender should work with the borrower to remedy the issue.

  • Confirm receipt of information demonstrating that a borrower had employees for whom the borrower paid salaries and payroll taxes on or around February 15, 2020 (4/2 Rule);

  • Confirm the dollar amount of average monthly payroll costs for the preceding calendar year by reviewing the payroll documentation submitted with the borrower’s application (4/2 Rule);

  • Follow BSA Requirements (4/2 Rule)

    • (Q18) If federally insured depository institutions and federally insured credit unions eligible to participate in the PPP program have not yet collected beneficial ownership information on existing customers, such institutions do not need to collect and verify beneficial ownership information for those customers applying for new PPP loans, unless otherwise indicated by the lender’s risk-based approach to BSA compliance.

    • (Q25) For lenders with existing customers: With respect to collecting beneficial ownership information for owners holding a 20% or greater ownership interest, if the PPP loan is being made to an existing customer and the lender previously verified the necessary information, the lender does not need to re-verify the information. Furthermore, if federally insured depository institutions and federally insured credit unions eligible to participate in the PPP program have not yet collected such beneficial ownership information on existing customers, such institutions do not need to collect and verify beneficial ownership information for those customers applying for new PPP loans, unless otherwise indicated by the lender’s risk-based approach to Bank Secrecy Act (BSA) compliance.

    • (Q25) For lenders with new customers: For new customers, the lender’s collection of the following information from all natural persons with a 20% or greater ownership stake in the applicant business will be deemed to satisfy applicable BSA requirements and FinCEN regulations governing the collection of beneficial ownership information: owner name, title, ownership %, TIN, address, and date of birth. If any ownership interest of 20% or greater in the applicant business belongs to a business or other legal entity, lenders will need to collect appropriate beneficial ownership information for that entity. If you have questions about requirements related to beneficial ownership, go to https://www.fincen.gov/resources/statutes-and-regulations/cdd-final-rule. Decisions regarding further verification of beneficial ownership information collected from new customers should be made pursuant to the lender’s risk-based approach to BSA compliance.

• Each lender’s underwriting obligation under the PPP is limited to the items above and reviewing the “Paycheck Protection Application Form.” (4/2 Rule)

• (Q13) Lenders may use their own online systems and a form they establish that asks for the same information (using the same language) as the Borrower Application Form. Lenders are still required to send the data to SBA using SBA’s interface.

• Borrowers must submit such documentation as is necessary to establish eligibility such as payroll processor records, payroll tax filings, or Form 1099-MISC, or income and expenses from a sole proprietorship. (4/2 Rule)

• For borrowers that do not have any such documentation, the borrower must provide other supporting documentation, such as bank records, sufficient to demonstrate the qualifying payroll amount. (4/2 Rule)

• Initially eligible lenders:

  • All SBA 7(a) lenders are automatically approved to make PPP loans on a delegated basis. (4/2 Rule)

• extended to additional lenders determined by the Administrator and the Secretary of the Treasury to have the necessary qualifications to process, close, disburse and service loans made with the guarantee of the Administration. The Administrator and the Secretary have jointly determined that authorizing additional lenders is necessary to achieve the purpose of allowing as many eligible borrowers as possible to receive loans by the June 30, 2020 deadline. (4/2 Rule) Program extended through December 31, 2020.

• (4/2 Rule) With transmission of a CARES Act Section 1102 Lender Agreement (SBA Form 3506) the following types of lenders have been determined to meet the criteria and are eligible to make PPP loans unless they currently are designated in Troubled Condition by their primary federal regulator or are subject to a formal enforcement action with their primary federal regulator that addresses unsafe or unsound lending practices:

  • Any federally insured depository institution or any federally insured credit union (4/2 Rule);

  • Any Farm Credit System institution (4/2 Rule);

  • (4/2 Rule) Any depository or non-depository financing provider that originates, maintains, and services business loans or other commercial financial receivables and participation interests; has a formalized compliance program; applies the requirements under the BSA as a federally regulated financial institution, or the BSA requirements of an equivalent federally regulated financial institution; has been operating since at least February 15, 2019, and has originated, maintained, and serviced more than $50 million in business loans or other commercial financial receivables during a consecutive 12 month period in the past 36 months, or is a service provider to any insured depository institution that has a contract to support such institution’s lending activities in accordance with 12 U.S.C. § 1867(c) and is in good standing with the appropriate Federal banking agency.

• Non-Bank and Non-Insured Depository Institution Lenders over $50 million: (4/30 Rule) The First Interim Final Rule provides that a non-bank lender or noninsured depository institution may be eligible to be a lender in the PPP if the lender has originated, maintained, and serviced more than $50 million in business loans or other commercial financial receivables during a 12-month period in the past 36 months, in addition to satisfying certain other requirements. To ensure broad and diverse lender participation, SBA and the Department of the Treasury have also determined that such lenders may be approved to make PPP loans if the lender has performed the required volume of any one of these three functions (originating, maintaining, or servicing).

• Non-Bank and Non-Insured Depository Institution Lenders under $50 million: (4/30 Rule) As described in the First Interim Final Rule, a non-bank lender may be eligible to be a lender in the PPP if the lender has originated, maintained, and serviced more than $50 million in business loans or other commercial financial receivables during a 12-month period in the past 36 months, in addition to satisfying certain other requirements. In addition, SBA and the Department of the Treasury have determined that a non-bank lender meets the criteria to be a PPP lender and may be approved to make PPP loans if it has originated, maintained, or serviced more than $10 million in business loans or other commercial financial receivables during a 12-month period in the past 36 months, if the nonbank lender is (1) a community development financial institution (other than a federally insured bank or federally insured credit union) or (2) a majority minority-, women-, or veteran/ military-owned lender. Consistent with the First Interim Final Rule, a lender is ineligible if it currently is designated in Troubled Condition by its primary federal regulator or is subject to a formal enforcement action with its primary federal regulator that addresses unsafe or unsound lending practices.

• loans can be sold in secondary market after fully disbursed at premium or discount to par value (4/2 Rule)

  • (Q30) A PPP loan may be sold into the secondary market at any time after the loan is fully disbursed. A secondary market sale of a PPP loan does not require SBA approval. A PPP loan sold into the secondary market is 100% SBA guaranteed. A PPP loan may be sold on the secondary market at a premium or a discount to par value.

• SBA will issue guidance regarding any advance purchase for loans sold in the secondary market (4/2 Rule)

• Do not need to apply the credit elsewhere test (4/2 Rule)

• has zero risk weight

• an insured depository institution or an insured credit union that modifies a covered loan in relation to COVID–19-related difficulties in a troubled debt restructuring on or after March 13, 2020, shall not be required to comply with Receivables-Troubled Restructurings by Creditors’

• SBA will reimburse lender for processing within 5 days after disbursement: (confirmed amounts) (4/2 Rule)

  • 5% of loans below $350,000

  • 3% of loans of $350,000 to $2,000,000

  • 1% of loans over $2,000,000

• (4/2 Rule) Agent fees will be paid by the lender out of the fees the lender receives from SBA

• (4/2 Rule) Agents may not collect fees from the borrower or be paid out of the PPP loan proceeds

  • 1% of loans below $350,000

  • 0.5% of loans of $350,000 to $2,000,000

  • 0.25% of loans over $2,000,000

• Amounts forgiven are treated as loan guaranteed for SBA

• SBA pays forgiveness not later than 90 days

• SBA shall purchase from lender Expected Forgiveness Amount not later than 15 days

• Expected Forgiveness Amount is amount expected to expend in 8 weeks 24 weeks (Flexibility Act) after origination for

  • Payroll costs

  • Payment of mortgage interest (but not principal) (4/2 Rule)

  • Payment of rent

  • Utility payments

  • (4/2 Rule) must be at 75% used for payroll at least 60% used for payroll (Flexibility Act);

• (4/2 Rule) A lender may request that the SBA purchase the expected forgiveness amount of a PPP loan or pool of PPP loans at the end of week seven of the covered period

• (4/2 Rule) To submit a PPP loan or pool of PPP loans for advance purchase, a lender shall submit a report requesting advance purchase with the expected forgiveness amount to the SBA

• (4/2 Rule) The Administrator will purchase the expected forgiveness amount of the PPP loan(s) within 15 days of the date on which the Administrator receives a complete report that demonstrates that the expected forgiveness amount is indeed reasonable.

• (4/2 Rule) The lender does not need to conduct any verification if the borrower submits documentation supporting its request for loan forgiveness and attests that it has accurately verified the payments for eligible costs.

• (4/2 Rule) The Administrator will hold harmless any lender that relies on such borrower documents and attestation from a borrower.

• (4/2 Rule) Applicant must submit SBA Form 2483 (Paycheck Protection Program Application Form) and payroll documentation.

• (4/2 Rule) Lender must submit SBA Form 2484 electronically in accordance with program requirements and maintain the forms and supporting documentation in its files

  • (Q28) Before a lender submits a PPP loan through E-Tran, the lender must have collected the information and certifications contained in the Borrower Application Form and the lender must have fulfilled its obligations set forth in paragraphs 3.b.(i)-(iii) of the PPP Interim Final Rule. Please refer to the Interim Final Rule and FAQ #1 for more information on the lender’s responsibility regarding confirmation of payroll costs. Lenders who did not understand that these steps are required before submission to E-Tran need not withdraw applications submitted to E-Tran before April 14, 2020, but must fulfill lender responsibilities with respect to those applications as soon as practicable and no later than loan closing.

  • (Q29) All PPP lenders may accept scanned copies of signed loan applications and documents containing the information and certifications required by SBA Form 2483 and the promissory note used for the PPP loan. Additionally, lenders may also accept any form of E-consent or E-signature that complies with the requirements of the Electronic Signatures in Global and National Commerce Act (P.L. 106-229). If electronic signatures are not feasible, when obtaining a wet ink signature without inperson contact, lenders should take appropriate steps to ensure the proper party has executed the document. This guidance does not supersede signature requirements imposed by other applicable law, including by the lender’s primary federal regulator.

• Lenders may use their own promissory note or an SBA form of promissory note

  • (Q19) Lenders may use their own promissory note or an SBA form of promissory note.

• Disbursement in 10 days: (Q20) The lender must make the first disbursement of the loan no later than ten calendar days from the date of loan approval.

• Multiple Disbursements Not Allowed: (4/28 Rule) The lender must make a one-time, full disbursement of the PPP loan within ten calendar days of loan approval; for the purposes of this rule, a loan is considered approved when the loan is assigned a loan number by SBA. (Transition rules adopted)

• Can disburse for increased loan: (5/13 Rule) Notwithstanding the requirement set forth in paragraph 1.a. of the interim final rule on disbursements posted on April 28, 2020, i.e., that lenders make a one-time, full disbursement of the PPP loan within ten calendar days of loan approval, if a PPP loan is increased under paragraphs 1.a. or b. above, the lender may make a single additional disbursement of the increased loan proceeds prior to submission of the initial SBA Form 1502 report for that loan.

  • (5/13 Rule) BA set forth in the interim final rule on disbursements and 1502 reporting posted on April 28, 2020, the process lenders must follow to electronically upload SBA Form 1502 information on PPP loans. The interim final rule provided that lenders must submit the SBA Form 1502 information within 20 calendar days after a PPP loan is approved or, for loans approved before availability of the updated SBA Form 1502 reporting process, by May 18, 2020. In its interim final rule posted on May 8, 2020, SBA revised that date from May 18, 2020 to May 22, 2020. Lenders must comply with the initial 1502 reporting deadline. SBA may review at any time an increase submitted by the lender to confirm that the increase was submitted within the required timeframe; increases submitted outside the required timeframe will not be forgiven and no processing fee will be earned on such amounts. Additionally, lenders are not entitled to processing fees on increases submitted outside of the required timeframe.

• No separate SBA authorization needed: (4/24 Rule) A lender does not need a separate SBA Authorization for SBA to guarantee a PPP loan. However, lenders must have executed SBA Form 2484 (the Lender Application Form—Paycheck Protection Program Loan Guaranty) 1 to issue PPP loans and receive a loan number for each originated PPP loan. Lenders may include in their promissory notes for PPP loans any terms and conditions, including relating to amortization and disclosure, that are not inconsistent with Sections 1102 and 1106 of the CARES Act, the PPP Interim Final Rules and guidance, and SBA Form 2484. See FAQ 21 (posted April 13, 2020). The decision not to require a separate SBA Authorization in order to ensure that critical PPP loans are disbursed as efficiently as practicable.

  • (Q21) A lender does not need a separate SBA Authorization for SBA to guarantee a PPP loan. However, lenders must have executed SBA Form 2484 (the Lender Application Form for the Paycheck Protection Program)6 to issue PPP loans and receive a loan number for each originated PPP loan. Lenders may include in their promissory notes for PPP loans any terms and conditions, including relating to amortization and disclosure, that are not inconsistent with Sections 1102 and 1106 of the CARES Act, the PPP Interim Final Rules and guidance, and SBA Form 2484.

• Non-Bank Lender: (Q22) For non-bank lender that meets all applicable criteria of the PPP Interim Final Rule, Treasury encourage lenders that are not currently 7(a) lenders to apply in order to increase the scope of PPP lending options and the speed with which PPP loans can be disbursed to help small businesses across America. We recognize that financial technology solutions can promote efficiency and financial inclusion in implementing the PPP.

• Bank’s submission of Form 1502: (4/28 Rule) SBA will make available a specific SBA Form 1502 reporting process through which PPP lenders will report on PPP loans and collect the processing fee on fully disbursed loans to which they are entitled. Lenders must electronically upload SBA Form 1502 information within 20 calendar days after a PPP loan is approved or, for loans approved before availability of the updated SBA Form 1502 reporting process, by May 18, 2020. The lender must report on SBA Form 1502 whether it has fully disbursed PPP loan proceeds. A lender will not receive a processing fee: (1) Prior to full disbursement of the PPP loan; (2) if the PPP loan is cancelled before disbursement; or (3) if the PPP loan is cancelled or voluntarily terminated and repaid after disbursement (including if a borrower repays the PPP loan proceeds to conform to the borrower’s certification regarding the necessity of the PPP loan request). In addition to providing ACH credit information to direct payment of the requested processing fee, lenders will be required to confirm that all PPP loans for which the lender is requesting a processing fee have been fully disbursed on the disbursement dates and in the loan amounts reported. A lender must report through either Etran Servicing or the SBA Form 1502 report any PPP loans that have been cancelled before disbursement or that have been cancelled or voluntarily terminated and repaid after disbursement. The Administrator, in consultation with the Secretary, determined that requiring lenders to report on disbursement within 20 calendar days of loan approval ensures that disbursement of funds to eligible borrowers will occur more rapidly. This requirement also will enhance SBA’s ability to track program data.

  • (5/20 Rule) extended to (1) May 29, 2020; or (2) 10 calendar days after disbursement or cancellation of a PPP loan

  • (Q48) SBA is extending the deadline for lenders to submit the initial SBA Form 1502. Under SBA’s interim final rule on disbursements, posted April 28, 2020, lenders must disburse PPP loans within 10 calendar days of loan approval; a loan is considered approved when the loan is assigned a loan number by SBA. That interim final rule also provides that loans for which funds have not been disbursed because a borrower has not submitted required loan documentation within 20 calendar days of loan approval shall be cancelled by the lender.22 Previously, the deadline for lenders’ submission of the initial SBA Form 1502 reporting information was May 22, 2020.23 SBA is extending the deadline for lenders to electronically upload the initial SBA Form 1502 reporting information to the later of: (1) May 29, 2020, or (2) 10 calendar days after disbursement or cancellation of the PPP loan. This extension of the timeline for the initial SBA Form 1502 reporting information will be promptly implemented through revisions to SBA’s interim final rules providing an extension to the certification safe harbor and the deadline for SBA Form 1502 reporting

• Loans to shareholders or directors of a Lender: (4/14 Rule) The Administrator recognizes that, unlike other SBA loan programs, the financial terms for PPP Loans are uniform for all borrowers, and the standard underwriting process does not apply because no creditworthiness assessment is required for PPP Loans. Consequently, there is no meaningful risk of underwriting bias or belowmarket rates and terms. The Administrator also recognizes that many directors and equity holders of PPP Lenders are owners of unrelated businesses. For those reasons, the Administrator, in consultation with the Secretary, has determined that SBA regulations (including 13 CFR 120.110 and 120.140) shall not apply to prohibit an otherwise eligible business owned (in whole or part) by an outside director or holder of a less than 30 percent equity interest in a PPP Lender from obtaining a PPP loan from the PPP Lender on whose board the director serves or in which the equity owner holds an interest, provided that the eligible business owned by the director or equity holder follows the same process as any similarly situated customer or account holder of the Lender. Favoritism by the Lender in processing time or prioritization of the director’s or equity holder’s PPP application is prohibited. The Administrator cautions, however, that Lenders should comply with all other applicable state and federal regulations concerning loans to associates of the Lender. Lenders should also consult their own internal policies concerning lending to individuals or entities associated with the Lender. The foregoing paragraph does not apply to a director or owner who is also an officer or key employee of the PPP Lender. Officers and key employees of a PPP Lender may obtain a PPP Loan from a different lender, but not from the PPP Lender with which they are associated. SBA also reminds Lenders that the ‘‘Authorized Lender Official’’ for each PPP Loan is subject to the limitations described in the Lender Application Form, which states in relevant part: ‘‘Neither the undersigned Authorized Lender Official, nor such individual’s spouse or children, has a financial interest in the Applicant [Borrower].’’

Fee Waiver

• SBA collects no fee under 23(a) and 18(a) (no upfront guarantee fee) (4/2 Rule)

• no lender’s annual service fee (“on-going guaranty fee”) (4/2 Rule)

• no subsidy recoupment fee (4/2 Rule)

• no fee payable to SBA for any guarantee sold into the secondary market. (4/2 Rule)

6. Reliance

All can rely upon guidance available at time of application (FAQs Question 17)

• (Q17) There is no need to change an already submitted application based on the new guidance. Borrowers and lenders may rely on the laws, rules, and guidance available at the time of the relevant application. However, borrowers whose previously submitted loan applications have not yet been processed may revise their applications based on clarifications reflected in these FAQs.

If you have a questions about PPP or issues affecting your business in this crisis, contact Allen Stahl + Kilbourne

By James Kilbourne and Derek Allen

Updated: June 8, 2020

We ask you to understand that this information is preliminary and is subject to change. As the SBA continues to publish program guidance about the Paycheck Protection Program, we are committed to keeping our valued clients well-informed. This is not intended to be legal advice. No attorney client relationship is created by this information.  Our attorneys can give legal advice only in the context of an attorney- client relationship after a conflict check, the execution of a representation agreement and a discussion of the specific information and unique issues facing your business.

Any statements contained herein do not constitute a formal legal opinion and should not be relied upon as such. These articles are intended for general informational purposes only.  Nothing expressed shall be grounds for the creation of an attorney-client relationship.  Our attorneys can give legal advice only in the context of an attorney-client relationship after a conflict check, the execution of a representation agreement and a discussion of the specific information and unique issues of your particular circumstances.

The situation surrounding COVID-19/coronavirus is changing constantly; as a result, any discussions that might take place may not necessarily reflect the latest information regarding recently-enacted, or pending or proposed legislation or guidance that could override, alter or otherwise affect existing legal analysis.