August 4, 2020

Volume X, Number 217

August 03, 2020

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SBA Issues Clarifications to PPP Rules

On Tuesday, April 14, the Small Business Administration (SBA) issued several important clarifications to its rules regarding the Paycheck Protection Program (PPP) in respect to the following:

  1. Partners in a partnership may not submit separate PPP applications as self-employed individuals, but must file on behalf of the partnership.

  2. Calculation of maximum loan amount for self-employed individuals and payroll/net monthly profit documentation.

  3. Use of PPP loan proceeds by self-employed individuals.

  4. Documentation for loan forgiveness by self-employed individuals.

  5. Rule change allowing PPP loans to the businesses of an outside director or holder of less than 30% of the shares of the lender.

  6. Officers and inside directors are still precluded from securing a PPP loan from the lender with which they are associated. Unfortunately, the clarifications did not address close relatives of officers and inside directors.

Below are the relevant provisions from the SBA’s Business Loan Program Temporary Changes; Paycheck Protection Program – Additional Eligibility Criteria and Requirements for Certain Pledges of Loans that relate to the above six items.

1. Partners in a partnership may not submit separate PPP applications as self-employed individuals, but must file on behalf of the partnership.

1. Individuals with Self-Employment Income who File a Form 1040, Schedule C

A partner in a partnership may not submit a separate PPP loan application for himself/herself 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. Partnerships are eligible for PPP loans under the Act, and limiting a partnership and its partners (and an LLC filing taxes as a partnership) to one PPP loan is necessary to help ensure that as many eligible borrowers as possible obtain PPP loans before the statutory deadline of June 30, 2020.

Rent, mortgage interest, utilities, and other debt service are generally incurred at the partnership level, not partner level, so it is more natural to provide the funds for these expenses to the partnership, not individual partners.

2. Calculation of maximum loan amount for self-employed individuals and payroll/net monthly profit documentation.

b. How do I calculate the maximum amount I can borrow and what documentation is required?

How you calculate your maximum loan amount depends on whether you employ other individuals.

If you have no employees, the following methodology should be used to calculate your maximum loan amount:

i. Step 1: Find your 2019 IRS Form 1040 Schedule C line 31 net profit amount (if you have not yet filed a 2019 return, fill it out and compute the value). If this amount is over $100,000, reduce it to $100,000. If this amount is zero or less, you are not eligible for a PPP loan.

ii. Step 2: Calculate the average monthly net profit amount (divide the amount from Step 1 by 12).

iii. Step 3: Multiply the average monthly net profit amount from Step 2 by 2.5.

iv. Step 4: Add the outstanding amount of any Economic Injury Disaster Loan (EIDL) made between January 31, 2020, and April 3, 2020, that you seek to refinance, less the amount of any advance under an EIDL COVID-19 loan (because it does not have to be repaid).

Regardless of whether you have filed a 2019 tax return with the IRS, you must provide the 2019 Form 1040 Schedule C with your PPP loan application to substantiate the applied-for PPP loan amount and a 2019 IRS Form 1099-MISC detailing nonemployee compensation received (box 7), invoice, bank statement, or book of record that establishes you are self-employed. You must provide a 2020 invoice, bank statement, or book of record to establish you were in operation on or around February 15, 2020.

If you have employees, the following methodology should be used to calculate your maximum loan amount:

i. Step 1: Compute 2019 payroll by adding the following:

a. Your 2019 Form 1040 Schedule C line 31 net profit amount (if you have not yet filed a 2019 return, fill it out and compute the value), up to $100,000 annualized. If this amount is over $100,000, reduce it to $100,000. If this amount is less than zero, set this amount at zero.

b. 2019 gross wages and tips paid to your employees whose principal place of residence is in the United States, computed using 2019 IRS Form 941 Taxable Medicare wages & tips (line 5c, column 1) from each quarter plus any pre-tax employee contributions for health insurance or other fringe benefits excluded from Taxable Medicare wages & tips; subtract any amounts paid to any individual employee in excess of $100,000 annualized and any amounts paid to any employee whose principal place of residence is outside the United States.

c. 2019 employer health insurance contributions (health insurance component of Form 1040 Schedule C line 14), retirement contributions (Form 1040 Schedule C line 19), and state and local taxes assessed on employee compensation (primarily under state laws commonly referred to as the State Unemployment Tax Act or SUTA from state quarterly wage reporting forms).

ii. Step 2: Calculate the average monthly amount (divide the amount from Step 1 by 12).

iii. Step 3: Multiply the average monthly amount from Step 2 by 2.5.

iv. Step 4: Add the outstanding amount of any EIDL made between January 31, 2020, and April 3, 2020, that you seek to refinance, less the amount of any advance under an EIDL COVID-19 loan (because it does not have to be repaid).

You must supply your 2019 Form 1040 Schedule C, Form 941 (or other tax forms or equivalent payroll processor records containing similar information), and state quarterly wage unemployment insurance tax reporting forms from each quarter in 2019 or equivalent payroll processor records, along with evidence of any retirement and health insurance contributions, if applicable. A payroll statement or similar documentation from the pay period that covered February 15, 2020, must be provided to establish you were in operation on February 15, 2020.

3. Use of PPP loan proceeds by self-employed individuals.

d. How can PPP loans be used by individuals with income from self-employment who file a 2019 Form 1040, Schedule C?

The proceeds of a PPP loan are to be used for the following:

i. Owner compensation replacement, calculated based on 2019 net profit as described in Paragraph 1.b. above.

ii. Employee payroll costs (as defined in the First PPP Interim Final Rule) for employees whose principal place of residence is in the United States, if you have employees.

iii. Mortgage interest payments (but not mortgage prepayments or principal payments) on any business mortgage obligation on real or personal property (e.g., the interest on your mortgage for the warehouse you purchased to store business equipment or the interest on an auto loan for a vehicle you use to perform your business), business rent payments (e.g., the warehouse where you store business equipment or the vehicle you use to perform your business), and business utility payments (e.g., the cost of electricity in the warehouse you rent or gas you use driving your business vehicle). You must have claimed or be entitled to claim a deduction for such expenses on your 2019 Form 1040 Schedule C for them to be a permissible use during the eight-week period following the first disbursement of the loan (the “covered period”). For example, if you did not claim or are not entitled to claim utilities expenses on your 2019 Form 1040 Schedule C, you cannot use the proceeds for utilities during the covered period.

iv. Interest payments on any other debt obligations that were incurred before February 15, 2020 (such amounts are not eligible for PPP loan forgiveness).

v. Refinancing an SBA EIDL loan made between January 31, 2020, and April 3, 2020 (maturity will be reset to the PPP loan’s maturity of two years). If you received an SBA EIDL loan from January 31, 2020, through April 3, 2020, you can apply for a PPP loan. If your EIDL loan was not used for payroll costs it does not affect your eligibility for a PPP loan. If your EIDL loan was used for payroll costs, your PPP loan must be used to refinance your EIDL loan. Proceeds from any advance up to $10,000 on the EIDL loan will be deducted from the loan forgiveness amount on the PPP loan.

e. Are there any other restrictions on how I can use PPP loan proceeds?

Yes. At least 75% of the PPP loan proceeds shall be used for payroll costs. For purposes of determining the percentage of use of proceeds for payroll costs (but not for forgiveness purposes), the amount of any refinanced EIDL will be included. The rationale for this 75% floor is contained in the First PPP Interim Final Rule.

f. What amounts shall be eligible for forgiveness?

The amount of loan forgiveness can be up to the full principal amount of the loan plus accrued interest. The actual amount of loan forgiveness will depend, in part, on the total amount spent over the covered period on:

i. Payroll costs, including salary, wages, and tips, up to $100,000 of annualized pay per employee (for eight weeks, a maximum of $15,385 per individual), as well as covered benefits for employees (but not owners), including health care expenses, retirement contributions, and state taxes imposed on employee payroll paid by the employer (such as unemployment insurance premiums).

ii. Owner compensation replacement, calculated based on 2019 net profit as described in Paragraph 1.b. above, with forgiveness of such amounts limited to eight weeks’ worth (8/52) of 2019 net profit, but excluding any qualified sick leave equivalent amount for which a credit is claimed under Section 7002 of the Families First Coronavirus Response Act (FFCRA) (Public Law 116-127) or qualified family leave equivalent amount for which a credit is claimed under Section 7004 of FFCRA.

iii. Payments of interest on mortgage obligations on real or personal property incurred before February 15, 2020, to the extent they are deductible on Form 1040 Schedule C (business mortgage payments).

iv. Rent payments on lease agreements in force before February 15, 2020, to the extent they are deductible on Form 1040 Schedule C (business rent payments).

v. Utility payments under service agreements dated before February 15, 2020, to the extent they are deductible on Form 1040 Schedule C (business utility payments).

4. Documentation for loan forgiveness by self-employed individuals.

g. What documentation will I be required to submit to my lender with my request for loan forgiveness?

In addition to the borrower certification required by Section 1106(e)(3) of the Act, to substantiate your request for loan forgiveness, if you have employees, you should submit Form 941 and state quarterly wage unemployment insurance tax reporting forms or equivalent payroll processor records that best correspond to the covered period (with evidence of any retirement and health insurance contributions). Whether or not you have employees, you must submit evidence of business rent, business mortgage interest payments on real or personal property, or business utility payments during the covered period if you used loan proceeds for those purposes.

The 2019 Form 1040 Schedule C that was provided at the time of the PPP loan application must be used to determine the amount of net profit allocated to the owner for the eight-week covered period.

5. Rule change allowing PPP loans to the businesses of an outside director or holder of less than 30% of the shares of the lender.

2. Clarification regarding Eligible Businesses

a. Are eligible businesses owned by directors or shareholders of a PPP Lender permitted to apply for a PPP Loan through the Lender with which they are associated?

[T]he Administrator, in consultation with the Secretary, has determined that SBA regulations (including 13 CFR 120.110 and 120.140) shall not apply to prohibit an otherwise eligible business owned (in whole or part) by an outside director or holder of a less than 30% equity interest in a PPP Lender from obtaining a PPP loan from the PPP Lender on whose board the director serves or in which the equity owner holds an interest, provided that the eligible business owned by the director or equity holder follows the same process as any similarly situated customer or account holder of the Lender. Favoritism by the Lender in processing time or prioritization of the director’s or equity holder’s PPP application is prohibited. The Administrator cautions, however, that Lenders should comply with all other applicable state and federal regulations concerning loans to associates of the Lender. Lenders should also consult their own internal policies concerning lending to individuals or entities associated with the Lender.
(Emphasis added.)

6. Officers and inside directors are still precluded from securing a PPP loan from the lender with which they are associated. Unfortunately, the clarifications did not address close relatives of officers and insider directors.

The foregoing paragraph does not apply to a director or owner who is also an officer or key employee of the PPP lender. Officers and key employees of a PPP lender may obtain a PPP loan from a different lender, but not from the PPP lender with which they are associated.

© 2020 Jones Walker LLPNational Law Review, Volume X, Number 108

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Robert L. Carothers, Jones Walker, Banking Services Lawyer, Financial Regulation Attorney
Partner

Rob Carothers is a partner in the firm's Banking & Financial Services Practice Group. His practice is focused primarily in the area of financial institution regulation. He has experience advising state banks, national banks, thrifts, and their holding companies on a wide range of regulatory matters, including:

  • Affiliate transactions and compliance with Sections 23A and 23B of the Federal Reserve Act and Regulation W and Anti-Tying Rules

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Craig N. Landrum, Jones Walker, Banking Industry Lawyer, Insurance Representation Attorney
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Craig Landrum is a partner in the firm's Banking & Financial Services Practice Group and practices from the firm's Jackson office. His practice focuses on bank regulatory law, corporate law, mergers and acquisitions law, and securities law. He also has experience representing insurance companies and agencies with regard to corporate and regulatory matters, including the licensing of bank subsidiaries as general insurance agencies and underwriters.

Mr. Landrum is a graduate of Mississippi State University, where he received a bachelor of science degree, with special distinction, and The University of Mississippi School of Law, where he received a juris doctor degree. While in law school, Mr. Landrum was a member of the Mississippi Law Journal and Phi Delta Phi. He was also a member of Phi Kappa Phi, Omicron Delta Kappa, Blue Key, and Beta Gamma Sigma. Currently, he is a member of the Capitol Area Bar Association, the Banking Law and Consumer Finance Law Committees of the American Bar Association, The Mississippi Bar, the Mississippi Bankers Association, where he has previously served as Chairman of the Bank Attorney's Committee, and the Louisiana Bankers Association.

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Ronald A. Snider Bank Regulatory Law & Corporate Law Jones Walker Mobile, AL
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Ron Snider is a partner in the Corporate Practice Group, where he focuses his practice on bank regulatory law and corporate law. 


From 1973 to 1979, Ron was with the Federal Home Loan Bank Board, first in the Office of the General Counsel, and then as assistant secretary. He also served as assistant secretary of the Federal Home Loan Mortgage Corporation from 1976 to 1979.

In addition to his active involvement in a number of professional associations, Ron is a member, and past chairman, of the board of the Alabama Public Library Service, serves on the Gulf...

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Thomas Walker Jr Corporate Attorney Jones Walker Jackson, MS
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Tom Walker is a partner in the Corporate Practice Group. He focuses on commercial and regulatory matters in the financial services industry, with a depth of experience representing financial institutions.


Prior to joining the firm, Tom served as executive vice president and director of a community bank in Forest, Mississippi. His experience as general counsel, chief operating officer, chief financial officer, and chief investments officer in the financial services sector enhances his ability to provide legal services to his clients.

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