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CARES Act: SBA Provides Guidance on Certain PPP Loan Increases and Eligibility of Electric Cooperatives
Practical Law Legal Update w-025-5234 (Approx. 6 pages)
CARES Act: SBA Provides Guidance on Certain PPP Loan Increases and Eligibility of Electric Cooperatives
by Practical Law Finance
| Published on 15 May 2020 • USA (National/Federal) |
The Small Business Administration (SBA) issued an interim final order providing guidance on increases to loans granted under the Paycheck Protection Program (PPP) for partnerships that did not include partner compensation in calculating their maximum PPP loan amount and for seasonal employers, if the lender has not yet submitted the required SBA Form 1502 report. The SBA also issued a separate interim final order clarifying that tax-exempt electric cooperatives are eligible for PPP Loans.
On March 27, 2020, the US government passed the CARES Act in response to the COVID-19 crisis. Under the CARES Act, the Small Business Administration (SBA) is offering loans under the Paycheck Protection Program (PPP). On April 2, 2020, the SBA issued an interim final rule (Initial Rule) outlining the key provisions for implementing the PPP. Subsequently, the SBA has issued additional interim final rules (see Practice Note, Road Map to the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), Paycheck Protection Program).
On May 13, 2020 the SBA issued an interim final order (Loan Increase IFR) providing guidance on increases to loans granted under the PPP for partnerships that did not include partner compensation in calculating their maximum PPP loan amount and for seasonal employers, if the lender has not yet submitted the required SBA Form 1502 report. On May 14, 2020, the SBA issued a separate interim final order (Electric Cooperative IFR) clarifying that tax exempt electric cooperatives are eligible for PPP Loans. Comments on both the Loan Increase IFR and Electric Cooperative IFR must be received on or before June 18, 2020.
Background on Need for PPP Loan Increases
On April 14, 2020, the SBA posted an interim final rule regarding individuals with self-employment income. It provided that "if you are a partner in a partnership, you may not submit a separate PPP loan application for yourself 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." (See Legal Update, CARES Act: SBA Clarifies Eligibility for Self-Employed Individuals under Paycheck Protection Program and Pledges of PPP Loans.)
In addition, on April 28, 2020, the Treasury Department posted an interim final rule with an alternative calculation of the maximum PPP loan amount for seasonal employers. (See Legal Update, CARES Act: Treasury Department Authorizes Alternative Time Period for Calculating Maximum PPP Loan Amounts for Seasonal Employers).
Since some PPP loans were approved before the additional guidance was issued, some partnerships and seasonal employers may not have received the maximum amount of PPP loan for which they are eligible. The Loan Increase IFR authorizes all PPP lenders to increase existing PPP loans to partnerships or seasonal employers to include additional amounts up to the maximum for which they are eligible under the additional guidance, provided the lender has not yet submitted the SBA Form 1502 report on the PPP loan.
In addition, although a prior interim final rule posted on April 28, 2020 (Disbursements IFR), requires PPP loans to be disbursed in a single disbursement, if a PPP loan that is increased has already been disbursed, the Loan Increase IFR authorizes the lender to make an additional disbursement of the increased loan proceeds before submission of the initial SBA Form 1502 that includes that loan. (See Legal Update, CARES Act: SBA Provides Lender Guidance on PPP Disbursements and Sales of PPP Loans.)
Requirements for PPP Loan Increases
Partnerships
The Loan Increase IFR states that if a partnership received a PPP loan that only included payroll costs of the partnership’s employees and other eligible operating expenses, but did not include any amount for partner compensation, the lender may electronically submit a request through the SBA’s E-Tran Servicing site to increase the PPP loan amount to include appropriate partner compensation, even if the loan has been fully disbursed, if the lender’s first SBA Form 1502 report to the SBA on the PPP loan has not been submitted.
After the initial SBA Form 1502 report on the PPP loan has been submitted to the SBA, or after the date the first SBA Form 1502 was required to be submitted to the SBA, the loan cannot be increased.
The increased loan amount cannot exceed $10 million for an individual borrower or $20 million for a corporate group. The borrower must provide the lender with required documentation to support the calculation of the increase.
For SBA guidance describing how to calculate partnership PPP loan amounts and defining the self-employment income of partners see How to Calculate Maximum Loan Amounts, Question 4.
Seasonal Employees
The Loan Increase IFR states that if a seasonal employer received a PPP loan before the alternative criterion for such employers was posted on April 28, 2020, and would be eligible for a higher maximum loan amount under the alternative criterion, the lender may electronically submit a request through SBA’s E-Tran Servicing site to increase the PPP loan amount, even if the loan has been fully disbursed, if the lender’s first SBA Form 1502 report to the SBA on the PPP loan has not been submitted. (See Legal Update, CARES Act: Treasury Department Authorizes Alternative Time Period for Calculating Maximum PPP Loan Amounts for Seasonal Employers).
After the initial SBA Form 1502 report on the PPP loan has been submitted to the SBA, or after the date the initial SBA Form 1502 report was required to be submitted to the SBA, the loan cannot be increased.
The increased loan amount cannot exceed $10 million for an individual borrower or $20 million for a corporate group. The borrower must provide the lender with required documentation to support the calculation of the increase.
Disbursements and 1502 Reporting on Increased PPP Loans
Additional Disbursements
Notwithstanding the requirement in the Disbursements IFR that lenders make a one-time, full disbursement of the PPP loan within ten calendar days of loan approval, if a PPP loan is increased under the guidance provided in the Loan Increase IFR, the lender may make a single additional disbursement of the increased loan proceeds before it submits the initial SBA Form 1502 report for that loan.
PPP Loan Increase Reporting Requirements and Timeline
The Disbursements IFR specifies the process lenders must follow to electronically upload information on PPP loans. It provides that lenders must submit the SBA Form 1502 information within 20 calendar days after a PPP loan is approved or, for loans approved before availability of the updated SBA Form 1502 reporting process, by May 22, 2020 (this date was extended on May 8, 2020; see Legal Update, CARES Act: SBA Extends Limited Safe Harbor for Certification Concerning Need for PPP Loan Request).
The Loan Increase IFR clarifies that:
- Lenders must comply with the initial 1502 reporting deadline.
- The SBA may review at any time an increase submitted by the lender to confirm that the increase was submitted within the required timeframe.
- Increases submitted outside the required timeframe will not be forgiven and no processing fee will be earned on such amounts.
- Lenders are not entitled to processing fees on increases submitted outside of the required timeframe.
Eligibility of Tax-Exempt Electric Cooperatives
The Electric Cooperatives IFR provides that electric cooperatives that are exempt from federal income taxation under section 501(c)(12) of the Internal Revenue Code are eligible for a PPP loan. Since electric cooperatives provide utility services and distribute savings to their member-owners, the SBA determined that these tax-exempt entities will be “a business entity organized for profit” for purposes of 13 CFR 121.105(a)(1). As a result, they are eligible PPP borrowers, if other eligibility requirements are met, including that they satisfy:
- The employee-based size standard established in the CARES Act.
- SBA’s employee-based size standard corresponding to its primary industry, if higher.
- Or both tests in SBA’s “alternative size standard.”