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SBA Eliminates Cliff for Borrowers Using Less Than 60% of PPP Loans for Payroll Costs

(Parker Tax Publishing June 2020)

The Small Business Administration (SBA) has updated its guidance relating to the Paycheck Protection Program to reflect the recently passed Paycheck Protection Program Flexibility Act, as well as additional issues of which it has been made aware. In particular, the SBA is treating the new 60 percent limitation on payroll costs as being a proportional limitation so that if an employer spends less than 60 percent on payroll costs, that employer is still eligible for loan forgiveness, although at a reduced level. SBA-2020-0034, SBA-2020-0035, SBA-2020-0036.


Among the provisions enacted as part of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), which was signed into law on March 27, 2020, was a provision authorizing the Small Business Administration (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) are 100 percent guaranteed by SBA, and the full principal amount of the loans may qualify for loan forgiveness. The PPP was subsequently enhanced and modified in the PPP and Health Care Enhancement Act (see PFTB 2020-04-23) and the PPP Flexibility Act (FTB-2020-06-05).

On April 2, 2020, the SBA posted an interim final rule, SBA-2020-0015, announcing the implementation of the CARES Act and the PPP. The SBA has posted additional interim final rules in the Federal Register and recently added to that guidance by issuing SBA-2020-0034, SBA-2020-0035, and SBA-2020-0036.

SBA Rules Updated to Reflect PPP Flexibility Act

The PPP Flexibility Act amends the CARES Act and amends provisions relating to PPP loan terms and PPP loan forgiveness. In light of the passage of the PPP Flexibility Act, the SBA issued interim final rule SBA-2020-0035 (6/16/20), which makes changes to the SBA's First Interim Rule posted on its website on April 2, 2020. SBA-2020-0035 thus revises the SBA's First Interim Rule posted on April 2, 2020, by changing key provisions, such as the loan maturity, deferral of loan payments, and forgiveness provisions, to conform to the PPP Flexibility Act. SBA-2020-0035 also makes conforming amendments on the use of PPP loan proceeds in order to be consistent with amendments made in the Flexibility Act. Several of these amendments are retroactive to the date of enactment of the CARES Act (i.e., March 27, 2020), as required by the PPP Flexibility Act.

In addition, SBA-2020-0035 clarifies one troublesome item in the PPP Flexibility Act that had practitioners concerned. Under the PPP Flexibility Act, the amount of a PPP loan that was required to be spent on payroll, in order to receive loan forgiveness, was reduced from 75 percent to 60 percent. However, as the law was written, it appeared to create a cliff that did not exist with respect to the 75 percent rule. The PPP Flexibility Act provides that a borrower must use at least 60 percent of the PPP loan for payroll costs to receive loan forgiveness. In SBA-2020-0035, the SBA said that it is interpreting this requirement as a proportional limit on nonpayroll costs as a share of the borrower's loan forgiveness amount rather than as a threshold for receiving any loan forgiveness.

According to the SBA, this interpretation is consistent with the new safe harbor in the PPP Flexibility Act, which provides that if a borrower is unable to rehire previously employed individuals or similarly qualified employees, the borrower will not have its loan forgiveness amount reduced based on the reduction in full-time equivalent employees. It would be incongruous to interpret the PPP Flexibility Act's 60 percent requirement as a threshold for receiving any loan forgiveness, the SBA said, because in some cases it would directly conflict with the flexibility provided by the new safe harbor. The SBA added that this interpretation of the 60 percent requirement is most consistent with Congress's purpose in that legislation - namely to increase the flexibility provided to borrowers related to PPP loan forgiveness.

Observation: The SBA said it will be issuing revisions to its interim final rules on loan forgiveness and loan review procedures to address amendments the PPP Flexibility Act made to loan forgiveness requirements.

SBA Revises Rule on Eligibility Requirement Relating to Felony Convictions

The First Interim Final Rule provided, among other things, that a PPP loan will not be approved if an owner of 20 percent or more of the equity of the applicant has been convicted of a felony within the last five years. After further consideration, the SBA determined that a shorter timeframe for felonies that do not involve fraud, bribery, embezzlement, or a false statement in a loan application or an application for federal financial assistance is more consistent with Congressional intent to provide relief to small businesses and also promotes the important policies underlying the First Step Act of 2018 (Pub. L. 115-391).

Therefore, the SBA, in SBA-2020-0036, revised Part III.2.b.iii of the First Interim Final Rule to provide that a borrower can be ineligible for a PPP loan even if the individual meets the general eligibility requirements if the individual is an owner of 20 percent or more of the equity of the applicant is incarcerated, on probation, on parole; presently subject to an indictment, criminal information, arraignment, or other means by which formal criminal charges are brought in any jurisdiction; or has been convicted of a felony involving fraud, bribery, embezzlement, or a false statement in a loan application or an application for federal financial assistance within the last five years or any other felony within the last year. Thus, the SBA removed the ineligibility rule for any individual convicted of a felony within the last five years.

Observation: The SBA revised the PPP Borrower Application Form, effective June 12, 2020, to reflect this change.

Certain Telephone Cooperatives Are Eligible PPP Borrowers

On May 14, 2020, SBA posted an interim final rule providing that certain electric cooperatives, which may also be exempt from taxation or organized under state nonprofit statutes, but which return any excess of net operating revenues over their cost of operations to their member-owners, will be considered to be a business entity organized for profit for purposes of the PPP and therefore eligible to receive PPP loans, provided they meet other eligibility criteria.

Because telephone cooperatives also operate as businesses, and to provide certainty to potential PPP applicants, the SBA issued interim final rule SBA-2020-0034 (6/11/20) which provides that, for purposes of the PPP, a telephone cooperative that is exempt from federal income tax under Code Sec. 501(c)(12) also will be considered to be a business entity organized for profit. As a result, such telephone cooperatives are eligible PPP borrowers, as long as other eligibility requirements are met.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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