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Paycheck Protection Program Guidance for Small Businesses Issued in Interim Final Rule

April 3, 2020

On April 2, 2020, the U.S. Department of Treasury issued an Interim Final Rule (Rule) regarding the Paycheck Protection Program (PPP), established by the Coronavirus Aid Relief and Economic Security (CARES) Act, previously reported here. The Rule, available here, provides guidance to small businesses (those with fewer than 500 employees, as well as certain other businesses considered small by the SBA, based upon industry standards) seeking forgivable loans through lenders approved by the Small Business Administration (SBA). These loans can be used during the COVID-19 pandemic to cover payroll and other approved expenses. The Rule includes information on how to calculate the amount of the loan, eligible payroll costs and the actions businesses must take to ensure the maximum amount of loan forgiveness.

Calculation of the Loan

To determine the amount of the loan available to a business under the PPP, the Rule instructs businesses to: 1) add up all eligible payroll costs (defined in detail below); 2) subtract compensation paid to any individual employee that exceeds $100,000 per year; 3) calculate the average monthly payroll costs (by dividing the total amount in Step 2 by 12 months); and then 4) multiply the average monthly payroll costs by 2.5. The amount of the loan will be the result of this calculation, up to a cap of $10 million. If a business has already received an Economic Injury Disaster Loan (EIDL) through the SBA, that amount can also be added after step 4.[1] (For information regarding EIDL, see our article here.)

Eligible Payroll Costs

Eligible payroll costs include:

The Rule confirms that the following are excluded from eligible payroll costs:

The Rule provides examples of how to calculate the maximum loan amount available under the PPP. As lenders are required to confirm an employer’s payroll costs, employers must submit payroll documents for the preceding calendar year with their application (such as payroll processor records or payroll tax filings), or other supporting documentation, such as bank records, if payroll documents are not available.  

Apply As Soon As Possible

A business may only apply for one PPP loan. We recommend that businesses submit applications as soon as possible, as the Rule provides that loans are provided on a “first come, first served” basis, and will no longer be available once the funds provided under the CARES Act are exhausted. The application can be found here along with additional information for borrowers.

Interest Rate

The Rule states that the interest rate on the portion of PPP loans not eligible for forgiveness will be 1%. This is a change from prior guidance from the SBA, which set this interest rate at 0.5%. The Rule also confirms that the maturity date on the loan will be two years. Payments on any unforgiven portion of a PPP loan will be deferred for six months, but interest will accrue during the six-month deferment.

Loan Forgiveness

As previously reported here, the purpose of the PPP is to keep employees employed at their current rate of pay. Loan forgiveness is therefore available up to the full principal amount of the loan and any accrued interest, provided that the loan is used for permissible purposes during the eight-week period following the date of the loan. The permissible purposes for a PPP loan are payroll costs, payments of interest on mortgage obligations incurred before February 15, 2020 (but not payment of mortgage principal), payment of rent on leases dated before February 15, 2020, and utility payments under service agreements dated before February 15, 2020. Employers are required to use 75% of the loan to cover payroll costs in order for the loan to be forgiven.

The amount of the loan eligible for forgiveness will be reduced proportionally if a company reduces its wage and salary levels by more than 25 percent or lays off employees. Employers who have already laid off employees or reduced compensation since February 15, 2020 can still be eligible for full loan forgiveness, however, if such workforce and compensation reductions are eliminated by June 30, 2020.

Further Guidance is Anticipated

The SBA has indicated that it will provide further guidance on the PPP, and that questions can be directed to the Lender Relations Specialist at any local SBA Field Office, found at https://www.sba.gov/tools/local-assistance/districtoffices.  

We will provide additional information as it becomes available.

Please reach out to any of our attorneys if you have any questions.

[1] The Rule explains that an employer who has obtained an EIDL loan may apply for a PPP loan, but if the EIDL loan was used for payroll costs, the PPP loan must be used to refinance the EIDL loan. If a business obtained a $10,000 advance on the EIDL loan, the Rule states that the advance will be deducted from the loan forgiveness amount on the PPP loan.

[2] The Rule states “independent contractors have the ability to apply for a PPP loan on their own so they do not count for purposes of a borrower’s PPP loan calculation.