Changes to the Paycheck Protection Program (the “PPP”) were announced on February 22, 2021 that specifically impact small businesses with fewer than 20 employees. These changes were designed to prioritize loans to these specific small businesses. According to the Small Business Association (the “SBA”), 98% of small businesses employ less than 20 employees. But, only 45% of small businesses with less than 20 employees have received PPP loans.
One of the biggest changes announced is the implementation of a two-week exclusive application period during which only small businesses with less than 20 employees can apply for PPP loans. This exclusive application period began on February 24, 2021, and will run through March 9, 2021. The current PPP application period for all applicants will continue from March 10, 2021 through March 31, 2021.
While the exclusive application period began on February 24, 2021, changes to PPP eligibility were also announced without a specific effective date, with the intention that they would go into effect during the first week of March, 2021. On March 3, 2021, the SBA released its interim final rule titled Business Loan Program Temporary Changes; Paycheck Protection Program — Revisions to Loan Amount Calculation and Eligibility. With the release of this interim final rule, the additional PPP eligibility changes have become effective immediately on March 3, 2021.
One important change included in the interim final rule is a revision to the PPP loan calculation formula for sole proprietors, independent contractors, and self-employed individuals. Previously, PPP loan amounts for these individuals were based upon the net profit reported on annual tax returns, which prevented unprofitable individuals from receiving a PPP loan. Under the new calculation formula, PPP loan amounts can be based on an individual’s gross income.
Additionally, other changes remove prior restrictions on PPP loan eligibility. The restrictions preventing a small business owner with: (i) a past non-fraud felony conviction; or (ii) a delinquent or defaulted federal student loan from obtaining a PPP loan have been eliminated. Previously, a business was ineligible for a PPP loan if at least 20% of its ownership is held by an individual who: (i) has an arrest or conviction for a felony related to financial assistance fraud within the previous five years; (ii) has any other felony within the previous year; or (iii) is currently delinquent or has defaulted within the last seven years on any federal debt, including a student loan. The updated eligibility guidelines now only prevent a business from obtaining a PPP loan if at least 20% of its ownership is held by an individual who is: (i) presently incarcerated; or (ii) for any felony, presently subject to an indictment, criminal information, arraignment, or other means by which formal criminal charges are brought in any jurisdiction; or (iii) has been convicted of, pleaded guilty or nolo contendere to, or commenced any form of parole or probation (including probation before judgment) for a felony involving fraud, bribery, embezzlement, or a false statement in a loan application or an application for federal financial assistance within the last five years.
It is important to note that while the two-week exclusive application period began on February 24, 2021, the changes noted above did not go into effect until March 3, 2021. PPP loan applications are determined based upon the rules in effect when the PPP loan application is submitted. Thus, only PPP loan applications submitted after the release of the SBA’s interim final rule on March 3, 2021 will be able to take advantage of the changes to eligibility.
Kari Heinze is an associate in Walter Haverfield’s Columbus office. She focuses her practice on business services within the healthcare and dental practice arena. Kari can be reached at firstname.lastname@example.org or at 614-246-2266.
Vince Nardone is Partner-in-Charge of Walter Haverfield’s Columbus office. He serves as a business advisor to owners and executives of closely-held businesses, counseling them on business planning, tax planning and controversy, cash-flow analysis, succession planning, and legal issues that may arise in business operations. Vince can be reached at 614-246-2264 or email@example.com.