New SBA Guidance for the Paycheck Protection Program
The Small Business Administration (SBA) released an interim final rule for the Paycheck Protection Program (the “Program”). Information about the Program was released quickly and led to rampant speculation and self-interpretation. The new SBA guidance attempts to resolve some of the ambiguity and better defines how the Program loans will be administered.
Application Period and Requirements
The application window for Program loans opened Friday, April 3 for small businesses and sole proprietors, but many lenders are delaying the acceptance of applications as they seek additional guidance and understanding for administering the Program. Independent contractors must wait until April 10 to apply, pursuant to the new guidance. In all cases, loans will be available until June 30 unless the $349 billion allocated to the Program is exhausted before that point.
The new guidance has further clarified that certain businesses may not be eligible for a Program loan, including any business that has obtained a direct or guaranteed loan from the SBA (or any other Federal agency), and is currently delinquent or has defaulted within the last seven years.
The application requires certain representations and certifications from the borrower, which includes an acknowledgement that submitted tax documents are identical to those submitted to the Internal Revenue Service. Businesses must also acknowledge that they will make a good faith effort to purchase American-made equipment and products to the extent feasible. This is particularly important to keep in mind for businesses that currently rely on foreign suppliers.
Low Interest Rate and Maturity Period
One of the more notable details of the new SBA guidance is that all loans will be subject to a 1% interest rate and will mature over a two-year period. This is a departure from previous guidance issued by the SBA that suggested the interest rate would be 0.5%. Although the Program, by law, allows for a maximum interest rate of 4% and a 10-year maturity period, the SBA and Secretary of the Treasury, who have been delegated authority to govern the loan program within the confines of the law, determined that the temporary nature of the Program and current economic climate warranted a 1% interest rate and shortened maturity period.
Interest will begin to accrue when a loan originates, however, it is clear now that businesses may defer interest payments for up to six months.
Treatment of Independent Contractors and Federal Taxes
For businesses that make use of independent contractors, those contractors cannot be counted as employees when calculating the business’s loan amount. Similarly, independent contractors will not be considered for loan forgiveness purposes. As noted above, independent contractors may apply for a Program loan on their own beginning April 10.
With respect to employer withheld federal employment taxes, including FICA, those are expressly excluded from the definition of payroll costs and should not be factored in when calculating loan amounts.
Use of Loan Proceeds and Loan Forgiveness
Another key point that was clarified through the new guidance is that at least 75% of a business’s loan proceeds must be allocated to payroll costs to be eligible for loan forgiveness. Thus, not more than 25% of a Program loan can be used for non-payroll costs such as rent, utilities or other costs. This ensures that the purpose of the Program, to keep American workers paid and employed, is uniformly maintained. Strict adherence to these percentages will be considered when the lender calculates the forgivable amount of a Program loan. Businesses should note that the principal amount of a Program loan, including accrued interest, is eligible for forgiveness. It is anticipated that further guidance regarding loan forgiveness will be disseminated soon.
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The attorneys at McCarthy Lebit remain available to discuss any questions or needs that your business may have. We are continuing to stay apprised of COVID-19 developments and will continue to update our materials accordingly.
Adam Glassman is an attorney at the Cleveland, OH-based law firm, McCarthy, Lebit, Crystal & Liffman.
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