Late yesterday (April 2), the SBA issued  an Interim Final Rule for the Paycheck Protection Program.  If you are applying for this program, this is mandatory reading.  There is little information that is new in this guidance. But some information is frankly shocking, and also frustrating is that many questions remain unanswered.–IFRN%20FINAL.pdf

  • Restrictions on the use of the funds.  The rule is clear if you KNOWINGLY misuse the funds, the government may hold you liable for fraud.  Also, a false statement in the application is punishable with up to 5 years in prison and  up to a $250,000 fine.   If you weren’t taking the details of this program seriously you should now.   At first blush, that doesn’t seem unusual.   What is stunning is how the phrase “misuse of funds”  may be defined.
  • What is a misuse of funds?   There is no definition in the rule.   QA letter (r) of the rule states that the money can only be used to pay wages, make interest payments (not principal) , lease payments and utility payments.    The rules also states that:

    “PPP loan proceeds may be used for the purposes listed above and for other allowable uses described in Section 7(a) of the Small Business ACT (15 USC 636(a)).  After a quick skim of that body of complex law it appears that any reasonable business expense may be allowable.  But I’m not sure.  Consult your banker and legal counsel. 
  • QA letter (r) vi states that at LEAST 75% of the loan proceeds SHALL be used for payroll costs.   On the loan application you are asked to certify that not more than 25% of the loan proceeds SHALL  be used for non-payroll costs.   The word SHALL should scare you.  Perhaps that could constitute a misuse of funds.   
  •  Recommendation—Avoid Commingling
    I am recommending  you open two new bank accounts, and deposit 75% of PPP funds in one account for payroll, and 25% for everything else.     Do not commingle the funds.  Use the two accounts merely to transfer funds in a precise amount to your regular bank account prior to making an allowable expenditure.   Be very diligent to pay only the allowable expenditures with those specific funds.    For example, for a mortgage payment, you would only transfer the interest component from the PPP account.    The interest component should be paid with the PPP bank account, and the principal should be paid with non-PPP funds.   Also, while you don’t need to spend 75% of the proceeds on payroll during the 8 week measuring period, you do need to spend 75% of the money on payroll eventually, even if you have to repay some or all of the loan.

Other Revelations and Open Questions:

  •  QA letter (r) states that you can spend funds on interest payments for “any other debt obligations” incurred before February 15, 2020.  The actual codified law stated the only eligible interest payments were for secured mortgage and equipment loans.
  • To determine the loan amount, you look at historical wages.  The rule (page 8) states that you start with historical wages “from the last 12 months.”   The application still states that you use calendar 2019’s wages.   Your banker will have to speculate that the “last 12 months” means calendar 2019.
  • There still is zero guidance as to how to treat income earned by a partner in a partnership.    Can that be treated as wages?    Simple question.  Stunning that there is no answer.
  • QA Letter (i) The interest rate on the loans is one percent per annum.   The maturity date is 2 years.  No payments are due for 6 months.

Stay tuned.  We will update our website with clarifications as we receive updates.