[Federal Register Volume 85, Number 167 (Thursday, August 27, 2020)]
[Rules and Regulations]
[Pages 52881-52883]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-18940]



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 Rules and Regulations
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  Federal Register / Vol. 85, No. 167 / Thursday, August 27, 2020 / 
Rules and Regulations  

[[Page 52881]]



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.

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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 August 25, 2020.
    Comment date: Comments must be received on or before September 28, 
2020.

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 [email protected]. 
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.
    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 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

[[Page 52882]]

comments must be submitted on or before September 28, 2020. 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 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 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?
    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.
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    \1\ In this context, the related party itself would not also be 
eligible to request forgiveness for this amount.
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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

    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

[[Page 52883]]

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

Jovita Carranza,
Administrator.
[FR Doc. 2020-18940 Filed 8-25-20; 1:00 pm]
BILLING CODE P