CARES Act Paycheck Protection Program: Loans to Businesses Associated with PPP Lenders, Businesses with Legal Gaming Revenue and Self-Employed Borrowers
As described in our March 28 alert available on the Pepper Hamilton/Troutman Sanders COVID-19 Resource Center website, the CARES Act created a new program within the United States Small Business Administration’s (SBA) flagship 7(a) loan program called the Paycheck Protection Program (PPP). As captured in our April 1 alert and since, the United States Department of the Treasury and the SBA have released additional guidance in the form of interim final rules and a continually updated list of FAQs. On April 14, 2020 the SBA posted a third interim final rule providing additional guidance, followed by additional FAQs on April 14 and 15, 2020.
Interim Final Rule
Clarification regarding Eligible Businesses
Eligible Businesses Associated with the PPP Lender
The rule provides that the otherwise applicable SBA regulations will not prohibit an otherwise eligible business owned by an outside director of a PPP lender or holder of less than 30 percent of the equity interest in a PPP lender from obtaining a PPP loan from that PPP lender, provided that the borrower is subject to the same process as any similarly situated customer of the lender. Lenders will still be required to comply with state laws, other federal laws and the lender’s own internal policies applicable to affiliated transactions.
The rule does not apply to a director or owner who is also an officer or key employee of the PPP lender—businesses associated with officers and key employees of a PPP lender should apply for a PPP loan from a different PPP lender. The PPP lender application still requires attestation from the “Authorized Lender Official” for each PPP loan that states in the relevant part: “Neither the undersigned Authorized Lender Official, nor such individual’s spouse or children, has a financial interest in the Applicant [Borrower].”
Businesses with Gaming Revenue
A business that is otherwise eligible for a PPP Loan is not rendered ineligible due to its receipt of legal gaming revenues if the business derives one third or less of its gross annual revenue from legal gambling activities (the existing standard in 13 CFR 120.110(g)) or the following two conditions are satisfied: (a) the business’s legal gaming revenue (net of payouts but not other expenses) did not exceed $1 million in 2019; and (b) legal gaming revenue (net of payouts but not other expenses) comprised less than 50 percent of the business’s total revenue in 2019. The rule expressly notes that businesses that received illegal gaming revenue are categorically ineligible.
Individuals with Self-Employment Income Who File a Form 1040, Schedule C
The rule gives guidance regarding eligibility and payroll calculations to individuals who filed or will file a Form 1040 Schedule C for 2019, i.e., independent contractors and sole proprietors. General, active partners in a partnership or LLC filing as a partnership are not allowed to apply for a PPP loan as a self-employed individual. Independent contractors and sole proprietors who were not in operation beginning in 2020 will need to await additional guidance.
Eligibility Requirements
Independent contractors and sole proprietors meeting the following requirements may apply for a PPP loan as an individual applicant: (i) in operation on February 15, 2020; (ii) with self-employment income; (iii) principal place of residence is in the United States; and (iv) who filed or will file a Form 1040 Schedule C for 2019.
Maximum PPP Loan Amount Calculation with No Employees:
Step 1: Start with 2019 IRS Form 1040 Schedule C line 31 net profit amount. If this amount is over $100,000, reduce it to $100,000. If this amount is zero or less, the individual is not eligible for a PPP loan.
Step 2: Calculate the average monthly net profit amount.
Step 3: Multiply the average monthly net profit amount from Step 2 by 2.5.
Step 4: Add the outstanding amount of any Economic Injury Disaster Loan (EIDL) made between January 31, 2020 and April 3, 2020 that the applicant is seeking to refinance, less the amount of any advance under an EIDL COVID-19 loan (because it does not have to be repaid).
The 2019 IRS Form 1040 Schedule C must be filed with the PPP loan application (regardless of whether or not the applicant has filed his or her 2019 tax return with the IRS yet) along with a 2019 IRS Form 1099-MISC, invoice, bank statement or book of record that establishes that the applicant is self-employed and a 2020 invoice, bank statement or book of record that establishes the applicant was in operation on or around February 15, 2020.
Maximum PPP Loan Amount Calculation with Employees:
Step 1: Compute 2019 payroll by adding the following:
a. 2019 Form 1040 Schedule C line 31 net profit amount, up to $100,000 annualized, if this amount is over $100,000, reduce it to $100,000, if this amount is less than zero, set this amount at zero;
b. 2019 gross wages and tips paid to employees whose principal place of residence is in the United States computed using 2019 IRS Form 941 Taxable Medicare wages & tips (line 5c- column 1) from each quarter plus any pre-tax employee contributions for health insurance or other fringe benefits excluded from Taxable Medicare wages & tips; subtract any amounts paid to any individual employee in excess of $100,000 annualized and any amounts paid to any employee whose principal place of residence is outside the United States; and
c. 2019 employer health insurance contributions (health insurance component of Form 1040 Schedule C line 14), retirement contributions (Form 1040 Schedule C line 19), and state and local taxes assessed on employee compensation (primarily under state laws commonly referred to as the State Unemployment Tax Act or SUTA from state quarterly wage reporting forms).
Follow Steps 2-4 above.
2019 Form 1040 Schedule C, Form 941 (or other tax forms or equivalent payroll processor records containing similar information) and state quarterly wage unemployment insurance tax reporting forms from each quarter in 2019 or equivalent payroll processor records, along with evidence of any retirement and health insurance contributions, if applicable, must be submitted with the PPP loan application. A payroll statement or similar documentation from the pay period that covered February 15, 2020 must also be provided to establish the applicant was in operation on February 15, 2020.
Permitted PPP Loan Uses
The rule provides that the PPP loan may be used to support the ongoing operations, specifically for the following obligations:
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Owner compensation replacement;
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Employee payroll costs;
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Mortgage interest payments on any business mortgage obligation on real or personal property, business rent payments and business utility payments if deductible expenses;
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Interest payments on any other debt obligations that were incurred before February 15, 2020 (such amounts are not eligible for PPP loan forgiveness); and
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Refinancing an SBA EIDL loan made between January 31, 2020 and April 3, 2020.
Use of loan proceeds for self-employed individuals is limited to allowable uses of which the borrower made expenditures in 2019. Additionally, at least 75 percent of the PPP loan proceeds must be used for payroll costs.
Loan Forgiveness
Loan proceeds are eligible to be forgiven to the extent applied towards:
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payroll costs including salary, wages, and tips, up to $100,000 of annualized pay per employee (for eight weeks, a maximum of $15,385 per individual), as well as covered benefits for employees (but not owners), including health care expenses, retirement contributions, and state taxes imposed on employee payroll paid by the employer (such as unemployment insurance premiums);
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owner compensation replacement with forgiveness of such amounts limited to eight weeks’ worth of 2019 net profit, but excluding any qualified sick leave equivalent amount for which a credit is claimed under section 7002 of the Families First Coronavirus Response Act (FFCRA) or qualified family leave equivalent amount for which a credit is claimed under section 7004 of FFCRA;
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payments of interest on mortgage obligations on real or personal property incurred before February 15, 2020, to the extent they are deductible;
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rent payments on lease agreements in force before February 15, 2020, to the extent they are deductible; and
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utility payments under service agreements dated before February 15, 2020 to the extent they are deductible.
The maximum amount of loan forgiveness is based on the borrower’s eligible payments—i.e., the sum of payroll costs and certain overhead expenses—over the eight-week period following the date of loan disbursement. The rule limits forgiveness to eight weeks’ worth of 2019 net profit because many self-employed individuals have few of the overhead expenses that qualify for forgiveness under the CARES Act. Additionally, 75 percent of the amount forgiven must be attributable to payroll costs.
A borrower must submit the certification required by Section 1106(e)(3) of the Act, certifying that the information provided is true and correct and that the loan proceeds were used for amounts eligible for forgiveness. If the borrower has employees, IRS Form 941 and state quarterly wage unemployment insurance tax reporting forms or equivalent payroll processor records that best correspond to the covered period (with evidence of any retirement and health insurance contributions). Whether or not the borrower has employees, evidence of business rent, business mortgage interest, payments on real or personal property, or business utility payments during the covered period if loan proceeds were used for those purposes. The SBA will rely on the 2019 Form 1040 Schedule C to determine the amount of net profit allocated to the owner for the eight-week period.
Relationship to Unemployment Compensation or Assistance
The rule also notes that participation in the PPP may affect an individual’s eligibility for state-administered unemployment compensation or unemployment assistance programs, including the programs authorized by Title II, Subtitle A of the CARES Act, or CARES Act Employee Retention Credits.
FAQs
In Question #28, the SBA clarified that before a lender submits a PPP loan through E-Tran, the lender must have collected the information and certifications contained in the Borrower Application Form and the lender must have fulfilled its obligations set forth in paragraphs 3.b.(i)-(iii) of the PPP Interim Final Rule.
In Question #29, the SBA clarified that all PPP lenders may accept scanned copies of signed loan applications and documents containing the information and certifications required by SBA Form 2483 and the promissory note used for the PPP loan. Additionally, lenders may also accept any form of E-consent or E-signature that complies with the requirements of the Electronic Signatures in Global and National Commerce Act (P.L. 106-229). Adding further that if electronic signatures are not feasible, when obtaining a wet ink signature without in person contact, lenders should take appropriate steps to ensure the proper party has executed the document.
The SBA noted, however, that this guidance does not supersede signature requirements imposed by other applicable law, including by the lender’s primary federal regulator.