SBA’s Nineteenth IFR amends PPP guidance for self-employed borrowers
June 18, 2020
By: Mark A. Mangano
The Paycheck Protection Program Flexibility Act (Flexibility Act) modified the Paycheck Protection Program (PPP) and associated forgiveness established by the CARES Act. The modifications expanded the amount of potentially forgivable payroll expense per employee from $15,385 to $46,154. By interim final rule, the Small Business Administration (SBA) has limited the maximum forgivable owner compensation for self-employed individuals to $20,833.
On June 17, 2020, the SBA issued its nineteenth interim final rule: Business Loan Program Temporary Changes; Paycheck Protection Program- Revisions to the Third and Sixth Interim Final Rules (Final Rule)1. The Final Rule amends the Third2 and Sixth3 interim final rules to address Flexibility Act mandated changes to the PPP.
The most significant changes relate to the Third interim final rule that addressed guidance on PPP loans for self-employed individuals. The changes relate to restrictions on use of PPP loan proceeds, amounts eligible for forgiveness, and maturity of loans.
Increased flexibility in use of loan proceeds
The Final Rule confirms the more flexible definition of the amount of PPP loan proceeds that must be used for payroll costs previously stated in amendments to the first interim final rule related to the PPP. At least 60 percent of the PPP loan proceeds must be used for payroll costs.
Owner compensation forgiveness is limited
The Flexibility Act extended the covered period in which borrowers must incur and disburse payroll costs from eight weeks to 24 weeks. This change makes it easier to achieve forgiveness under the PPP.
Under the new covered period of 24 weeks, the forgivable payroll expense for an individual employee over that period could be much greater than the payroll cost estimated for the employee in applying for the PPP loan. This increase may benefit the borrower in situations where the borrower cannot retain or replace some of its employees and can qualify for Safe Harbor exemptions from forgiveness deductions for reductions in full time equivalent employees. Despite the increase, the borrower cannot be forgiven more than the amount of the PPP loan which was calculated on 2.5 times the borrower’s average monthly payroll.
Self-employed borrowers may not apply the expanded definition of forgivable compensation to the owner’s owner compensation replacement. Owners are afforded a slight increase in forgivable annualized net profit from eight weeks to 2.5 months of 2019 net profit. Based upon the maximum allowable net profit of $100,000 this can represent an increase from $15,385 to $20,833. The forgivable net profit is not expanded to the full 24 weeks due to the determination that it would create a disincentive for self-employed borrowers to retain or rehire employees to support the forgiveness calculations.
Maturity of new PPP loans extended to five years
The Final Rule modifies the language of the Third interim final rule to confirm that PPP loans made on or after June 5, 2020 will have a term of five years. Loans made before June 5, 2020 may be extended from two years to five years upon the agreement of the borrower and the lender.