Last Minute Revisions to Guidance for Paycheck Protection Loans

Many small businesses have been eagerly awaiting the opportunity to access much needed dollars through new or revised programs that were enacted by the CARES Act passed by Congress on March 27th.  The Paycheck Protection Program (PPP) is a particularly attractive program as it provides the opportunity for the full amount of the loans obtained under this program to be 100% forgiven.

Loan applications were to be available starting on April 3rd for small businesses and sole proprietors (April 10th for independent contractors and self-employed), lenders have been awaiting definitive guidelines and answers to many of the details of how the program is to work.  The Treasury Department and the Small Business Administration finally issued Interim Final Rules (IFR) on April 2nd hours before the loan program was to begin.  On several key issues, the IFR establishes positions that are different from those stated in the Fact Sheet that Treasury issued on March 31st.

The late issuance of the IFR and the fact that it contains information different from what the Treasury Department had previously stated very likely will cause a postponement of the planned April 3rd roll out of the PPP loan applications, at least for several lenders.

Here are some of the most notable points made in the Interim Final Rule found on the Treasury Department and SBA webpages:

New Terms for PPP Loans

Between March 31st and April 2nd, the Treasury Department has doubled the applicable interest rate and shortened the length of the loan.  The interest rate on the PPP loans has now been set at 1% fixed (previously had been announced as .5%) and the length of the loans are now 2 years, instead of 3 as had been set by Treasury previously. The first payment on the loans will still be deferred for 6 months from distribution, though interest will begin accruing during the deferral period.

Even though the terms of the PPP loans have changed for the worse for small business borrowers, these are still very attractive loans that the government has made available for small businesses to cover payroll and operating costs.

Status of Independent Contractors

Because of the ambiguity in the wording of the CARES Act, it has been unclear whether a small business’s payments to independent contractors could be included in the average monthly payroll figure that is key to determining the maximum amount of the loan requested.

Treasury and the SBA have now definitively stated that payments to independent contractors are NOT to be included in the payroll calculation.  The IFR states that since PPP loans are available for independent contractors, they are not to be included in a small business’ payroll total.  Likewise, payments to independent contractors between February 15 and June 30, 2020 cannot be included in determining how much of the PPP loan will be forgiven.

Restrictions on Payments Included in Loan Forgiveness

The most attractive feature of the PPP program is the opportunity it provides to have the entire amount of the loan – and any accrued interest – forgiven and further to not have it be considered income for tax reporting purposes.  To obtain loan forgiveness, the borrower needs to maintain employee and compensation levels and, in the eight weeks following the date of the loan, to use the loan proceeds for the following purposes:

• payroll costs,

• payments of interest on mortgage obligations incurred before February 15, 2020,

• rent payments on leases dated before February 15, 2020, and

• utility payments under service agreements dated before February 15, 2020. 

The IFR has placed a restriction on this, however, it now states that 75% of the loan proceeds need to be used towards payroll expenses for the loan to be forgiven.  This has caused some businesses to have to re-calibrate how they had intended to use the funds, since many employers were considering whether to terminate or furlough personnel so that those employees can take advantage of the increased  unemployment benefits currently available through July 31st and use the majority of the PPP loan proceeds to cover utilities and rent.  This possibility no longer exists if the borrower is seeking to maximize how much of their loan can be forgiven.

***Special Note

I realize that there are still some open-ended questions here regarding people who have already laid off employees prior to the legislation. The requirement of 75% of the loan proceeds being used for payroll and how that will affect loan forgiveness even if employees are brought back or wages restored by June 30th creates a difficult situation for many employers. The situation will need to be looked at on a case-by-case basis in order to see how and if the numbers work.

We are certainly in uncharted waters with changes being made on a daily basis. I will continue to work on getting information out in a timely manner as this crisis continues. Of course, the ultimate hope here is that this all comes to a close very soon.

Here to work with you,
David Quan

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