The CARES Act was enacted to provide immediate assistance to individuals, families, and businesses affected by the COVID-19 emergency. Among the provisions contained in the CARES Act are provisions authorizing SBA to temporarily guarantee loans under a new 7(a)
loan program titled the “Paycheck Protection Program.” Loans guaranteed under the Paycheck Protection Program (PPP) will be 100 percent guaranteed by SBA, and the full principal amount of the loans may qualify for loan forgiveness. The Flexibility Act amends the CARES Act, including its provisions relating to loan terms and loan forgiveness. The purpose of this interim final rule is to update the Interim Final Rule on Additional Eligibility Criteria and Requirements for Certain Pledges of Loans (Third Interim Final Rule), posted on SBA’s website on April 14, 2020 and published in the Federal Register on April 20, 2020 (85 FR 21747), and the Interim
Final Rule on Disbursements (Sixth Interim Final Rule), posted on SBA’s website on April 28, 2020 and published in the Federal Register on May 4, 2020 (85 FR 26321), in light of the amendments under the Flexibility Act. The Third Interim Final Rule and the Sixth Interim Final Rule, each as amended by this interim final rule, should be interpreted consistent with the frequently asked questions (FAQs) regarding the PPP that are posted on SBA’s website1 and the other interim final rules issued regarding the PPP.
See https://www.sba.gov/document/support–faq-lenders-borrowers.
See https://www.sba.gov/funding-programs/loans/coronavirus-relief-options/paycheck-protection-program.
1. Changes to the Third Interim Final Rule
A.Use of PPP Loan Proceeds
Under section 1102 of the CARES Act, certain provisions regarding the issuance and use of PPP loans are limited to the “covered period.” “Covered period,” as that term is used in section 1102 of the CARES Act, was originally defined as the period from February 15, 2020, to June 30, 2020. However, section 3(a) of the Flexibility Act extended the “covered period” as defined in section 1102 until December 31, 2020. Therefore, Part III.1.d.(iii.) of the Third Interim Final Rule (85 FR 21747, 21749) is revised by striking “during the eight- week period following the first disbursement of the loan (the “covered period”)” and “during the covered period”.
Section 2(a) of the Flexibility Act provides a minimum maturity of five years for all PPP loans made on or after the date of enactment of the Flexibility Act (June 5, 2020), and permits lenders and borrowers to extend the maturity date of earlier PPP loans by mutual agreement. Therefore, Part III.1.d.v. of the Third Interim Final Rule (85 FR 21747, 21749) is revised by striking “PPP’s maturity of two years” and replacing it with “PPP’s maturity of two years for PPP loans made before June 5, 2020 unless the borrower and lender mutually agree to extend the maturity of such loans to five years, or PPP’s maturity of five years for PPP loans made on or after June 5”.
Section 3(b) of the Flexibility Act amended the requirements regarding forgiveness of PPP loans to reduce, from 75 percent to 60 percent, the portion of PPP loan proceeds that must be used for payroll costs for the full amount of the PPP loan to be eligible for forgiveness. Consistent with this change, SBA’s interim final rule posted on June 11, 2020, decreased from 75 percent to 60 percent the portion of loan proceeds that must be used for payroll costs. Therefore, Part III.1.e. of the Third Interim Final Rule (85 FR 21747, 21750) is revised to read as follows:
e. Are there any other restrictions on how I can use PPP loan proceeds?
Yes. At least 60 percent of the PPP loan proceeds shall be used for payroll costs. For purposes of determining the percentage of use of proceeds for payroll costs (but not for forgiveness purposes), the amount of any refinanced EIDL will be included. The rationale for this 60 percent floor is contained in the First PPP Interim Final Rule and SBA’s interim final rule posted on June 11, 2020.
B. Loan Forgiveness
Under section 1106 of the CARES Act, certain provisions regarding the forgiveness of PPP loans are limited to the “covered period.” “Covered period,” as that term is used in section 1106 of the CARES Act, was originally defined as the eight-week period beginning on the date of the origination of a covered loan. However, section 3(b) of the Flexibility Act extended the length of the covered period as defined in section 1106 of the CARES Act from eight to 24 weeks, while allowing borrowers that received PPP loans before June 5, 2020 to elect to use the original eight-week covered period. As noted above, section 3(b) of the Flexibility Act also amended the requirements regarding forgiveness of PPP loans to reduce, from 75 percent to 60 percent, the amount of PPP loan proceeds that must be used for payroll costs for the full amount of the PPP loan to be eligible for forgiveness. Therefore, Part
III.1.f. of the Third Interim Final Rule (85 FR 21747, 21750) is revised to read as follows:
f. What amounts shall be eligible for forgiveness?
The amount of loan forgiveness can be up to the full principal amount of the loan plus accrued interest. The actual amount of loan forgiveness will depend, in part, on the total amount spent over the 24-week period beginning on the date your PPP loan is disbursed3 (“covered period”) on:
i. payroll costs including salary, wages, and tips, up to $100,000 of annualized pay per employee (for 24 weeks, a maximum of $46,154 per individual,4 or 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);
ii owner compensation replacement, calculated based on 2019 net profit as described in Paragraph 1.b. above, with forgiveness of such amounts limited to eight weeks’ worth (8/52) of 2019 net profit (up to $15,385) for an eight-week covered period or 2.5 months’ worth (2.5/12) of 2019 net profit (up to $20,833) for a 24-week covered period, 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)(Public Law 116-127) or qualified family leave equivalent amount for which a credit is claimed under section 7004 of FFCRA;
iii. payments of interest on mortgage obligations on real or personal property incurred before February 15, 2020, to the extent they are deductible on Form 1040 Schedule C (business mortgage payments);
iv. rent payments on lease agreements in force before February 15, 2020, to the extent they are deductible on Form 1040 Schedule C (business rent payments); and
v. utility payments under service agreements dated before February 15, 2020 to the extent they are deductible on Form 1040 Schedule C (business utility payments).
The Administrator, in consultation with the Secretary, has determined that it is appropriate to limit the forgiveness of owner compensation replacement for individuals with self-employment income who file a Schedule C or F to either eight weeks’ worth (8/52) of 2019 net profit (up to $15,385) for an eight-week covered period or 2.5 months’ worth (2.5/12) of 2019 net profit (up to $20,833) for a 24-week covered period per owner in total across all businesses. This approach is consistent with the structure of the CARES Act and its overarching focus on keeping workers paid, and will prevent windfalls that Congress did not intend. Specifically, Congress determined that the maximum loan amount is generally based on 2.5 months of the borrower’s average total monthly payroll costs during the one-year period preceding the loan. 15 U.S.C. 636(a)(36)(E). For example, a borrower with one other employee would receive a maximum loan amount equal to five months of payroll (2.5 months of payroll for the owner plus 2.5 months of payroll for the employee). If the owner laid off the employee and availed itself of the safe harbor in the Flexibility Act from reductions in loan forgiveness for a borrower that is unable to return to the same level of business activity the business was operating at before February 15, 2020, the owner could treat the entire amount of the PPP loan as payroll, with the entire loan being forgiven. This would not only result in a windfall for the owner, by providing the owner with five months of payroll instead of 2.5 months, but also defeat the purpose of the CARES Act of protecting the paycheck of the employee. For borrowers with no employees, this limitation will have no effect, because the maximum loan amount for such borrowers already includes only 2.5 months of their payroll. Finally, at least 60 percent of the amount forgiven must be attributable to payroll costs, for the reasons specified in the First PPP Interim Final Rule and SBA’s interim final rule posted on June 11, 2020.
In addition, Part III.1.g. of the Third Interim Final Rule (85 FR 21747, 21750) is revised by striking “eight-week”.
2. Changes to the Sixth Interim Final Rule
As described above, section 3(b) of the Flexibility Act extended the length of the covered period as defined in section 1106 of the CARES Act from eight to 24 weeks, while allowing borrowers that received PPP loans before June 5, 2020 to elect to use the original eight-week covered period. Therefore, Part III.1.a. of the Sixth Interim Final Rule (85 FR 26321, 26322-
23) is revised by striking both references to “eight-week covered period” and replacing them with “covered period”.
3. Additional Information
SBA may provide further guidance, if needed, through SBA notices which will be posted on SBA’s website at www.sba.gov. Questions on the Paycheck Protection Program may be directed to the Lender Relations Specialist in the local SBA Field Office. The local SBA Field Office may be found at https://www.sba.gov/tools/local-assistance/districtoffices.
1 See https://www.sba.gov/document/support–faq-lenders-borrowers.
2 See https://www.sba.gov/funding-programs/loans/coronavirus-relief-options/paycheck-protection-program.
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