Paycheck Protection Program – Interim Final Rule
Senate Bailout & Small Businesses
March 26, 2020
USA Deleveraging
April 13, 2020Paycheck Protection Program – Interim Final Rule
Written on 4/03/2020
Updated 4/7/20 based on Guidance released by SBA on 4/6/20. I am available to act as your "agent" for the PPP loan at no cost to you.
Here’s the full text of the Interim Rule: Interim Final Rule
Here's the full text of the SBA Aggregation Rules: SBA Aggregation Rules for Financial Assistance Programs
4/6/20 Guidance by SBA: SBA FAQ Guidance
1. You are eligible to apply for the Paycheck Protection Program (PPP) loan if you paid any wages and payroll taxes (or paid 1099 contractors - although this is irrelevant to consider as I'll discuss later in this post) during the past year and you were in operation as of February 15, 2020.
2. "You" the "Eligible Borrower" includes any entity to which you have control or the ability to control per the aggregation rules on page 6 of the interim final rule, and the cited aggregation rules per 13 CFR § 121.103.
(A) For aggregation rules, I would RECOMMEND on traditional measures in IRS guidelines. If you have 5% or greater ownership of an entity, that one include that entity as part of "you" the "Eligible Borrower" for the purposes of the PPP loan. Although the best course of action would be to await further guidance.
3. You are ineligible under certain circumstances such as:
(A) are (or will be) incarcerated,
(B) you or any business partner who owns at least 20% of any entities you also partake in, is under indictment or has been convicted of a felony within the past 5 years,
(C) you or any partners / owner have ever defaulted (or are delinquent) on a government loan within the past 7 years.
4. Maximum loan size is your payroll costs over the last year, divided by 12, then multiplied by 2.5...i.e 2.5 times average monthly payroll.
5.Bottom of page 8 of the rule: v. Step 5 - (To calculate maximum loan size) Add the outstanding amount of an Economic Injury Disaster Loan (EIDL) made between January 31, 2020 and April 3, 2020....minus the 10K grant
(A) SIDE NOTE: this is an interesting development! Is the SBA / Treasury intending to Replace / Eliminate the EIDL loans? Why would they add the EIDL loan amount into the PPP loan? There has been MANY mixed messages about the interaction between the EIDL loan & this PPP loan... it would not surprise me if they combined the 2 loans together and have the language for the PPP loan supersede. If this is the case, this stimulus is very very WEAK as it omits a very large portion of the economy. See 6 & 7 below.
6. "Payroll costs" are defined on page 10 section f: taxable compensation, employee benefits (probably ERISA covered employee benefits), state & local taxes paid for compensation. Note that the next section reiterates previously stated limits and exclusions.
7. Page 11 section h: YOU CANNOT include 1099 payments / compensation as "payroll costs". This part is puzzling because paying 1099's makes you ELIGIBLE for the loan... but you can't apply it for receiving any MONEY for the loan. If you are in real estate or any other 1099 heavy industry, this PPP loan does very little for you. Compounded with the possibility of the SBA & Treasury eliminating the EIDL loan per the reason in 5a above... this is not enough stimulus to sustain many small businesses. The elevated unemployment compensation remains the most robust "bail out" thus far for the majority of employers in my opinion.
8. Your loan repayments can be delayed anywhere from 6 months to 1 year. The terms are 1% interest and 2 years. Interest still accrues if you do not begin repaying the loan right away. So if you forebear the loan for one year, interest still accrues for that year and must be repaid. This is a material change from the original text of the law.
(A) This also further adds to my suspicion that the EIDL loans will not be issued or their issuance will be greatly reduced. From a boots on the ground perspective, it will be difficult to find a person or company to service these loans. There isn't enough compensation built in or guidelines around the longer dated 10-30 year EIDL loans that any lender or bank would want to service those loans. The previous PPP loan legal language had a 10 year repayment term.
1. Refer to my previous blog about the particulars of the "75% cliff": https://diversifiedhumansolutions.com/blog/caresbailout/
2. If you do NOT use at least 75% of the PPP loan for "Payroll" (again, this OMITS payments to 1099 as the law is currently written), then the loan forgiveness is reduced by each percent, dollar for dollar under 75%. Be sure to use PPP loan proceeds toward payroll.
3. The Interim rules seems to LIMIT the maximum forgiveness of the loan to 75% of the total loan. So it is unclear the maximum size of loan forgiveness based on contradictory guidelines. The language is unclear. EDIT: the entire loan can be forgiven.
I would not apply for a loan until you are ready to re-open! Taking this money now to forego elevated unemployment benefits (as they currently are) would be foolish for most businesses. If you are a grocery store or some essential business that is currently fully staffed, wait for additional guidance unless you need the money now. The updated text gives me pause as to how you aggregate your maximum loan and what business I am a part owner for to include in calculating the PPP loan. But if you need the cash, go get it! Use favorable interpretations... with the government, most people employed in the system tell me "it's better to ask for forgiveness, not permission."
Hypothetically speaking, If I am a 30% owner in a hotel, 100% owner in an insurance brokerage, a 10% owner in a grocery Co-op, and a 33% owner of a single family residential investment property... do I add all of those entities together to apply for my PPP loan? The answer to that is that one should aggregate based on 13 CFR § 121.301 and any business which you own 50% or more, AND any business in which you have the power to BLOCK an action by the board or shareholders.
Self employed people will be able to apply for the PPP loans starting next Friday (April 10, 2020). I believe you'll have to wait for those guidelines to clarify these guidelines....and then another few sets of guidelines after that if you want more clarity. If a 1099 contractor asks your for a Form 1099, you should give it to them as they probably need that documentation to access their PPP loan later. You should also file a copy of that 1099 with the government per applicable labor regulations.
Overall, I am concerned this stimulus isn't good enough. It leaves out large sectors of the economy, especially real estate. For example small boutique hotel owners / bed & breakfasts that typically pay people / companies as 1099 contractors. How are those real estate entities going to survive? For companies where their largest expense is NOT W2 wages & benefits, the PPP loan does very little for them. IF (BIG IF) the SBA & Treasury KEEPS the EIDL loans alive... that WOULD help companies without large W2 wage related expenses. However, the language in this Final Interim Rule does not seem favorable for the survival of the EIDL loans.
Another consideration is that lenders/banks are all but absolved or any responsibility...page 24 section c, to summarize: The lender does not have to conduct verification of loan accuracy IF the borrower submits documentation & attests to their accuracy! So it's the "honor" system for the lender. If your lender does a quick once over of your PPP loan paperwork, and there are no major red flags, you'll get your loan. This does NOT however say that the regulators won't come after YOU personally for any errors. I just say this to caution you of the enthusiasm of any lenders as they are not on the hook, and they are making quite a large commission from giving you this loan. These loans can also be sold on the secondary market, so the lender / bank gets to sell a 2 year Treasury bond at 3-4 times the current 2 year treasury yield (geeky side note for investors).
If you need the money, apply... you will get it. If you can wait for further guidance, I would do so. If you are involved in a business that is NOT W2 wage prevalent, call your lobbyist or trade association. There may or may not be further guidance on the aggregation rules under 13 CFR § 121.103 to determine loan eligibility & amount, but that must be made clearer in my opinion. If you need to act now, I would use the 5% rule that is often used by the IRS. If you own 5% or more of the company, you exert control and can apply that entity's W-2 wages in calculating the eligibility & amount of your PPP loan. I would wait for guidance, but if you need to act now, that seems like the reasonable way to prudently act.
I do not believe there will be much oversight and enforcement of these loans. But I don't know. With so many of these loans going out and with such speed and unclear guidance... how can the Feds / IRS police this effectively or exert fair punishment? If you need the money go for a favorable interpretation if you'd like! That's your risk to take. I'm not a cop or a regulator. If you have "fear of missing out" and think the money may run out, go ahead and take it as well. My advice would still be to time the loan so that you receive the funds when you re-open and are at or near full capacity.
Updated 4/7/20 based on Guidance released by SBA on 4/6/20. I am available to act as your "agent" for the PPP loan at no cost to you.
Paycheck Protection Program - Interum Rule (Still not clear)
Here’s the full text of the Interim Rule: Interim Final Rule
Here's the full text of the SBA Aggregation Rules: SBA Aggregation Rules for Financial Assistance Programs
4/6/20 Guidance by SBA: SBA FAQ Guidance
If you are eligible & Maximum Loan Amount
1. You are eligible to apply for the Paycheck Protection Program (PPP) loan if you paid any wages and payroll taxes (or paid 1099 contractors - although this is irrelevant to consider as I'll discuss later in this post) during the past year and you were in operation as of February 15, 2020.
2. "You" the "Eligible Borrower" includes any entity to which you have control or the ability to control per the aggregation rules on page 6 of the interim final rule, and the cited aggregation rules per 13 CFR § 121.103.
(A) For aggregation rules, I would RECOMMEND on traditional measures in IRS guidelines. If you have 5% or greater ownership of an entity, that one include that entity as part of "you" the "Eligible Borrower" for the purposes of the PPP loan. Although the best course of action would be to await further guidance.
3. You are ineligible under certain circumstances such as:
(A) are (or will be) incarcerated,
(B) you or any business partner who owns at least 20% of any entities you also partake in, is under indictment or has been convicted of a felony within the past 5 years,
(C) you or any partners / owner have ever defaulted (or are delinquent) on a government loan within the past 7 years.
4. Maximum loan size is your payroll costs over the last year, divided by 12, then multiplied by 2.5...i.e 2.5 times average monthly payroll.
5.Bottom of page 8 of the rule: v. Step 5 - (To calculate maximum loan size) Add the outstanding amount of an Economic Injury Disaster Loan (EIDL) made between January 31, 2020 and April 3, 2020....minus the 10K grant
(A) SIDE NOTE: this is an interesting development! Is the SBA / Treasury intending to Replace / Eliminate the EIDL loans? Why would they add the EIDL loan amount into the PPP loan? There has been MANY mixed messages about the interaction between the EIDL loan & this PPP loan... it would not surprise me if they combined the 2 loans together and have the language for the PPP loan supersede. If this is the case, this stimulus is very very WEAK as it omits a very large portion of the economy. See 6 & 7 below.
6. "Payroll costs" are defined on page 10 section f: taxable compensation, employee benefits (probably ERISA covered employee benefits), state & local taxes paid for compensation. Note that the next section reiterates previously stated limits and exclusions.
7. Page 11 section h: YOU CANNOT include 1099 payments / compensation as "payroll costs". This part is puzzling because paying 1099's makes you ELIGIBLE for the loan... but you can't apply it for receiving any MONEY for the loan. If you are in real estate or any other 1099 heavy industry, this PPP loan does very little for you. Compounded with the possibility of the SBA & Treasury eliminating the EIDL loan per the reason in 5a above... this is not enough stimulus to sustain many small businesses. The elevated unemployment compensation remains the most robust "bail out" thus far for the majority of employers in my opinion.
8. Your loan repayments can be delayed anywhere from 6 months to 1 year. The terms are 1% interest and 2 years. Interest still accrues if you do not begin repaying the loan right away. So if you forebear the loan for one year, interest still accrues for that year and must be repaid. This is a material change from the original text of the law.
(A) This also further adds to my suspicion that the EIDL loans will not be issued or their issuance will be greatly reduced. From a boots on the ground perspective, it will be difficult to find a person or company to service these loans. There isn't enough compensation built in or guidelines around the longer dated 10-30 year EIDL loans that any lender or bank would want to service those loans. The previous PPP loan legal language had a 10 year repayment term.
Loan Forgiveness
1. Refer to my previous blog about the particulars of the "75% cliff": https://diversifiedhumansolutions.com/blog/caresbailout/
2. If you do NOT use at least 75% of the PPP loan for "Payroll" (again, this OMITS payments to 1099 as the law is currently written), then the loan forgiveness is reduced by each percent, dollar for dollar under 75%. Be sure to use PPP loan proceeds toward payroll.
3. The Interim rules seems to LIMIT the maximum forgiveness of the loan to 75% of the total loan. So it is unclear the maximum size of loan forgiveness based on contradictory guidelines. The language is unclear. EDIT: the entire loan can be forgiven.
Next Steps
I would not apply for a loan until you are ready to re-open! Taking this money now to forego elevated unemployment benefits (as they currently are) would be foolish for most businesses. If you are a grocery store or some essential business that is currently fully staffed, wait for additional guidance unless you need the money now. The updated text gives me pause as to how you aggregate your maximum loan and what business I am a part owner for to include in calculating the PPP loan. But if you need the cash, go get it! Use favorable interpretations... with the government, most people employed in the system tell me "it's better to ask for forgiveness, not permission."
Hypothetically speaking, If I am a 30% owner in a hotel, 100% owner in an insurance brokerage, a 10% owner in a grocery Co-op, and a 33% owner of a single family residential investment property... do I add all of those entities together to apply for my PPP loan? The answer to that is that one should aggregate based on 13 CFR § 121.301 and any business which you own 50% or more, AND any business in which you have the power to BLOCK an action by the board or shareholders.
Self employed people will be able to apply for the PPP loans starting next Friday (April 10, 2020). I believe you'll have to wait for those guidelines to clarify these guidelines....and then another few sets of guidelines after that if you want more clarity. If a 1099 contractor asks your for a Form 1099, you should give it to them as they probably need that documentation to access their PPP loan later. You should also file a copy of that 1099 with the government per applicable labor regulations.
Overall, I am concerned this stimulus isn't good enough. It leaves out large sectors of the economy, especially real estate. For example small boutique hotel owners / bed & breakfasts that typically pay people / companies as 1099 contractors. How are those real estate entities going to survive? For companies where their largest expense is NOT W2 wages & benefits, the PPP loan does very little for them. IF (BIG IF) the SBA & Treasury KEEPS the EIDL loans alive... that WOULD help companies without large W2 wage related expenses. However, the language in this Final Interim Rule does not seem favorable for the survival of the EIDL loans.
Another consideration is that lenders/banks are all but absolved or any responsibility...page 24 section c, to summarize: The lender does not have to conduct verification of loan accuracy IF the borrower submits documentation & attests to their accuracy! So it's the "honor" system for the lender. If your lender does a quick once over of your PPP loan paperwork, and there are no major red flags, you'll get your loan. This does NOT however say that the regulators won't come after YOU personally for any errors. I just say this to caution you of the enthusiasm of any lenders as they are not on the hook, and they are making quite a large commission from giving you this loan. These loans can also be sold on the secondary market, so the lender / bank gets to sell a 2 year Treasury bond at 3-4 times the current 2 year treasury yield (geeky side note for investors).
If you need the money, apply... you will get it. If you can wait for further guidance, I would do so. If you are involved in a business that is NOT W2 wage prevalent, call your lobbyist or trade association. There may or may not be further guidance on the aggregation rules under 13 CFR § 121.103 to determine loan eligibility & amount, but that must be made clearer in my opinion. If you need to act now, I would use the 5% rule that is often used by the IRS. If you own 5% or more of the company, you exert control and can apply that entity's W-2 wages in calculating the eligibility & amount of your PPP loan. I would wait for guidance, but if you need to act now, that seems like the reasonable way to prudently act.
I do not believe there will be much oversight and enforcement of these loans. But I don't know. With so many of these loans going out and with such speed and unclear guidance... how can the Feds / IRS police this effectively or exert fair punishment? If you need the money go for a favorable interpretation if you'd like! That's your risk to take. I'm not a cop or a regulator. If you have "fear of missing out" and think the money may run out, go ahead and take it as well. My advice would still be to time the loan so that you receive the funds when you re-open and are at or near full capacity.
