SBA Issues Interim Final Rule on PPP Loan Program

Last evening, the Treasury Department issued its first formal Rule related to the PPP Loan Program created by the CARES Act.  In it, the SBA has waived the comment period and the normal 30-day delayed effective date, making this Rule effective immediately.  The Interim Final Rule clarifies certain key components while other items remain unclear. Borrowers will need to carefully evaluate direction from the CARES Act, the Interim Final Rule and the Loan Application Instructions to determine the position that best fits their circumstances.

To assist you, we are providing several key updates:

The lack of clarity on the period used to measure “Average Monthly Payroll Costs” seems to offer two alternatives to borrowers. The Application instructions indicate that most Applicants will use their calendar year 2019 average monthly payroll. The calendar year method would likely be easier for most borrowers based on the correlation with payroll records and filings. However, other guidance appears to allow use of the 52-week period ending with the last payroll before the application is filed. This method may not only be more time consuming for most borrowers but also likely requires a reduction to payroll for federal withholding taxes for payroll periods occurring in the computation on or after February 15, 2020. Borrowers should carefully evaluate which period best fits their situation. Seasonal businesses and new businesses still have additional options for measuring payroll.

It appears that total payroll costs for each employee are capped at $100,000 including employee benefits and certain state and local taxes based on compensation. While the language between the various guidance is not completely consistent, the instructions to the Application Form guide borrowers to limit “payroll costs” per employee to $100,000 on an annualized basis.

There does not seem to be a provision for including the self-employment income of partners of a partnership in the calculation of Average Monthly Payroll. The various guidelines seem to only refer to employee payroll or self-employment income of sole proprietors or independent contractors.

The Rule also clarifies that loan balances under an SBA Economic Injury Disaster Loan (EIDL) are eligible to be added to your PPP loan amount for EIDL received from January 31 through April 3, 2020.  If the EIDL loan was based on payroll costs, you must refinance your EIDL with PPP.

The Rule clarifies that a company’s payments to 1099 independent contractors are EXCLUDED from payroll costs.  The SBA has determined this is duplicative since the recipients are also eligible for PPP. This is a clear change from prior guidance.

The interest rate on the loan balance has been increased from 0.5% to 1%.

Keep in mind that the Application and process to request Loan Forgiveness eight weeks after the receipt of loan proceeds are still to be prescribed by the SBA.  More details will be shared when they become available.

Applications for most businesses will be accepted starting April 3rd, and independent contractor and sole-proprietors can apply starting April 10th. 

Disclaimer: Please note this is based on the information that is currently available and is subject to change.