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SBA Releases Guidance on PPP Loans

April 3, 2020

The Small Business Administration (the “SBA”) has released regulations and an updated application form for the  Paycheck Protection Program established under the CARES Act.  Although the regulations are intended to clarify the application process and provide additional information, certain aspects of the program remain unclear.  Below is a summary of areas that remain unclear and several important changes to the program.

Calculation of “payroll costs” for purposes of determining how much can be borrowed:  

  • It is unclear as to which period applicants should refer when performing this calculation.  Despite the language in the Act and the regulations about using the trailing twelve-month period to calculate average payroll costs, the application form instructs applicants to look at costs for the 2019 calendar year. The regulations also direct lenders to look at applicants’ 2019 payroll records. 
  • The regulations indicate that payroll costs need to be reduced by employer- and employee-side Social Security and Medicare taxes and income taxes withheld from employees’ wages, but in each case only to the extent imposed or withheld between February 15, 2020, and June 30, 2020.  This should not impact the calculation of how much an applicant may borrow through PPP if only 2019 payroll records are looked at.
  • The calculation of the $100,000 per employee limit is also unclear, as the regulations do not clarify whether this limit is inclusive of all payroll costs or merely employee salaries. 
  • Payments to independent contractors are no longer included in the calculation of payroll costs, as independent contractors are encouraged to submit their own applications.  The regulations do not mention the treatment of partners or guaranteed payments to them, but given the exclusion of payments to independent contractors and other self-employed individuals, it is likely that payments to partners receiving Forms K-1 are similarly excluded.

Additional details:

  • The interest rate for loans is now 1%.  Loans will have a two-year term, with no payments due for the first six months.
  • The loans may only be used for payroll costs (which incorporates the $100,000 per employee per year limit), certain healthcare-related costs, mortgage interest (but not principal) payments, rent payments, utility payments, and interest payments on certain other debts, as well as to refinance recent economic injury disaster loans from the SBA.  Certain other permissible uses under the Act are no longer permitted.  Moreover, the regulations now require that 75% of the loan be used for payroll costs. 
  • Notwithstanding what a PPP loan may be used for, amounts used for purposes other than payroll costs, mortgage interest, rent, and utilities are not subject to forgiveness, and amounts used for any purpose other than payroll costs in excess of 25% are not subject to forgiveness.
  • E-signatures on the application are explicitly permitted.
  • Applications are on a first-come, first-served basis.

The final application form is available on the SBA’s website.

Those interested in applying should speak with their lenders as soon as possible, given the first-come, first-served nature of the program.  If you have any questions about the program or application process, please contact Jason Navarino, Rich Lomuscio or any member of Riker Danzig’s Tax and Corporate Departments.

Please visit Riker Danzig’s COVID-19 Resource Center to stay up to date on all related legal issues.    

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Jason D. Navarino

Jason D. Navarino

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