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SBA Issues New Rule on Loan Increases

On May 13, 2020, the U.S. Small Business Administration (“SBA”) posted a tenth Interim Final Rule on Loan Increases. This Interim Final Rule supplements the previously posted interim final rules by providing guidance on the ability to increase certain Paycheck Protection Program (“PPP”) loans for partnerships and seasonal employers due to additional guidance issued by SBA that was not available at the time these PPP loans were approved. The immediate effective date of this Interim Final Rule will benefit lenders so that they can swiftly close and disburse loans to small businesses.

On April 14, 2020, SBA posted an Interim Final Rule Additional Eligibility Criteria and Requirements for Certain Pledges of Loans that, among other things, provided guidance for individuals with self-employment income. The interim final rule stated, “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.”

On April 28, 2020, the Department of the Treasury posted an Interim Final Rule on Additional Criterion for Seasonal Employers that provided an alternative criterion for calculating the maximum loan amount for PPP loans issued to seasonal employers.

Some PPP loans were approved to partnerships or seasonal employers before the additional guidance was issued and, as a result, those businesses may not have received PPP loans in the maximum amount for which they are eligible. This Interim Final Rule authorizes all PPP lenders to increase existing PPP loans to partnerships or seasonal employers to include appropriate amounts to cover partner compensation in accordance with the interim final rule posted on April 14, 2020, or to permit the seasonal employer to calculate its maximum loan amount using the alternative criterion posted on April 28, 2020. This Interim Final Rule also authorizes lenders to make an additional disbursement of the increased loan proceeds prior to submission of the initial SBA Form 1502 that includes that loan.

Section 1(a). A partnership that received a PPP loan that only included amounts necessary for payroll costs of the partnership’s employees and other eligible operating expenses, but did not include any amount for partner compensation, may ask their lender to submit a request to increase the PPP loan amount to include appropriate partner compensation, even if the loan has been fully disbursed, provided that the lender’s first SBA Form 1502 report on the PPP loan has not been submitted.

Section 1(b). A seasonal employer that received a PPP loan before the alternative criterion for such employers was posted on April 28, 2020, who would be eligible for a higher maximum loan amount under the alternative criterion, may ask their lender to submit a request to increase the PPP loan amount, even if the loan has been fully disbursed, provided that the lender’s first SBA Form 1502 report to SBA on the PPP loan has not been submitted.

After the initial SBA Form 1502 report has been submitted to SBA, or after the date the initial SBA Form 1502 report was required to be submitted to SBA, the loan cannot be increased. In no event can the increased loan amount exceed the maximum loan amount allowed under the PPP Program, which is $10 million for an individual borrower or $20 million for a corporate group. Additionally, the borrower must provide the lender with required documentation to support the calculation of the increase.

Section 2. Notwithstanding the requirement set forth in the Interim Final Rule on Disbursements posted on April 28, 2020, if a PPP loan is increased under paragraphs 1(a) or (b) above, the lender may make a single additional disbursement of the increased loan proceeds prior to submission of the initial SBA Form 1502 report for that loan. The interim final rule posted on April 28, 2020 provided 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 18, 2020. This Interim Final Rule revises that date from May 18 to May 22, 2020. 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. Additionally, lenders are not entitled to processing fees on increases submitted outside of the required timeframe.

Partnerships and seasonal employers that received their PPP loans prior to SBA posting new interim final rules on April 14, 2020 and April 28, 2020, should review the “average monthly payroll costs” used as the basis for their PPP loan request and determine whether they may be able to increase their loan amount based upon the new guidance in this new Interim Final Rule. If there is an opportunity to request an increase, borrowers should contact their lenders immediately to discuss the process for submitting this request, before the lender submits SBA Form 1502 and within the required timeframe discussed above.

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For additional information on the Paycheck Protection Program, as well as other Federal, state and local relief measures, please visit our COVID-19 Resource Center on our website. If you have any questions, please contact your Tronconi Segarra & Associates advisor or a member of our response team at covid19team@tsacpa.com