Paycheck Protection Program – SBA Issues Additional Eligibility Criteria
On April 14, 2020, the SBA released additional guidance providing clarity regarding the eligibility criteria and certain requirements for the $349 billion small business loan program known as the Paycheck Protection Program (PPP), which was approved as part of the CARES Act.
04.17.20
The interim final rule supplements the First PPP Interim Final Rule issued on April 2, 2020 and previous guidance to address criteria for individuals with self-employment income and eligibility of certain PPP loan applicants, including:
Partners Cannot Apply Separately – Included in Payroll Costs
While individuals with self-employment income who filed or will file a Form 1040, Schedule C for 2019 are generally eligible for a PPP loan, partners in a partnership may not submit a separate loan application as a self-employed individual. The self-employment income of general active partners may be reported as a payroll cost, up to $100,000 annualized, on a PPP loan application filed on or behalf of the partnership. The SBA indicated that limiting a partnership and its partners to one PPP loan is necessary to avoid confusion with respect to the application process and ensure that as many eligible borrowers as possible obtain PPP loans before the statutory deadline of June 30, 2020.
Participation in the PPP May Affect Eligibility for Other Assistance
Self-employed individuals should be aware that participation in the PPP could affect their eligibility for state and federal unemployment compensation or unemployment assistance programs, including unemployment assistance available through other components of the CARES Act.
Deductions on 2019 Form 1040, Schedule C Determine Entitlement
Self-employed individuals may use the proceeds of a PPP loan to cover: (i) owner compensation replacement, calculated based on 2019 net profit, (ii) employee payroll costs, if applicable and (iii) mortgage interest payments, business rent payments and business utility payments (for example, in connection with a warehouse used to store business equipment or a vehicle used to perform business). You must have claimed or be entitled to claim a deduction for such expenses on your 2019 Form 1040, Schedule C in order for them to be a permissible use eligible for forgiveness. The SBA explained that it is appropriate to limit the forgiveness of owner compensation replacement for individuals with self-employment income to eight weeks’ worth of 2019 net profit to prevent windfalls that Congress did not intend.
Officer and Key Employee Relationships with PPP Lenders Are Relevant
Existing SBA regulations shall not apply to prohibit an otherwise eligible business owned by an outside director or holder of less than 30% 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 holder owns 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 PPP lender (favoritism is prohibited). This policy does not apply to a director or owner who is also an officer or key employee of the PPP lender – such individuals may obtain a PPP loan from a different lender, but not from the PPP lender with which they are associated.
The new guidance is available here.
The SBA Focus Group of the COVID-19 Task Force at Klehr Harrison stands ready to assist you in your business and legal needs. We will continue to provide additional information and guidance as the PPP loan program is implemented.
Co-authors Matthew McDonald, partner, and Elizabeth Bucilla, associate are members of the Corporate & Securities Department at Klehr Harrison.