April 29, 2020

Since our last update, the Small Business Administration has published four Interim Final Rules relating to the Paycheck Protection Program (PPP). These items summarized key eligibility components relating to the Paycheck Protection Program and clarified areas where The Coronavirus Aid, Relief, and Economic Security Act (CARES) was either unclear or in the eyes of the SBA, needed to treat certain items with more clarity or specificity. A link to these rulings and other related items may be found here: https://home.treasury.gov/policy-issues/cares/assistance-for-small-businesses

Key Provisions or Clarifications in the Interim Final Rulings April 14, 24, 27, and 28, 2020

Below we will focus only on those items we consider new, clarified, and of interest to KHA clients. The points listed below are not an exhaustive list. For more detailed information, please visit each resource below.

Interim Final Rule – Additional Eligibility Criteria and Requirements for Certain Pledges of Loans

  • This rule clarified eligibility for 1040 Schedule C borrowers applying for PPP loans and how the SBA plans to address the owner’s compensation by introducing a new term called the “owner compensation replacement.” This definition will be used in calculating the maximum loan amount and the amount eligible for forgiveness.
  • General active partners in partnerships can apply as part of the company’s application up to the $100,000 annualized amount.
  • Documentation for submission to lender for forgiveness application was alluded to such as payment receipts and detailed records for all eligible expenses.

Interim Final Rule – Promissory Notes, Authorizations, Affiliations, and Eligibility

  • A limited safe harbor was provided for any entities certifying to “current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant” that no longer believe they meet this definition. Those entities have until May 7, 2020 to pay funds back.
  • Hedge funds, private equity firms and entities in bankruptcy are ineligible for PPP loans.
  • Legal gaming businesses are eligible for PPP loans.
  • Employee stock ownership plans do not trigger affiliation rules.

Interim Final Rule – Additional Criterion for Seasonal Employers

  • The CARES Act allowed seasonal employers to use February 15, 2019 or March 1, 2019 to June 30, 2019 for calculating average payroll amounts over a 12-week period. This rule now allows any 12-week period from May 1, 2019 to September 15, 2019.
  • If the business was not fully operational as of February 15, 2020, the business can still be deemed as having been in business so long as it was fully functioning at least 8 weeks between May 1, 2019 and September 15, 2019.
  • This applies only to seasonal employers and all lenders who are authorized to make PPP loans can make these loans.

Interim Final Rule – On Disbursements

  • Borrowers are unable to take multiple draws from a PPP loan in attempts to delay the start of the 8-week period.
  • Similarly. lenders must make a one-time full disbursement of the PPP loan within 10 calendar days of approval. The loan is approved when an SBA loan number has been assigned.
  • For those with loans currently partially drawn, transitionary guidance states the 10-calendar day period begins on April 28, 2020, implying that by May 8, 2020 the remainder of the funds must be disbursed.
  • The 8-week period began on the date of the first disbursement if partial disbursements existed.
  • Economic Injury Disaster Loan refinance funds should be sent directly to the SBA and not to the lender.

Other Items

PPP: Frequently Asked Questions

The SBA continues to update this form. In a recent revision, we want to bring attention to question 31. “Do businesses owned by large companies with adequate sources of liquidity to support the business’s ongoing operations qualify for a PPP loan?” From the answer, it states that those making the certification regarding: “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” must do so in good faith, considering current business operations and their ability to access other sources of liquidity to support ongoing operations in a manner not detrimental to the business. Although the CARES Act waived the credit elsewhere rule, it appears there will still be some justification required for borrowers. Lenders are able to rely on borrower certification here and this FAQ does point to rules and regulations in place at the time of the loan application completion. Also highlighted in question 37, similar items apply for businesses owned by private companies with adequate sources of liquidity.

PPP: How to Calculate Maximum Loan Amounts – By Business Type

A new tool was provided on April 24, 2020 with actual examples for how to calculate the maximum loan amount depending on the business’s entity type.  You can find it here.

What’s Next

Some clarity is added and as of today, additional loans from the second round of the PPP funds are being originated throughout the United States. More on that can be found here. Forthcoming, we anticipate an interim final rule on loan forgiveness to be issued by the Treasury and will plan to keep you updated as we know more.

Let KHA Assist

If you are interested in understanding how the forgiveness portion of the PPP Loan is calculated, the KHA Management Consultants team has dedicated resources to understanding this and are willing and available to assist KHA clients.  Please reach out to understand how KHA might help you. 

As your trusted advisors, we are committed to keeping you well-informed with any new legislation passed by Congress or other authorities as well as any new pronouncements by the Department of Treasury that may affect you. Please do not hesitate to reach out to KHA with any additional questions you may have.

These sources are simply included for informational purposes. KHA Accountants, PLLC, its partners and others do not provide any assurance as to the accuracy of these items or the information included therein. As such, KHA Accountants, PLLC cannot be held liable for any information derived from referenced sources. This by no means is a recommendation to obtain a loan or attempt to apply for a loan. There are many unknowns at this time regarding what other stimulus (grants or other loan options) may become available with pending and future bills, executive orders, or emergency declarations to follow, that may become laws. Consult your legal and business advisors prior to making financing decisions. This is intended for illustrative and discussion purposes only.