Business Loan Program Temporary Changes; Paycheck Protection Program – Treatment of Owners and Forgiveness of Certain Nonpayroll Costs (Docket Number SBA-2020-0044)

Summary

Interim final rule of the Small Business Administration, Docket Number SBA-2020-0044, on treatment of owners and forgiveness of certain nonpayroll costs under the Paycheck Protection Program. Owner-employees with less than a 5 percent ownership stake in a C- or S-Corporation are exempt from the owner-employee compensation rule, as they have no meaningful ability to influence how loan proceeds are allocated. The rule also limits forgiveness of nonpayroll costs attributable to the business operation of a tenant or sub-tenant of the borrower or, for home-based businesses, to household expenses. The agency cited its authority to guarantee loans having expired on August 8, 2020.

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SMALL BUSINESS ADMINISTRATION

13 CFR Part 120

[Docket Number SBA-2020-0044]

RIN 3245-AH56

Business Loan Program Temporary Changes; Paycheck Protection Program – Treatment

of Owners and Forgiveness of Certain Nonpayroll Costs

AGENCY: U.S. Small Business Administration.

ACTION: Interim final rule.

SUMMARY: On April 2, 2020, the U.S. Small Business Administration (SBA) posted on its

website an interim final rule relating to the implementation of Sections 1102 and 1106 of the

Coronavirus Aid, Relief, and Economic Security Act (CARES Act or the Act) (published in the

Federal Register on April 15, 2020). Section 1102 of the Act temporarily adds a new product,

titled the “Paycheck Protection Program,” to the U.S. Small Business Administration’s (SBA’s)

7(a) Loan Program. Subsequently, SBA issued a number of interim final rules implementing the

Paycheck Protection Program. This interim final rule supplements the previously posted interim

final rules by providing additional guidance on treatment of owners and forgiveness of certain

nonpayroll costs.

DATES: Effective Date: The provisions in this interim final rule are effective [INSERT DATE

OF FILING AT THE OFFICE OF THE FEDERAL REGISTER].

Comment Date: Comments must be received on or before [INSERT DATE 30 DAYS AFTER

DATE OF PUBLICATION IN THE FEDERAL REGISTER].

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ADDRESSES: You may submit comments, identified by number SBA-2020-0044 through the

Federal eRulemaking Portal: http://www.regulations.gov. Follow the instructions for submitting

comments.

SBA will post all comments on www.regulations.gov. If you wish to submit confidential

business information (CBI) as defined in the User Notice at www.regulations.gov, please send an

email to ppp-ifr@sba.gov. Highlight the information that you consider to be CBI and explain

why you believe SBA should hold this information as confidential. SBA will review the

information and make the final determination whether it will publish the information.

FOR FURTHER INFORMATION CONTACT: A Call Center Representative at 833-572-0502,

or the local SBA Field Office; the list of offices can be found at https://www.sba.gov/tools/local-

assistance/districtoffices.

SUPPLEMENTARY INFORMATION:

I. Background Information

On March 13, 2020, President Trump declared the ongoing Coronavirus Disease 2019

(COVID-19) pandemic of sufficient severity and magnitude to warrant an emergency declaration

for all States, territories, and the District of Columbia. With the COVID-19 emergency, many

small businesses nationwide are experiencing economic hardship as a direct result of the Federal,

State, tribal, and local public health measures that are being taken to minimize the public’s

exposure to the virus. These measures, some of which are government-mandated, have been

implemented nationwide and include the closures of restaurants, bars, and gyms. In addition,

based on the advice of public health officials, other measures, such as keeping a safe distance

from others or even stay-at-home orders, have been implemented, resulting in a dramatic

decrease in economic activity as the public avoids malls, retail stores, and other businesses.

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On March 27, 2020, the President signed the Coronavirus Aid, Relief, and Economic

Security Act (the CARES Act) (Pub. L. 116-136) to provide emergency assistance and health

care response for individuals, families, and businesses affected by the coronavirus pandemic.

The Small Business Administration (SBA) received funding and authority through the CARES

Act to modify existing loan programs and establish a new loan program to assist small

businesses nationwide adversely impacted by the COVID-19 emergency.

Section 1102 of the CARES Act temporarily permits SBA to guarantee 100 percent of 7(a)

loans under a new program titled the “Paycheck Protection Program.” Section 1106 of the

CARES Act provides for forgiveness of up to the full principal amount of qualifying loans

guaranteed under the Paycheck Protection Program (PPP).

On April 24, 2020, the President signed the Paycheck Protection Program and Health Care

Enhancement Act (Pub. L. 116-139), which provided additional funding and authority for the

PPP. On June 5, 2020, the President signed the Paycheck Protection Program Flexibility Act of

2020 (Flexibility Act) (Pub. L. 116-142), which changed provisions of the PPP relating to the

maturity of PPP loans, the deferral of PPP loan payments, and the forgiveness of PPP loans. On

July 4, 2020, the President signed into law S. 4116, which reauthorized lending under the PPP

through August 8, 2020 (Pub. L. 116-147).

This interim final rule addresses the ownership percentage that triggers the applicability of

owner compensation rules for forgiveness purposes. This interim final rule also addresses

limitations on the eligibility of certain nonpayroll costs for forgiveness.

II. Comments and Immediate Effective Date

This interim final rule is effective without advance notice and public comment because

Section 1114 of the CARES Act authorizes SBA to issue regulations to implement Title I of the

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Act without regard to notice requirements. In addition, SBA has determined that there is good

cause for dispensing with advance public notice and comment on the grounds that it would be

contrary to the public interest. Specifically, advance public notice and comment would defeat

the purpose of this interim final rule given that SBA’s authority to guarantee PPP loans expired

on August 8, 2020 and SBA began accepting lender loan forgiveness submissions on August 10,

2020. These same reasons provide good cause for SBA to dispense with the 30-day delayed

effective date provided in the Administrative Procedure Act (APA). See 5 U.S.C. 553(b)(B).

Although this interim final rule is effective on or before date of filing, comments are solicited

from interested members of the public on all aspects of the interim final rule, including Section

III below. These comments must be submitted on or before [INSERT DATE 30 DAYS AFTER

DATE OF PUBLICATION IN THE FEDERAL REGISTER]. The SBA will consider these

comments and the need for making any revisions as a result of these comments.

III. Paycheck Protection Program – Treatment of Owners and Forgiveness of Certain

Nonpayroll Costs

Overview

The CARES Act was enacted to provide immediate assistance to individuals, families, and

organizations affected by the COVID-19 emergency. Among the provisions contained in the

CARES Act are provisions authorizing SBA to temporarily guarantee loans under a new 7(a)

loan program titled the “Paycheck Protection Program.” Loans guaranteed under the Paycheck

Protection Program (PPP) will be 100 percent guaranteed by SBA, and the full principal amount

of the loans may qualify for loan forgiveness. The purpose of this interim final rule is to provide

additional guidance concerning the ownership percentage that triggers the applicability of the

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owner compensation rule for forgiveness purposes and limitations on the eligibility of certain

nonpayroll costs for forgiveness.

1. Owners

Are any individuals with an ownership stake in a PPP borrower exempt from application

of the PPP owner-employee compensation rule when determining the amount of their

compensation that is eligible for loan forgiveness?

Yes, owner-employees with less than a 5 percent ownership stake in a C- or S-

Corporation are not subject to the owner-employee compensation rule. The First Loan

Forgiveness Rule, as revised by the Revisions to Loan Forgiveness and Loan Review

Procedures Interim Final Rules, 85 FR 38304, 38307 (June 26, 2020), caps the amount of

loan forgiveness for payroll compensation attributable to an owner-employee. There is

no exception in the rule based on the owner-employee’s percentage of ownership. The

Administrator, in consultation with the Secretary, has now determined that an owner-

employee in a C- or S-Corporation who has less than a 5 percent ownership stake will not

be subject to the owner-employee compensation rule. This exemption is intended to

cover owner-employees who have no meaningful ability to influence decisions over how

loan proceeds are allocated.

2. Eligibility of Certain Nonpayroll Costs for Loan Forgiveness

a. Are amounts attributable to the business operation of a tenant or sub-tenant of the PPP

borrower or, in the context of home-based businesses, household expenses, eligible for

forgiveness?

No, the amount of loan forgiveness requested for nonpayroll costs may not include any

amount attributable to the business operation of a tenant or sub-tenant of the PPP

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borrower or, for home-based businesses, household expenses. The examples below

illustrate this rule.

Example 1: A borrower rents an office building for $10,000 per month and sub-

leases out a portion of the space to other businesses for $2,500 per month. Only

$7,500 per month is eligible for loan forgiveness.

Example 2: A borrower has a mortgage on an office building it operates out of,

and it leases out a portion of the space to other businesses. The portion of

mortgage interest that is eligible for loan forgiveness is limited to the percent

share of the fair market value of the space that is not leased out to other

businesses. As an illustration, if the leased space represents 25% of the fair

market value of the office building, then the borrower may only claim forgiveness

on 75% of the mortgage interest.

Example 3: A borrower shares a rented space with another business. When

determining the amount that is eligible for loan forgiveness, the borrower must

prorate rent and utility payments in the same manner as on the borrower’s 2019

tax filings, or if a new business, the borrower’s expected 2020 tax filings.

Example 4: A borrower works out of his or her home. When determining the

amount of nonpayroll costs that are eligible for loan forgiveness, the borrower

may include only the share of covered expenses that were deductible on the

borrower’s 2019 tax filings, or if a new business, the borrower’s expected 2020

tax filings.

b. Are rent payments to a related party eligible for loan forgiveness?

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Yes, as long as (1) the amount of loan forgiveness requested for rent or lease payments to

a related party is no more than the amount of mortgage interest owed on the property

during the Covered Period that is attributable to the space being rented by the business,

and (2) the lease and the mortgage were entered into prior to February 15, 2020.1 Any

ownership in common between the business and the property owner is a related party for

these purposes. The borrower must provide its lender with mortgage interest

documentation to substantiate these payments. While rent or lease payments to a related

party may be eligible for forgiveness, mortgage interest payments to a related party are

not eligible for forgiveness. PPP loans are intended to help businesses cover certain non-

payroll obligations that are owed to third parties, not payments to a business’s owner that

occur because of how the business is structured. This will maintain equitable treatment

between a business owner that holds property in a separate entity and one that holds the

property in the same entity as its business operations.

3. Additional Information

SBA may provide further guidance, if needed, through SBA notices that will be posted on

SBA’s website at www.sba.gov. Questions on the Paycheck Protection Program may be directed

to the Lender Relations Specialist in the local SBA Field Office. The local SBA Field Office

may be found at https://www.sba.gov/tools/local-assistance/districtoffices.

Compliance with Executive Orders 12866, 12988, 13132, 13563, and 13771, the

Paperwork Reduction Act (44 U.S.C. Ch. 35), and the Regulatory Flexibility Act (5 U.S.C.

601-612).

Executive Orders 12866, 13563, and 13771

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In this context, the related party itself would not also be eligible to request forgiveness for this amount.

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This interim final rule is economically significant for the purposes of Executive Orders

12866 and 13563, and is considered a major rule under the Congressional Review Act. SBA,

however, is proceeding under the emergency provision at Executive Order 12866 Section

6(a)(3)(D) based on the need to move expeditiously to mitigate the current economic conditions

arising from the COVID-19 emergency. This rule’s designation under Executive Order 13771

will be informed by public comment.

Executive Order 12988

SBA has drafted this rule, to the extent practicable, in accordance with the standards set forth

in Section 3(a) and 3(b)(2) of Executive Order 12988, to minimize litigation, eliminate

ambiguity, and reduce burden. The rule has no preemptive or retroactive effect.

Executive Order 13132

SBA has determined that this rule will not have substantial direct effects on the States, on the

relationship between the National Government and the States, or on the distribution of power and

responsibilities among the various layers of government. Therefore, SBA has determined that

this rule has no federalism implications warranting preparation of a federalism assessment.

Paperwork Reduction Act, 44 U.S.C. Chapter 35

SBA has determined that this rule will not impose new or modify existing recordkeeping or

reporting requirements under the Paperwork Reduction Act.

Regulatory Flexibility Act (RFA)

The Regulatory Flexibility Act (RFA) generally requires that when an agency issues a

proposed rule, or a final rule pursuant to Section 553(b) of the APA or another law, the agency

must prepare a regulatory flexibility analysis that meets the requirements of the RFA and publish

such analysis in the Federal Register. 5 U.S.C. 603, 604. Specifically, the RFA normally

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requires agencies to describe the impact of a rulemaking on small entities by providing a

regulatory impact analysis. Such analysis must address the consideration of regulatory options

that would lessen the economic effect of the rule on small entities. The RFA defines a “small

entity” as (1) a proprietary firm meeting the size standards of the Small Business Administration

(SBA); (2) a nonprofit organization that is not dominant in its field; or (3) a small government

jurisdiction with a population of less than 50,000. 5 U.S.C. 601(3)–(6). Except for such small

government jurisdictions, neither State nor local governments are “small entities.” Similarly, for

purposes of the RFA, individual persons are not small entities.

The requirement to conduct a regulatory impact analysis does not apply if the head of the

agency “certifies that the rule will not, if promulgated, have a significant economic impact on a

substantial number of small entities.” 5 U.S.C. 605(b). The agency must, however, publish the

certification in the Federal Register at the time of publication of the rule, “along with a statement

providing the factual basis for such certification.” If the agency head has not waived the

requirements for a regulatory flexibility analysis in accordance with the RFA’s waiver provision,

and no other RFA exception applies, the agency must prepare the regulatory flexibility analysis

and publish it in the Federal Register at the time of promulgation or, if the rule is promulgated in

response to an emergency that makes timely compliance impracticable, within 180 days of

publication of the final rule. 5 U.S.C. 604(a), 608(b).

Rules that are exempt from notice and comment are also exempt from the RFA requirements,

including conducting a regulatory flexibility analysis, when among other things the agency for

good cause finds that notice and public procedure are impracticable, unnecessary, or contrary to

the public interest. SBA Office of Advocacy guide: How to Comply with the Regulatory

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Flexibility Act, Ch.1. p.9. Accordingly, SBA is not required to conduct a regulatory flexibility

analysis.

Jovita Carranza,
Administrator.

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Our copy: 2020-08_PPP-IFR-Ownership.pdf
Original: www.sba.gov