SBA Releases Additional
Interim Final Rule Implementing
the Paycheck Protection Program; Announces Lapse in PPP and EIDL Appropriations

On April 14, the Small Business Administration (SBA) issued an interim final rule, effective immediately, regarding the implementation of the Paycheck Protection Program (PPP), with a focus on guidance for individuals with self-employment income who file Schedule C, Profit or Loss From Business (Sole Proprietorship), with their IRS Form 1040, U.S. Individual Income Tax Return, including independent contractors and sole proprietors (self-employed individuals). Guidance is also provided with respect to certain partners in partnerships. The interim final rule additionally clarifies in part PPP eligibility criteria, including eligibility of businesses deriving revenue from legal gaming activities. Prospective borrowers should continue to consult the SBA and Treasury Department websites regularly to track new content and revisions to previously released guidance. 

This alert summarizes certain material information provided in the latest SBA interim final rule that was either not previously covered in, or serves to update a portion of, our previous alerts issued in connection with the financial assistance programs available under the CARES Act, which are collected and published in the Kramer Levin COVID-19 Legal Resource Guide found here: COVID-19 Legal Resource Guide.

As of the time of publication of this alert, the SBA website advises that the SBA is unable to accept new PPP lender and loan applications, Economic Injury Disaster Loan (EIDL) applications or lender applications due to a lack of available appropriations funding. Applicants who have already submitted their applications will continue to be processed on a first-come, first-served basis. News sources have reported that Congress is currently discussing the appropriation of an addition $250 billion for the PPP. As such, potential borrowers and lenders should continue to monitor the SBA website for any announcements of when additional applications will be accepted.

PPP Loan Eligibility

General Eligibility for Self-Employed Individuals

The SBA has clarified that self-employed individuals are eligible for PPP loans if they were (1) in operation on Feb. 15, 2020, (2) have a principal place of operation in the United States and (3) have filed, or will file, a Form 1040 Schedule C for 2019. If a self-employed individual has net income on his or her 2019 Form 1040 Schedule C that is equal to zero or less than zero, then the individual is not eligible for a PPP loan.

Partner Eligibility

The interim final rule clarifies that partners in a partnership (or members of a limited liability company taxed as a partnership) may not file a PPP loan application separately from the partnership as self-employed individuals. Instead, the self-employment income of general active partners may be reported as a payroll cost of the partnership, up to $100,000 on an annual basis, on a PPP loan application filed by or on behalf of the partnership. The interim final rule does not define a “general active partner,” but, subject to additional SBA guidance, this term may be intended to distinguish between those partners who actively participate in the day-to-day management and business activities of the business as compared with limited partners, who do not. Further, the interim final rule does not define “self-employment income” of general active partners with precise references to lines on partnership tax forms, but it is likely that such partners should include amounts listed on line 14 (“Self-employment earnings (loss)”) of their Schedules K-1, Partner’s Share of Income, Deductions, Credits, etc., issued in connection with the partnership’s information return filed on IRS Form 1065 for the purposes of calculating payroll costs, though further SBA guidance is needed. This clarification is intended to streamline the application process for businesses with general active partners receiving Schedule K-1 allocations; allow lenders to more quickly process applications; and lower the burdens of applying for such partnerships/partners, rather than requiring each such partner to apply separately from the partnership.

The SBA notes that partners in a partnership should be aware that participation in the PPP may affect their eligibility for state-administered unemployment compensation or unemployment assistance programs, including the programs authorized by Title II, Subtitle A of the CARES Act, or CARES Act Employee Retention Credits.

The interim final rules notes that the SBA will issue additional guidance for those individuals with self-employment income who (i) were not in operation in 2019 but were in operation on Feb. 15, 2020, and (ii) will file a Form 1040 Schedule C for 2020.

Casino Eligibility

The interim final rule clarifies the standing SBA rule regarding ineligibility of businesses receiving revenue from legal gaming activities. A business that is otherwise eligible for PPP loans will not be considered ineligible from participating in the PPP due to receipt of legal gambling revenues under the following conditions:

• Such business does not derive more than one-third of gross annual revenue from legal gambling activities; or
• (1) The business’s legal gaming revenue (net of payouts but not other expenses) did not exceed $1 million in 2019, and (2) legal gaming revenue (net of payouts but not other expenses) comprised less than 50% of the business’s total revenue in 2019.

Businesses that receive illegal gambling revenue remain categorically ineligible.

Lender Affiliate Eligibility

The interim rule clarifies that SBA regulations (including 13 CFR 120.110 and 120.140) will not apply to prohibit an otherwise eligible business owned (in whole or part) by an outside director or holder of a less than a 30% equity interest in a PPP lender from obtaining a PPP loan from the PPP lender on whose board the director serves or in which the equity owner holds an interest, provided that the eligible business owned by the director or equity holder follows the same process as any similarly situated customer or account holder of the lender. However, officers and key employees of a PPP lender may obtain a PPP loan from a different lender, but not from the PPP lender with which they are associated. The SBA advised PPP lenders to comply with all other applicable state and federal regulations concerning loans to associates and should also consult their own internal policies concerning lending to individuals or entities associated with the lender.

PPP Loan Amount for Self-Employed Individuals

Calculating Loan Amount for Self-Employed Individuals With No Employees

The interim final rule provides the following guidance on calculating maximum PPP loan amount for self-employed individuals with no employees:

1. Review your 2019 IRS Form 1040 Schedule C line 31 net profit amount (reduce it to $100,000 if such amount exceeds $100,000). If this amount is zero or less, you are not eligible for a PPP loan. If you have not yet filed a 2019 return, fill it out and compute the net profit value.
2. Calculate your average monthly net profit amount by dividing your 2019 net profit by 12.
3. Multiply the average monthly net profit amount by 2.5.
4. Add the outstanding amount of any EIDL made between Jan. 31, 2020, and April 3, 2020, to be refinanced, less the amount of any advance under such EIDL.

Calculating Loan Amount for Self-Employed Individuals With Employees

The interim final rule provides the following guidance on calculating maximum PPP loan amount for self-employed individuals with employees:

1. Calculate 2019 payroll by adding the following:
   • Your 2019 IRS Form 1040 Schedule C line 31 net profit amount (reduce it to $100,000 if such amount exceeds $100,000). If this amount is zero, set at zero. If you have not yet filed a 2019 return, fill it out and compute the net profit value.
   • The 2019 gross wages and tips paid to employees whose principal place of residence is in the United States computed using 2019 IRS Form 941 Taxable Medicare wages and tips (line 5c column 1) from each quarter plus any pretax employee contributions for health insurance or other fringe benefits excluded from taxable Medicare wages and tips. Subtract any amounts paid to any individual employee in excess of $100,000 annualized.
   • 2019 employer health insurance contributions (health insurance component of Form 1040 Schedule C line 14), retirement contributions (Form 1040 Schedule C line 19), and state and local taxes assessed on employee compensation (primarily under state laws commonly referred to as the State Unemployment Tax Act, or SUTA, from state quarterly wage reporting forms).
2. Calculate your average monthly net profit amount by dividing your 2019 net profit by 12.
3. Multiply the average monthly net profit amount by 2.5.
4. Add the outstanding amount of any EIDL made between Jan. 31, 2020, and April 3, 2020, to be refinanced, less the amount of any advance under such EIDL.

Required PPP Loan Documentation

Self-Employed Individuals With No Employees

The interim final rule provides the following guidance on documentation to be submitted with a PPP loan application for self-employed individuals with no employees:

• 2019 Form 1040 Schedule C (regardless of whether a 2109 tax return was filed with the IRS)
• 2019 IRS Form 1099-MISC detailing nonemployee compensation received (box 7)
• An invoice, bank statement or book of record that establishes self-employment status; PPP loan applicants must also provide a 2020 invoice, bank statement or book of record to establish such applicant was in operation on or around Feb. 15, 2020 (guidance is forthcoming for individuals who were not in operation in 2019 but who were in operation on Feb. 15, 2020, and will file a Form 1040 Schedule C for 2020)

Self-Employed Individuals With Employees

The interim final rule provides the following guidance on documentation to be submitted with a PPP loan application for self-employed individuals with employees:

• 2019 Form 1040 Schedule C (regardless of whether a 2109 tax return was filed with the IRS)
• Form 941 (or other tax forms or equivalent payroll processor records containing similar information) and state quarterly wage unemployment insurance tax reporting forms from each quarter in 2019 or equivalent payroll processor records, along with evidence of any retirement and health insurance contributions, if applicable
• A payroll statement or similar documentation from the pay period that covered Feb. 15, 2020, to establish the applicant was in operation on Feb. 15, 2020

Use of Loan Proceeds by Self-Employed Individuals

At least 75% of the PPP loan proceeds received by self-employed individuals must 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 SBA and Treasury Department have determined that self-employed individuals’ use of loan proceeds is limited to those types of allowable uses for which the borrower made expenditures in 2019 since the PPP loan is meant to be necessary “to support the ongoing operations” of the borrower.

Permitted uses of PPP loan proceeds include:

• Owner compensation replacement, based on the 2019 IRS Form 1040 Schedule C line 31 net profit amount (as calculated above)
• Employee payroll costs (as defined in the PPP interim final rule, released on April 2) for employees whose principal place of residence is in the United States
• Mortgage (not including mortgage prepayments or principal payments), rent and utilities
  • The applicant must have claimed or been entitled to claim a deduction for such expenses on the 2019 Form 1040 Schedule C for such payments to be a permissible use during the eight-week period following the first disbursement of the loan.
• Debt interest payments incurred before Feb. 15, 2020 (such amounts are not eligible for PPP loan forgiveness)
• Refinancing an EIDL loan made between Jan. 31, 2020, and April 3, 2020 (maturity will be reset to the PPP’s maturity of two years once refinanced)

PPP Loan Forgiveness for Self-Employed Individuals

As of the release of the interim final rule, the SBA has provided limited guidance on how the PPP forgiveness process will work. The interim final rule confirms that the full principal amount of the PPP loan to a self-employed individual, plus accrued interest, is eligible for forgiveness. The actual amount of forgiveness comprises the amounts spent on the costs listed below over the eight-week period following receipt of the loan proceeds; however, 75% of the amount forgiven must be attributable to payroll costs.

• Payroll costs including employee salary, wages and tips, up to $100,000 on an annualized basis per employee (a maximum of $15,385 per employee for the eight-week period), 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)
• Owner compensation replacement, calculated based on the 2019 IRS Form 1040 Schedule C line 31 net profit amount (as calculated above), with forgiveness of such amounts limited to eight weeks’ worth of 2019 net profit, and excluding any qualified sick leave equivalent amount for which a credit is claimed under Section 7002 of the Families First Coronavirus Response Act (FFCRA) or qualified family leave equivalent amount for which a credit is claimed under Section 7004 of the FFCRA
• Payments of mortgage interest incurred before Feb. 15, 2020, to the extent they are deductible on Form 1040 Schedule C (business mortgage payments)
• Rent payments on leases in force before Feb. 15, 2020, to the extent they are deductible on Form 1040 Schedule C (business rent payments)
• Utility payments under service agreements dated before Feb. 15, 2020, to the extent they are deductible on Form 1040 Schedule C (business utility payments)

Required Forgiveness Documentation for Self-Employed Individuals

• The borrower certification required by Section 1106(e)(3) of the CARES Act, which is a certification from a representative of the eligible recipient authorized to certify the following:
  • The documentation presented is true and correct.
  • The amount for which forgiveness is requested was used to retain employees, make interest payments on a covered mortgage obligation, make payments on a covered rent obligation or make covered utility payments.
• 2019 Form 1040 Schedule C
• Evidence of business rent, business mortgage interest, payments on real or personal property, or business utility payments during the covered period if loan proceeds were used for any of those purposes
• For applicants with employees:
  • Form 941 and state quarterly wage unemployment insurance tax reporting forms or equivalent payroll processor records that best correspond to the eight-week period following receipt of the loan proceeds (with evidence of any retirement and health insurance contributions).