SBA issued an Interim Final Rule (“IFR”) relating to the Paycheck Protection Program (“PPP”)
4.6.20 | Client Alert – COVID-19 Update
This past Thursday, the Small Business Association (“SBA”) issued an Interim Final Rule (“IFR”) relating to the Paycheck Protection Program (“PPP”) loan and loan forgiveness programs (under sections 1102 and 1106 of the CARES Act). There were several changes from the PPP statute and earlier guidance that meaningfully circumscribes the field of eligible borrowers, specifically in the real estate area. Additionally, there are more than a few grey areas remaining.
Ineligibility of Real Estate Owners?
Seemingly without a basis to do so, the SBA, in the IFR, referenced an existing part of its regulations in an apparent effort to exclude several types of businesses that previously qualified for loans under the PPP statute as written. The exclusion would bar from being an eligible business under the PPP various kinds of real estate businesses. Most broadly, businesses that are primarily engaged in owning or purchasing real estate and leasing real estate for any purpose are not eligible. Based on the plain language of the IFR, this appears to be a blanket exclusion. However, real estate management and other service companies with payroll should still qualify. Additionally, the following business are listed as being ineligible:
- Passive businesses owned by developers and landlords that do not actively use or occupy the assets acquired or improved with the loan proceeds;
- Businesses engaged in subdividing real estate;
- Businesses that lease land for cell phone tower;
- Businesses that enter into a management agreement with a third party that give the management company sole discretion to manage the operations; and
- Apartment buildings.
The apparent exclusion of these businesses has caught the real estate business community, as well as its advisors, by surprise. Further clarification, rather expeditiously, of its scope and intent is sorely needed. Potential borrowers in these businesses should remain prepared to file pending additional guidance.
Other Changes and Clarifications
The IFR clarifies that independent contractor compensation does not constitute payroll costs of the payee company. Instead, independent contractors should apply for their own loan based on their net income with a similar $100,000 annualized limit applicable to individual employees.
The IFR and the new application still do not explicitly address the issue of partners receiving guaranteed payments for services or an allocated distributive share of partnership self-employment income. The PPP statutory provisions do not expressly include partners or guaranteed payments for services as payroll costs. At this juncture, there does not appear to be a sufficient basis to include an allocated distributive share of partnership self-employment income in a partnership’s or partner’s payroll cost computation. However, the PPP’s definition of “eligible self-employed individual” ultimately references the income tax code and regulations addressing self-employment tax. Because those regulations treat the recipient of a guaranteed payment for services, but not distributive share, as being self-employed in a trade or business, it is possible that such a recipient may themselves be eligible to apply for a PPP loan. Moreover, whether PPP lenders will accept applications on that basis remains to be seen.
The SBA continues to be inconsistent in defining the appropriate 12 month measuring period for the maximum loan amount. The PPP on its face requires a 12 month look back from the date the loan is applied for. However, several releases from the SBA, included the loan application form, suggest that the 2019 calendar year is the appropriate testing period. At this time, subject to lender resistance, there seems to be an argument to take either position and taxpayers should consider the period that maximizes their borrowing ability.
The PPP and IFR contain language indicating that withholding taxes (both employment and income) paid by the borrower between 2/15/20 and 6/30/20 do not count as eligible payroll costs for use of funds (under section 1102) or forgiveness (under section 1106). The applicability of these provisions is still unclear, and we are awaiting further guidance. However, if the calendar year 2019 is used to calculate the maximum loan amount, this provision should not limit that calculated amount. It is possible that the above-mentioned withholding will not be eligible for forgiveness when paid during the 8-week loan forgiveness period. Borrowers appear to be continuing to use gross wages in payroll costs for their applications unless and until it is expressly not allowed.
It is also unclear whether the $100,000 compensation limitation applies to all payroll costs attributed to any one employee or only the salary component is subject to the $100,000 cap, and any additional eligible benefits and costs attributed to that employee are included on top of that. While it would not be in bad faith to apply for the loan under the more liberal interpretation, it is not without risk that excess amounts may be denied or not forgiven.
The IFR provides (consistent with the PPP loan borrower application), that no more than 25% of funds may be used for non-payroll costs. This is a limitation for both the use of funds (section 1102) and loan forgiveness (section 1106).
The IFR also increases the interest rate on the PPP loans from 0.5% to 1% (still well under the 4% maximum allowed under the PPP) and makes clear that accrued interest on forgiven principal is eligible for forgiveness (contrary to the PPP). Moreover, the loan term for borrowed funds not forgiven is fixed at two years, less than the maximum ten years in the PPP.
As always, Berdon’s professionals remain available to consult and provide guidance during these trying times and will continue to provide updates as further guidance is released.
Please reach out to your Berdon Advisor to discuss how these updates to the Paycheck Protection Program apply to your business.
 We do acknowledge the inconsistencies in the IFR relating to independent contractors, however, it does appear that SBA’s intent was to exclude independent contractors from payroll costs of the payee.