White House Announces Modifications to Paycheck Protection Program That Expand Lending to Small Businesses in Need

This alert has been updated as of March 10, 2021, to reflect subsequent U.S. Small Business Administration (SBA) guidance implementing the Paycheck Protection Program (PPP) changes previously announced by the Biden administration.

On Feb. 22, the Biden administration announced that it was implementing certain rule changes to the PPP to make the program more accessible to smaller businesses. Following such announcement, the SBA published a press release and a new interim final rule implementing such new PPP rules. The SBA press release can be found here and the new interim final rule can be found here.  Question #64 of the newly released March 3 SBA FAQs, found here, also implements the new PPP rules. 

The most significant and time-sensitive modifications to the PPP noted was the establishment of a 14-day exclusive loan application period for businesses and nonprofits with fewer than 20 employees, which period began Feb. 24 and runs through Mar. 10. 

Additional PPP changes implemented through the new interim final rule and new FAQ include: 

• Revising the PPP’s loan amount calculation formula to allow sole proprietors, independent contractors, and self-employed individuals to receive more financial support by permitting such individuals who file for federal taxes on IRS Form 1040, Schedule C, base their loan amount calculations on gross income (which is used by the SBA in calculating loan amounts for farmers).  Previously, for purposes of calculating a borrower’s loan amount, PPP rules defined “payroll costs” (Payroll Costs) for such individuals who file an IRS Form 1040, Schedule C as employee payroll costs (if employees exist) plus net profits, being the individual’s net earnings from self-employment (Owner Compensation).  Pursuant to the new interim final rule, if a Schedule C filer has no employees, such borrower may simply elect to calculate its loan amount based on either net profit or gross income (being the amount such borrower reports on line 7 of its Schedule C) since without employees, such borrower’s Owner Compensation is the only component of the borrower’s Payroll Costs. However, if a Schedule C filer has employees (where Owner Compensation is added to employee payroll costs to determine the borrower’s total Payroll Costs), such borrower may elect to calculate the Owner Compensation share of its Payroll Costs based on either net profit or gross income less those expenses reported on lines 14 (employee benefit programs), 19 (pension and profit sharing plans), and 26 (wages (less employment credits)) of Schedule C.  Further, expenses reported on lines 14, 19, and 26 of Schedule C represent employee payroll costs and are subtracted from the Owner Compensation share of Payroll Costs if the owner uses gross income to calculate its loan amount in order to avoid double-counting these costs.
  
  
• The SBA notes in the new interim final rule that the use of gross income by Schedule C filers may, in some cases, increase the risk of waste, fraud, or abuse, because it will substantially increase the maximum loan amount for relevant borrowers, and in some cases a Schedule C filer’s gross income may not accurately reflect the extent to which its PPP loan is necessary to support the ongoing operations of its business.  As such, to mitigate this risk, if a Schedule C filer elects to use gross income to calculate its loan amount on a First Draw PPP Loan and the borrower reports more than $150,000 in gross income on its Schedule C that was used to calculate its First Draw loan amount, such borrower may not rely on the SBA’s previously announced safe harbor deeming certain borrowers to have made their certifications of need in good faith and such borrower may be subject to a review by the SBA of its need certification.  However, the SBA is not applying this safe harbor exclusion to Second Draw PPP Loans, because Second Draw applicants are required to certify that they have realized a reduction in gross receipts in excess of 25% relative to the relevant comparison time period; as such, they are deemed to have made the required need-based certification in good faith.
  
  
• This change to the loan amount calculation is only implemented with respect to PPP loans that are approved after March 3, 2021.  A borrower whose PPP loan has already been approved as of the effective date of March 3, 2021 cannot increase its PPP loan amount based on the new calculation methodology.

• Expanding PPP eligibility to include:
  
  
• Small business owners with prior non-financial fraud felony convictions for which there was a previously a one-year lookback, consistent with a bipartisan congressional proposal.  The new interim final rule notes that financial fraud felonies for which there remains a five-year lookback for eligibility include those involving fraud, bribery, embezzlement, or false statements on loan applications or applications for federal assistance;
  
  
• Small business owners who have struggled to make federal student loan payments by eliminating federal student loan debt delinquency and default as disqualifiers to participating in the PPP, which applies to both new First Draw or Second Draw PPP applicants and those borrowers who have already received  First Draw or Second Draw PPP loans; and
  
  
• Non-citizen small business owners who are lawful U.S. residents by clarifying that they may use their Individual Taxpayer Identification Number (ITIN) to apply for PPP loans.

Our previous alerts issued in connection with the financial assistance programs available under the CARES Act are collected and published in the Kramer Levin COVID-19 Legal Resource Guide found here: COVID-19 Legal Resource Guide. The Kramer Levin COVID-19 Legal Resource Guide will be updated to include this alert and any future alerts addressing the financial assistance programs available under the CARES Act and Economic Aid Act.