Update on Paycheck Protection Program Interim Rule
April 27, 2020
The SBA last week updated the previously issued interim final rules that were promulgated under the Paycheck Protection Program (the “PPP”), as enacted by the CARES Act (Pub. L. 116-136).
In particular, it addressed the eligibility of certain taxpayers to participate in the PPP.
The interim final rule applies to applications for loans that are submitted under the PPP through June 30, 2020, or until funds made available for that purpose are exhausted.
Hedge Fund/Private Equity. According to the updated rule, hedge funds and private equity firms are primarily engaged in investment or speculation, and such businesses are therefore ineligible to receive a PPP loan.
The update also reaffirms that the “affiliation rules” apply to private equity-owned (“portfolio”) businesses in the same manner as any other business subject to outside ownership or control.
In addition to applying any applicable affiliation rules, the update reminds portfolio company borrowers that they should carefully review the required certification on the PPP Borrower Application Form (SBA Form 2483) stating that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.”
However, the updated rule also reminds businesses that the affiliation rules are waived if the borrower receives financial assistance from an SBA-licensed Small Business Investment Company (SBIC) in any amount. This includes any type of financing listed in 13 CFR 107.50, such as loans, debt with equity features, equity, and guarantees. Affiliation is waived even if the borrower has investment from other non-SBIC investors.
Hospitals. The interim guidance is amended to provide that a hospital that is otherwise eligible to receive a PPP loan as a business concern or nonprofit organization (described in section 501(c)(3) of the Internal Revenue Code of 1986 and exempt from taxation under section 501(a) of such Code) shall not be rendered ineligible for a PPP loan due to ownership by a state or local government if the hospital receives less than 50% of its funding from state or local government sources, exclusive of Medicaid.
Gaming. The update clarifies that a business which is otherwise eligible for a PPP Loan is not rendered ineligible due to its receipt of legal gaming revenues. Businesses that received illegal gaming revenue remain categorically ineligible.
ESOPs. According to the revised rules, for purposes of the PPP, a business’s participation in an ESOP does not result in an affiliation between the business and the ESOP. Under an ESOP, a business concern contributes its stock (or money to buy its stock or to pay off a loan that was used to buy stock) to the plan for the benefit of the company’s employees. The plan maintains an account for each employee participating in the plan. Shares of stock vest over time before an employee is entitled to them. However, with an ESOP, an employee generally does not buy or hold the stock directly while still employed with the company. Instead, the employee generally receives the shares in his or her personal account only upon the cessation of employment with the company, including retirement, disability, death, or termination.
Bankruptcy. According to the updated interim rules, if the applicant or the owner of the applicant is the debtor in a bankruptcy proceeding, either at the time it submits the application or at any time before the loan is disbursed, the applicant is ineligible to receive a PPP loan.
If the applicant or the owner of the applicant becomes the debtor in a bankruptcy proceeding after submitting a PPP application but before the loan is disbursed, it is the applicant’s obligation to notify the lender and request cancellation of the application. Failure by the applicant to do so will be regarded as a use of PPP funds for unauthorized purposes.
The Borrower Application Form for PPP loans (SBA Form 2483) already reflects this restriction in the form of a borrower certification. The update reaffirms that lenders may rely on an applicant’s representation concerning the applicant’s or an owner of the applicant’s involvement in a bankruptcy proceeding.
Farrell Fritz Can Help
Navigating the Paycheck Protection Program loan process can be challenging. Businesses need to determine their eligibility for the loan, determine the maximum amount of loan that they are eligible to receive, and determine whether their intended use of loan proceeds will qualify them for forgiveness.
Employment strategies, tax implications, and business impact all need to be considered with your professional advisors. The Farrell Fritz COVID-19 Crisis Response Team, and specifically, our PPP Group can help you put together the strategy that works for your business. For immediate assistance with evaluating the Paycheck Protection Program, please contact the COVID19response@farrellfritz.com or your Farrell Fritz relationship partner.
COVID-19 Crisis Response and Help
To access a special report on The CARES Act by Tax Partner, Lou Vlahos, please visit: https://www.farrellfritz.com/coronavirus-aid-relief-and-economic-security-act-impact-summary/
For additional resources, please visit the Farrell Fritz COVID-19 Crisis Response and Help page: https://www.farrellfritz.com/covid-19-update/
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