SBA Releases Interim Final Rules for PPP

The U.S. Small Business Administration (SBA) has released Interim Final Rules (“Final Rules”) for the Paycheck Protection Program (PPP) — sections 1102 and 1106 of the CARES Act. The Interim Final Rules are different from the statutory language in several important respects and state that additional guidance on the affiliation rules will be issued promptly.

Key differences between section 1102 of the CARES Act and the Interim Final Rules are outlined below.

1) Eligible Entity: The PPP statutory language provides that “in addition to small business concerns” the following entities are eligible if they have 500 employees or less or otherwise meet the employee limits in SBA guidelines: “any business concern, nonprofit organizations, veterans organizations, or Tribal business concerns described in section 31(b)(2)(C).”

The Final Rules provide that only small business concerns (unless a waiver of the affiliation rules is explicitly allowed by the act), nonprofit organizations and veterans organizations with less than 500 employees that were in operation on Feb. 15, 2020, and paid employees or independent contractors are eligible for the program.

Although the statute would allow any business concern to apply, even those that are not a small business concern, the Final Rules restrict eligible businesses to just small business concerns. This will substantially limit a large number of businesses from accessing the PPP.

2) International Businesses: The Final Rules clarify that if a U.S. business has domestic and foreign components, the domestic component can qualify for the loan provided that the business has 500 or fewer employees whose principal place of residence is in the United States. This is an expansion from pre-CARES SBA rules and is consistent with the statute, which did not directly address the computation of the 500 limit in the context of a multinational business. The pending affiliate guidance expected soon may complicate this interpretation, but as the statute and Final Rules now stand, these U.S. businesses should be able to apply.

3) Loan Terms: The PPP statutory language provides that the loan terms could allow for an interest rate as high as 4% and a loan term of up to 10 years.

The Final Rules provide that the loan terms will be two-year loans with a 1% interest rate.

While this is a substantial reduction in the interest rate, there is also a substantial reduction in the term of the loan.

In addition, the Final Rules clarify that payroll costs for determining the amount of the loan do not include federal employment taxes, which for most businesses will total 7.65% of wages.

4) Loan Forgiveness: The PPP statutory language provides that the loan will be forgiven as long as the employee workforce is not reduced during the covered period compared to one of two testing periods and salaries for employees earning under $100,000 are not reduced more than 25%. To be eligible for forgiveness, a business must use the loan to pay for payroll costs, interest on a mortgage obligation, rent and utility payments. There is no requirement in the statute as to how much can be spent on any given category.

The Final Rules require that at least 75% of the loan proceeds must be used on payroll costs. This is a significant change on the acceptable use of the loan proceeds, and may affect whether a business should apply for a PPP loan.

The Final Rules also state the following:

1) Independent Contractors: The Final Rules clarify that independent contractors are not employees.

2) Affiliation Rules: The Final Rules provide that additional guidance related to the affiliation rules will be issued promptly.

3) Limited Funds: While the PPP is funded with $345 billion, the Final Rules confirm that this is a first-come, first-served program. Once banks have approved loans totaling $345 billion, no additional loans can be awarded until Congress provides additional funding, which would be late April at the earliest.

4) Ineligible Businesses: The Final Rules appear to apply the regular rules related to ineligible businesses in 13 C.F.R. 120.110. This could adversely impact businesses whose revenues come at least one-third from gaming as well as other enterprises historically ineligible for SBA loans.