Updated August 31, 2020
On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security Act, also known as the CARES Act, which provides for various economic stimulus measures, including a new loan program regulated by the U.S. Small Business Administration (SBA) called the Paycheck Protection Program (PPP). You can read more about the PPP and the other stimulus programs here.
On June 5, 2020, President Trump signed into law the Paycheck Protection Program Flexibility Act of 2020 (the Flexibility Act), which amends the CARES Act to make certain changes to PPP loans and to provide more flexibility to borrowers. For an overview of the changes made by the Flexibility Act, click here. This blog post has been updated to incorporate the changes made by the Flexibility Act.
On July 4, 2020, President Trump signed into law a bill that extends the application period for PPP loans from June 30, 2020, to August 8, 2020, which provides eligible borrowers additional time to contact participating lenders to facilitate a PPP application.
Guidance and Interim Final Rules
On March 31, 2020, the U.S. Treasury Department issued initial guidance on the PPP, including an overview of the program, quick facts for borrowers, and quick facts for lenders.
The SBA and the U.S. Treasury Department have since issued 24 additional interim final rules on the implementation of the PPP, which you can access at the following links: (1) First Rule (general interpretation), (2) Second Rule (affiliation rules), (3) Third Rule (self-employment eligibility), (4) Fourth Rule (documentation, affiliation, and eligibility), (5) Fifth Rule (seasonal employers), (6) Sixth Rule (disbursements), (7) Seventh Rule (corporate groups and lender eligibility), (8) Eighth Rule (nonprofits and student workers), and (9) Ninth Rule (extension of safe harbor repayment deadline),(10) Tenth Rule (increased amounts and additional disbursements), (11) Eleventh Rule (eligibility of certain electric cooperatives), (12) Twelfth Rule (counting of employees of foreign affiliates), (13) Thirteenth Rule (extension of repayment safe harbor and lender deadlines), (14) Fourteenth Rule (loan forgiveness), (15) Fifteenth Rule (SBA review process and party obligations), (16) Sixteenth Rule (eligibility of certain telephone cooperatives), (17) Seventeenth Rule (revisions to First Rule implementing the Flexibility Act changes), (18) Eighteenth Rule (eligibility of borrowers with certain felonies), (19) Nineteenth Rule (additional revisions implementing the Flexibility Act changes), (20) Twentieth Rule (additional revisions implementing the Flexibility Act changes), (21) Twenty-First Rule (effect of certain felonies on eligibility for PPP loans), (22) Twenty-Second Rule (PPP payroll cost eligibility for fishing boat crewmembers), (23) Twenty-Third Rule (process to appeal SBA PPP determinations), and (24) Twenty-Fourth Rule (owner-employees and non-payroll costs under the PPP).
In its guidance, the Treasury Department announced the beginning application dates for the PPP:
- April 3, 2020: All applicants other than independent contractors and self-employed individuals.
- April 10, 2020: Independent contractors and self-employed individuals.
You can find the application here, which application SBA has revised to conform with revisions to the PPP made by the Flexibility Act.
Along with your application, you will need to submit documentation supporting both: (1) your average monthly payroll cost, and (2) the fact that you were in operation with employees on February 15, 2020. The interim final rules suggest borrowers may use the following types of supporting documentation: payroll processor records, payroll tax filings, Form 1099-MISC (for independent contractors), and income and expenses (for sole proprietorships).
For assistance in calculating your maximum PPP loan amount, see guidance issued by the SBA and Treasury Department here.
In order to maximize availability of funds, the SBA and Treasury Department are limiting the amount of PPP funds available to businesses that constitute a “single corporate group” to a maximum of $20 million in the aggregate. For purposes of this limitation, businesses will constitute a “single corporate group” if they are majority owned, directly or indirectly, by a common parent. Each applicant will have the responsibility of notifying its lender if it has applied for, or received, PPP funds in excess of this limit. Any funds received in excess of the limit will constitute unauthorized use of PPP funds, meaning limited forgiveness and potential penalties.
Pay particular attention to the good faith certification that you must make on page 2 of the application. You must certify your need, purpose, and use of the loan and that you will only apply for and receive one PPP loan. Note that the SBA retains the right to require all borrowers to demonstrate the basis upon which they made the good faith certifications, subject to certain safe harbors enacted by the SBA. Guidance from the SBA and the Treasury Department suggests that: (1) public companies with substantial market value and access to capital markets, and (2) private companies with adequate sources of liquidity, may be unable to make the good faith certifications. The SBA has announced that it will review the good faith certifications of all borrowers who receive a PPP loan of $2 million or more and loans of lesser amounts, as appropriate.
The SBA will deem borrowers who repay a PPP loan in full by Monday, May 18, 2020, to have made the necessary certifications in good faith. Although official guidance has not yet been issued, the SBA and the Treasury Department have indicated that any borrower who, together with any affiliates, received less than $2 million in PPP loans, will be deemed to have made the certifications in good faith. If a borrower who did not otherwise meet these safe harbors is found to have failed to make the certifications in good faith, then the SBA will requirement repayment, and, if the borrower repays the loan after notification by the SBA, the SBA will not pursue administrative enforcement.
Once you complete the application, you will need to submit it, along with all required supporting documentation, to an SBA-approved lending institution. You can find an approved lending institution at: https://www.sba.gov/paycheckprotection/find. The SBA anticipates approving additional lenders, so also check with your lending institution to see if it is participating in the PPP. Borrowers have 20 calendar days from loan approval to submit all required loan documentation, or the lender is required to cancel the loan.
Although the CARES Act, as extended, allows for lenders to apply for SBA approval of PPP loans until August 8, 2020, you should complete and submit your application and documentation as soon as possible and in advance of such date because limited funds will lead to an expected high demand. Availability is on a first-come, first-served basis.
Of importance, note that, although the Flexibility Act has extended the definition of the “covered period” to December 31, 2020, SBA has clarified that the last day for lenders to apply to the SBA for approval of a PPP loan is August 8, 2020. Because SBA approval must be obtained by August 8, 2020, borrowers should submit all required application information in advance of such date.
Important Clarifications and Changes
The Treasury Department guidance and the Flexibility Act make the following important clarifications and changes to the PPP:
- According to the Flexibility Act, payment of any principal, interest, and fees will be deferred until the SBA remits the loan forgiveness amount (or notification of no loan forgiveness) to the lender (although interest will accrue during that time). The lender must then notify the borrower of the determination and the first payment date (if any).
- The interest rate will be fixed at 1.00%.
- According to the Flexibility Act, for any loans made prior to June 5, 2020, any principal amount of the loan not forgiven will be subject to a term of 2 years following the determination date of forgiveness, but for loans made on or after June 5, 2020, any principal amount of the loan not forgiven will be subject to a minimum term of 5 years and a maximum term of 10 years. Lenders and borrowers on loans made prior to June 5, 2020, may mutually amend such loans to allow for the longer repayment term.
- According to the Flexibility Act, at least 60% of the amount subject to loan forgiveness must be used for payroll costs. Although you may use the loan proceeds for other purposes, be mindful of this limitation for forgiveness. SBA guidance has clarified that using less than 60% of PPP proceeds on payroll costs will result in a proportional reduction in the amount of forgiveness, rather than a complete bar on forgiveness.
- Certain alternative guidance has been provided for seasonal employers in the Fifth Rule issued by the SBA and Treasury Department.
On June 16, 2020, the SBA released a revised PPP Loan Forgiveness Application, and a new PPP Loan Forgiveness Application EZ, both incorporating changes made by the Flexibility Act. Read more about the applications and their instructions here, which discussion also includes links to the applications and instructions. In order to be eligible for forgiveness, the Flexibility Act requires PPP borrowers apply for loan forgiveness no later than 10 months following the end of their 24-week (or 8-week) covered period, or December 31, 2020, whichever occurs first; otherwise, PPP loan payments must begin on such date.
We will continue to monitor any additional guidance from the Treasury Department and the SBA, and we will update our discussions as warranted. If you have any questions, please contact John Anjier, Nina Skinner, C.J. Miller, or Madeline Thomas.
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