April 3, 2020
Late on April 2, 2020, the Treasury Department posted a draft Interim Final Rule implementing sections 1102 and 1106 of the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act” or “the Act”). Section 1102 created the “Paycheck Protection Program” (“PPP”) loans, which are an addition to the SBA’s existing 7(a) Loan Program, and section 1106 provided for forgiveness of some or all of the loan amounts. We summarize the most relevant portions of the draft Interim Final Rule for government contractors.
Because the window for applying for the loans has opened, and the loans will be made available on a “first-come, first-served” basis, small businesses are understandably anxious about the relative lack of guidance on how to apply for a loan, and other details regarding the loans. This draft Interim Final Rule appears incomplete in some areas, and it remains to be seen how close this is to “final.” Nonetheless, here are 6 key takeaways from the draft Interim Final Rule:
Both the Act and the SBA size standards make clear which types of organizations are eligible for the paycheck protection loans. The draft Interim Final Rule provides examples of ineligible individuals and organizations:
- Organizations engaged in any activity that is illegal under federal, state, or local law;
- Household employers (individuals who employ household employees such as nannies or housekeepers);
- Organizations with an owner of 20 percent or more of the equity that 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 within the last five years; or
- Organizations (or their individual owners) that have ever obtained a direct or guaranteed loan from SBA or any other Federal agency that is currently delinquent or has defaulted within the last seven years and caused a loss to the government.
2) Interest Rate
Although the Act permitted a higher interest rate, the SBA determined that a 1% interest rate is appropriate.
3) Maturity Date
Although the Act provided that the loans would have a maximum maturity of up to ten years from the date the borrower applies for loan forgiveness, the SBA determined that a two-year loan term is sufficient.
4) Payment Deferrals and Loan Forgiveness
Borrowers will not have to make any payments for six months following the date of disbursement of the loan. However, interest will continue to accrue on PPP loans during this six-month deferment.
The PPP loan can be forgiven up to the full principal amount of the loan and any accrued interest. Loan forgiveness is primarily applicable to payroll costs, but up to 25% of the total loan forgiveness can be used for costs other than payroll.
5) Access and Use of Funds
The loan proceeds are disbursed on a “first-come, first-served” basis.
At least 75% of the PPP loan proceeds shall be used for payroll costs.
On the application, an authorized representative of the applicant must certify in good faith to all of the following:
- The applicant was in operation on February 15, 2020 and had employees for whom it paid salaries and payroll taxes or paid independent contractors, as reported on a Form 1099-MISC.
- Current economic uncertainty makes this loan request necessary to support the ongoing operations of the applicant.
- The funds will be used to retain workers and maintain payroll or make mortgage interest payments, lease payments, and utility payments.
Nichols Liu is tracking all of the developments, guidelines, and regulations relating to the CARES Act, and will continue to post updates on our blog. We are available to discuss any needs or questions you may have.