Paycheck Protection Program Interim Regulations

On April 2, 2020 the Small Business Administration (SBA) issued its interim regulations to implement the provisions of the Paycheck Protection Program (the “Program”) created by the Coronavirus Aid, Relief, and Economic Security Act (the “Act”). The regulations clarify certain provisions and procedures of the Program, and attempt to add additional conditions not contained within the Act.

The regulations fine-tune who is an eligible borrower for Program loans:

• To be eligible, the regulations require that borrower have been in operation as of February 15, 2020 and either have

had paid employees as of that date or have had paid independent contractors as reported on form 1099-MISC.

• Borrowers must submit documentation as is necessary to establish that they were in operation as of February 15, 2020 and had paid employees (or independent contractors) as of that date, such as payroll records, tax filings, 1099-

MISC forms, or bank records.

Borrowers who would otherwise meet Program eligibility requirements are still ineligible for loans under the Program if, among other things:

• The borrower is engaged in a business which is illegal under state, federal or local law;

• The borrower is a household employer (i.e., an individual who employs household employees such as maids or

nannies)

• Any person owning 20% or more of the equity in the borrower is incarcerated, on probation, or on parole, or is

presently subject to an indictment, criminal information, arraignment, or other means by which formal criminal

charges are brought in any jurisdiction;

• Any person owning 20% or more of the equity in the borrower has been convicted of a felony within the last five

years;

• the borrower, or any other business owned or controlled by the borrower or any of the borrower’s owners, is

currently delinquent on any SBA or other government loan, or has, within the past seven years, defaulted on any

SBA or other government loan.

• The borrower is primarily engaged in the business of lending, such as banks, finance companies, and factors (pawn

shops, although engaged in lending, may qualify in some circumstances).

• The borrower is a passive business (such as real estate investment).

• The borrower is a private club.

• The borrower is a business principally engaged in teaching, instructing, counseling or indoctrinating religion or

religious beliefs, whether in a religious or secular setting.

The Act is silent as to the number of Program loans a borrower may take out; however, by regulation, the SBA is limiting borrowers to only one Program loan.

The Act provides that payments on Program loans must be deferred at least six months up to one year. By regulation, the SBA is limiting loan deferment to only six months. Additionally, interest will continue to accrue on the loan during the deferment period.

Under the Act, borrowers are eligible to have their Program loan forgiven in an amount equal to the amount spent by the borrower payroll costs, mortgage interest, rent, and utility payments during the eight week period following the origination of the loan. For example, if a small business had monthly payroll costs of only $2,500, but also had monthly rent and utility costs of $2,500, the small business would be eligible to have up to $10,000 of its loan forgiven under the Program as enacted by the Act.

However, by regulation the SBA is attempting to limit the Act’s forgiveness provisions as to non-payroll costs. Specifically, under the regulations not more than 25% of the loan forgiveness amount may be attributable to non-payroll costs. Using the example above, the small business would violate the 25% rule because half of its Program monies were used to pay non- payroll expenses. The SBA has indicated that it will release additional regulations clarifying this new rule.