Update on Paycheck Protection Program Interim Rule
May 14, 2020
The CARES Act temporarily adds a new program, titled the “Paycheck Protection Program,” to the SBA’s 7(a) Loan Program. The CARES Act also provides for forgiveness of up to the full principal amount of qualifying loans guaranteed under the Paycheck Protection Program (PPP). The PPP is intended to provide economic relief to small businesses nationwide adversely impacted by COVID-19. SBA posted interim final rules on April 3, 2020, April 14, 2020, April 24, 2020, April 28, 2020, April 30, 2020, May 5, 2020, and May 8, 2020, and the Department of the Treasury posted an additional interim final rule on April 28, 2020.
Yet another interim final rule was issued on May 13 which supplements the previously posted interim final rules by providing guidance on the ability to increase certain PPP loans.
On April 14, 2020, SBA posted an interim final rule that, among other things, provided guidance for individuals with self-employment income. The interim final rule explained that a partner in a partnership may not submit a separate PPP loan application as a self-employed individual. Instead, the self-employment income of general active partners may be reported as a payroll cost, up to $100,000 annualized, on a PPP loan application filed by or on behalf of the partnership.
Some PPP loans were approved to partnerships before the additional guidance was issued and, as a result, those businesses may not have received PPP loans in the maximum amount for which they are eligible. This interim final rule authorizes all PPP lenders to increase existing PPP loans to partnerships to include appropriate amounts to cover partner compensation in accordance with the interim final rule posted on April 14, 2020.
In addition, although the interim final rule on disbursements posted on April 28, 2020, requires PPP loans to be disbursed in a single disbursement of the PPP loan within ten calendar days of loan approval, if a PPP loan that is increased has already been disbursed, this interim final rule authorizes the lender to make an additional disbursement of the increased loan proceeds prior to submission of the initial SBA form to be submitted by the lender (SBA Form 1502) that includes that loan, generally within 20 calendar days after a PPP loan is approved.
According to the new interim rule, if a partnership received a PPP loan that did not include any compensation for its partners, such loan amount may be increased to include partner compensation. Of course, the borrower must provide the lender with required documentation to support the calculation of the increase.
Specifically, if a partnership received a PPP loan that only included amounts necessary for payroll costs of the partnership’s employees and other eligible operating expenses, but did not include any amount for partner compensation, the lender may electronically submit a request to increase the PPP loan amount to include appropriate partner compensation, even if the loan has been fully disbursed, provided that the lender’s first SBA Form 1502 report to SBA on the PPP loan has not been submitted.
The loan cannot be increased after the initial SBA Form 1502 report on the PPP loan has been submitted to SBA, or after the date the first SBA Form 1502 was required to be submitted to SBA. In no event can the increased loan amount exceed the maximum loan amount allowed under the PPP Program, which is $10 million for an individual borrower or $20 million for a corporate group.
This interim final rule applies to applications submitted under the PPP through June 30, 2020, or until funds made available for the Program are exhausted, whichever occurs first.