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April 3, 2020SBA Issues Interim Final Rule on Paycheck Protection Program1. ?Issued Yesterday.?Late yesterday the SBA released its Interim Final Rule (the “Rule”) on the Paycheck Protection Program (“PPP”).??This article assumes you know the basics about the PPP, so this will address new or clarifying information.??Most banks indicated yesterday that they were not prepared to accept applications today because they did not have the Rule yet.??Now that the Rule has been issued, banks should move quickly to accept applications but it remains to be seen whether that will happen today or whether lenders will take the weekend to digest and implement the Rule.??2. ?Documentation Required.??Documentation to support the loan must include payroll records and payroll tax filings, and if you do not have that, “other supporting documentation” sufficient to establish the qualifying payroll amount.??As indicated below, your lender may require a prior year’s tax return as well.3. ?Employees Making > $100,000.??As to any employee earning more than $100,000 per year, you don’t have to deduct that employee’s entire compensation; instead, you “subtract any compensation paid to an employee in excess of an annual salary of $100,000.”4. ?Federal Taxes.??You must deduct from your calculation of the payroll costs “Federal employment taxes imposed or withheld between February 15, 2020 and June 30, 2020, including the employee’s and employer’s share of FICA (Federal Insurance Contributions Act) and Railroad Retirement Act taxes, and income taxes required to be withheld from employees.”??Interestingly, this deduction is not from the entire prior year’s average monthly payroll, but only during the “covered period” of February 15-June 30, 2020. I compared the language in the Rule against the language in the CARES Act (the “Act”) itself, and Act also states that the non-inclusion of federal tax is “during the covered period” which is defined as February 15-June 30, 2020.5. ?Interest Rate.??Although the Act states that interest on the loan can be up to 4%, the Rule?states the interest rate will be 1%.??6. ?Maturity Date.??Although the Act states the maturity date will be up to 10 years, the Rule says it will be 2 years.7. ?Electronic Signatures.??The application can be signed by an e-signature.8. ?Repayment.??Repayments on the loan are deferred for 6 months after loan disbursement, but interest will continue to accrue. However, loan forgiveness can include both principal and interest.9. ?First-Come, First-Served.??The loan will be on a first-come, first-served basis, so apply early before the money runs out.10. ?Use of Loan Proceeds.??While the amount of the loan forgiveness can be up to 100% of principal and interest, no more than 25% of the loan proceeds can be used for items other than payroll. I recommend putting the loan proceeds into a separate account to prove what those funds were used for, so when you apply for forgiveness, the bank can easily track the use of the loan proceeds because they are not commingled with funds in your general operating account.?11. ?Payment to Independent Contractors.??As to payments made to independent contractors from the loan proceeds, you will not be forgiven any amounts paid to a 1099 contractor because those contractors have the ability to apply for a PPP loan on their own.12. ?Loan Application Form.??Submit your loan application on SBA Form 2483 (PPP Application Form), along with payroll documentation. Your banks will have access to that form and will post it on their websites when they are ready to start accepting loan applications.13. ?Fraud.??Surprisingly, there is a fraud provision if you merely use the money for purposes other than payroll, lease payments, utilities, and interest on mortgage obligations.??Specifically, the Rule states, “If you knowingly?use the funds for unauthorized purposes, you will be subject to additional liability such as charges for fraud.”14. ?Tax Returns.??One of the certifications the borrower must make is that the borrower understands “that the lender will confirm the eligible loan amount using tax documents I have submitted. I affirm that these tax documents?are identical to those submitted to the Internal Revenue Service.” That suggests the banks may require you to submit your most recently filed tax return.???15. ?Personal Guarantee and Collateral.??You do not have to provide collateral or sign a personal guarantee to obtain the loan.16. ?Conclusion.??In conclusion, the only remaining bottleneck to banks opening the application process is how fast they can digest and then implement the Rule.??That may differ from bank to bank.?? ................
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