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SBA Releases Interim Final Rule on the Paycheck Protection Program (PPP) and Loan Forgiveness

As directed by the CARES Act, the Small Business Administration (SBA) published its interim final rule, Business Loan Program Temporary Changes; Paycheck Protection Program, providing additional guidance and requirements for the Paycheck Protection Program (PPP). The interim final rule is effective immediately after being published in the Federal Register.

Eligibility and Documentation

In order to be eligible for the PPP, the business must have less than 500 employees whose principal place of residence is in the U.S., or operates in a certain industry and meets the SBA employee-based size standards for that industry. The business must also be a small business as defined by the SBA and subject to the affiliate rules, unless waived. A tax-exempt 501(c)(3) non-profit organization, a tax-exempt veterans organization as described in 501(c)(19) of the Internal Revenue Code, or tribal business also qualify. Independent contractors, sole-proprietors, and eligible self-employed individuals who were in operation as of February 15, 2020 can apply for the loan.

Documents required to establish eligibility include payroll processing records, payroll tax filings, Form 1099-MISC, or income and expense from a sole proprietorship. If the borrower does not have such documentation, they can provide other supporting documentation (such as bank records) to demonstrate the qualifying payroll amount.   

Those who are ineligible for a PPP loan include:

  • Businesses engaged in illegal activity under federal, state, or local law
  • A household employer (employing nannies or housekeepers, for example)
  • A business where an owner of 20% or more of the equity is in jail, on probation, subject to indictment or similar proceeding, or convicted of a felony in the last 5 years
  • The business or owner is currently delinquent on an SBA loan or defaulted on one within the last seven years and caused a loss to the government.

Businesses that are not eligible for PPP loans are listed in 13 CFR 120.110, and described further in SBA’s Standard Operation Procedure (SOP) 50 10, Subpart B, Chapter 2 (except for nonprofits that are authorized under the Act). Financial businesses primarily engaged in the business of lending, such as banks, are not eligible.


The rule provided several examples of how to calculate the payroll-based formula.

Payroll-based formula

Step 1: Aggregate payroll costs from the last twelve months for employees whose principal place of residence is the United States.

Step 2: Subtract any compensation paid to an employee in excess of an annual salary of $100,000 and/or any amounts paid to an independent contractor or sole proprietor in excess of $100,000 per year.

Step 3: Calculate average monthly payroll costs (divide the amount from Step 2 by 12).

Step 4: Multiply the average monthly payroll costs from Step 3 by 2.5.

Step 5: Add the outstanding amount of an Economic Injury Disaster Loan (EIDL) made between January 31, 2020 and April 3, 2020, less the amount of any “advance” under an EIDL COVID-19 loan (because it does not have to be repaid).


Example 1 – No employees make more than $100,000

Annual payroll: $120,000

Average monthly payroll: $10,000

Multiply by 2.5 = $25,000

Maximum loan amount is $25,000


Example 2 – Some employees make more than $100,000

Annual payroll: $1,500,000

Subtract compensation amounts in excess of an annual salary of $100,000: $1,200,000

Average monthly qualifying payroll: $100,000

Multiply by 2.5 = $250,000

Maximum loan amount is $250,000


Example 3 – No employees make more than $100,000, outstanding EIDL loan of $10,000

Annual payroll: $120,000

Average monthly payroll: $10,000

Multiply by 2.5 = $25,000

Add EIDL loan of $10,000 = $35,000

Maximum loan amount is $35,000


Example 4 – Some employees make more than $100,000, outstanding EIDL loan of $10,000

Annual payroll: $1,500,000

Subtract compensation amounts in excess of an annual salary of $100,000: $1,200,000

Average monthly qualifying payroll: $100,000

Multiply by 2.5 = $250,000

Add EIDL loan of $10,000 = $260,000

Maximum loan amount is $260,000 (pp. 8 – 10)

Payroll costs include:

  • Compensation to employees in the form of salary, wages, commissions, or similar compensation (not in excess of $100,000), cash tips or equivalent (based on records of past tips or reasonable, good-faith estimate)
  • Payment for vacation, parental, family, medical, or sick leave, allowance for separation or dismissal
  • Payment for provision of employee benefits consisting of group healthcare coverage, including insurance premiums, and retirement
  • Payment of state and local taxes assessed on compensation of employees
  • For independent contractors or sole proprietors: wage, commission, income, or net earnings from self-employed or similar compensation

There is a discrepancy between the CARES Act language stating that the payroll costs are based on the 12-month period preceding the loan date and the SBA application instruction stating that the borrower should use the average monthly payroll for 2019. The interim rule does not clarify this discrepancy and will likely need further clarification.

The following items are excluded from the definition of payroll costs:

  • Compensation to employees whose principal place of residence is outside the U.S.
  • Compensation to an individual in excess of an annual salary of $100,000, prorated as needed
  • Federal employment taxes imposed or withheld between February 15 - June 30, 2020, included the employee’s and employer’s share of FICA and Railroad Retirement Act taxes, and income taxes required to be withheld from employees
  • Qualified sick and family leave wages or which a credit is allowed under the Families First Coronavirus Response Act (FFCRA)

Independent contractors (IC) do not count for purposes of the borrower’s PPP payroll or forgiveness calculation because the IC is able to apply for the loan on their own.

Terms of the Loan

The interest of the loan will be 100 basis points or 1%. The interim final rule states that the rate was determined to be appropriate because it allows for low cost funds to borrowers, but is still an attractive interest rate for lenders relative to the cost of funding for comparable maturities.

The maturity is two years. Although the CARES Act provides that the loan will have a maximum maturity of up to 10 years, the SBA determined that a two-year loan term is sufficient due to the temporary economic disruption caused by COVID-19 and any disruption is expected to abate prior to the two-year maturity date. This will allow a business to resume their operations and pay off the loan.

A business can apply for only one PPP loan, and it is on a first-come, first-served basis. It is advised to take out the maximum allowable. Once all funds are used, no additional loans will be made. The Treasury Secretary can request additional funds from Congress, but there is no guarantee that the request will be granted.

Payments on the loan will begin six months following the date of disbursement. Interest will continue to accrue.

To apply for a loan, a borrower must submit SBA Form 2483 (Paycheck Protection Program Application Form) and payroll documentation. Unlike other SBA loans, no collateral or personal guarantees will be required. There is no fee payable by the borrower.

How the Loan Can Be Used

Proceeds of the loan are to be used for the following expenses:

  1. Payroll costs
  2. Costs related to the continuation of group health care benefits during periods of paid sick, medical, or family leave, and insurance premiums
  3. Mortgage interest payments (but not mortgage prepayments or principal payments)
  4. Rent payments
  5. Utility payments
  6. Interest payments on any other debt obligations that were incurred before February 15, 2020, and/or refinancing an SBA EIDL loan made between January 31, 2020 and April 3, 2020
    1. If you received an SBA EIDL loan from January 31, 2020 through April 3, 2020, you can apply for a PPP loan
    2. If your EIDL loan wasn’t used for payroll costs, it doesn’t affect your eligibility for a PPP loan
    3. If your EIDL loan was used for payroll costs, your PPP loan must be used to refinance your EIDL loan
    4. Proceeds from any advance up to $10,000 on the EIDL loan will be deducted from the loan forgiveness amount on the PPP loan

At least 75% of the total loan must be used for payroll costs. The borrower will need to document that the proceeds were used for payroll costs in order to determine the final amount of the loan forgiven.


On the PPP application, the borrower or authorized representative of the borrower, must certify the information provided to the organization is in good faith and to the best of the borrower’s knowledge and ability. Review the Paycheck Protection Program Borrower Application Form for more details.

PPP Loan Forgiveness

Borrowers are eligible for loan forgiveness of the principal and accrued interest for 8 weeks commencing from the origination date of the loan.  However, the loan must be used for its intended purpose and employee and compensation levels are maintained. Not more than 25% of the loan can be used for non-payroll costs. This cap on non-payroll expenses is to ensure that the core purpose of the statute of keeping workers paid and employed is carried out.

The amount of the loan forgiven will be reduced if:

  • Full-time employee headcount is decreased
  • Salaries and wages are decreased by more than 25% for any employee who made less than $100,000 annualized in 2019

Borrowers have until June 30, 2020 to restore full-time employment and salary levels for any changes made between February 15, 2020 and April 26, 2020. Lenders can ask the SBA to pay off the loan after seven weeks based on expected forgiveness.

The SBA will issue additional guidance on loan forgiveness. 

To read a copy of the interim final rule, please click here. The SBA also issued a PPP Information Sheet for Borrowers that can be found here.

The information in this article is communicated with the understanding that the Firm is not rendering legal services. If legal advice is required, the services of an attorney should be sought.

This article is current as of the publishing date of April 3, 2020. Where information conflicts, please refer to most recently dated article. If you have specific questions, please reach out to your Wolf tax or audit contact.