By: Colleen Lyons
July 9, 2020
On July 4th, President Trump signed legislation extending the deadline for businesses to apply for loans under the Paycheck Protection Program (“PPP”) from June 30, 2020 until August 8, 2020. This five-week extension comes after the US Small Business Administration (“SBA”) and the US Treasury Department (“Treasury Department”) updated many of their previously issued interim regulations and the proposed loan forgiveness application form to conform to the changes mandated by the Paycheck Protection Program Flexibility Act of 2020 (the “Flexibility Act”) enacted on June 5, 2020, as described in our previous alert Paycheck Protection Program Flexibility Act Becomes Law.
These changes included (i) an extension of the covered period in which to use PPP loan funds and qualify for forgiveness to 24-weeks (or at the borrower’s option for loans assigned an SBA loan number prior to June 5, 2020, an 8-week or 24-week period); (ii) a decrease in the percentage of PPP loan funds that must be used for payroll costs from 75% to 60%; (iii) an increase in the loan term from 2 years to 5 years for borrowers whose PPP loan number was assigned on or after June 5, 2020, with an option to extend the loan term to 5 years for pre-June 5th borrowers with lender approval; (iv) the deferral of all interest and principal payments on PPP loans until the forgiveness review process is completed, provided that the borrower submits its loan forgiveness application within ten months of the end of its covered period; and (v) an extension for rehiring furloughed workers or restoring their salary and wages to avoid a loss in loan forgiveness until December 31, 2020. As highlighted below, several of the updates expanded on the text of the Flexibility Act and provide some useful additional guidance for borrowers. The SBA also promulgated Form 3508EZ, a simplified version of the loan forgiveness application for borrowers meeting certain requirements as described below.
Updated Limits on Payroll Costs Eligible for Forgiveness
While the Flexibility Act extended the covered period to 24 weeks, it did not address if, and how, the limits on payroll costs would change for forgiveness purposes. The updates to the Third and Sixth Interim Final Rules provide that the following payroll costs will be eligible for forgiveness:
- Payroll costs including salary, wages, and tips, up to $100,000 of annualized pay per employee (for 24 weeks, a maximum of $46,154 per individual, or for 8 weeks, a maximum of $15,385 per individual), as well as covered benefits for employees (but not owners), including health care expenses, retirement contributions, and state taxes imposed on employee payroll paid by the employer (such as unemployment insurance premiums); and
- owner compensation replacement for individuals with self-employment income who file Schedule C or F, calculated based on 2019 net profit, with forgiveness of such amounts limited to 8 weeks’ worth (8/52) of 2019 net profit (up to $15,385) for an 8-week covered period or 2.5 months’ worth (2.5/12) of 2019 net profit (up to $20,833) for a 24-week covered period.
Subsequent revisions to the Loan Forgiveness and Loan Review Procedures Interim Rule (the Updated Loan Forgiveness Interim Rule) provide some additional guidance around limits for owner-employees and self-employed individuals.
For borrowers that received a PPP loan before June 5, 2020 and elect to use an 8-week covered period, the amount of loan forgiveness requested for owner-employees and self-employed individuals’ payroll compensation is capped at 8 weeks’ worth (8/52) of 2019 compensation (i.e., approximately 15.38 percent of 2019 compensation) or $15,385 per individual, whichever is less, in total across all businesses. For all other borrowers using a twenty-four week covered period, the amount of loan forgiveness requested for owner-employees and self-employed individuals’ payroll compensation is capped at 2.5 months’ worth (2.5/12) of 2019 compensation (i.e., approximately 20.83 percent of 2019 compensation) or $20,833 per individual, whichever is less, in total across all businesses.
In addition, the Updated Loan Forgiveness Interim Rule confirmed that employer retirement and health insurance contributions made on behalf of owner-employees of C corporations during the covered period are entitled to forgiveness. In the case of owner employees of S-corporations, however, only employer retirement contributions made on their behalf are eligible for forgiveness and not employer health insurance contributions because those amounts are already included in the owner-employee’s cash compensation. For self-employed individuals, including Schedule C or F filers and general partners, retirement and health insurance contributions are included in their net self-employment income and therefore cannot be separately added to their payroll calculations.
New FTE Reduction Safe Harbor
The Flexibility Act included an additional safe harbor exemption from a loan forgiveness reduction where the borrower has a decrease in the number of full-time equivalent employees (FTEs) during the covered period. This safe harbor only applies, however, if the borrower is able to document an inability to return to the same level of business activity as the borrower was operating at or before February 15, 2020, due to compliance with requirements established or guidance issued between March 1, 2020 and December 31, 2020 by the Secretary of Health and Human Services, the Director of the Centers for Disease Control and Prevention (CDC), or the Occupational Safety and Health Administration related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID–19 (COVID Requirements or Guidance).
The Updated Loan Forgiveness Interim Rule interprets the above statutory exemption to include both direct and indirect compliance with COVID Requirements or Guidance, given that a significant amount of the reduction in business activity stemming from COVID Requirements or Guidance was the result of state and local government shutdown orders that are based, in part, on guidance from the three federal agencies. The Updated Loan Forgiveness Interim Rule provides the following example:
Example: PPP borrower is in the business of selling beauty products both online and at its physical store. During the covered period, the local government where the borrower’s store is located orders all nonessential businesses, including the borrower’s business, to shut down their stores, based in part on COVID–19 guidance issued by the CDC in March 2020. Because the borrower’s business activity during the covered period was reduced compared to its activity before February 15, 2020 due to compliance with COVID Requirements or Guidance, the borrower satisfies the Flexibility Act’s exemption and will not have its forgiveness amount reduced because of a reduction in FTEs during the covered period, if the borrower in good faith maintains records regarding the reduction in business activity and the local government’s shutdown orders that reference a COVID Requirement or Guidance as described above.
Borrowers that can certify that they have documented in good faith that their reduction in business activity during the covered period stems directly or indirectly from compliance with such COVID Requirements or Guidance are exempt from any reduction in their forgiveness amount stemming from a reduction in FTE employees during the covered period. Such supporting documentation must include copies of applicable COVID Requirements or Guidance for each business location and relevant borrower financial records.
Timing of Loan Forgiveness Application
Many borrowers, especially those who otherwise might qualify for an 8-week covered period, have asked whether they can apply for loan forgiveness before the end of the 24-week covered period. The Updated Loan Forgiveness Interim Rule states that a borrower may submit a loan forgiveness application any time on or before the maturity date of the loan—including before the end of the covered period—if the borrower has used all of the loan proceeds for which the borrower is requesting forgiveness.
This guidance does suggest, however, that if a borrower applies early for loan forgiveness it will forfeit a safe-harbor provision allowing it to restore salaries or wages by December 31, 2020 and avoid reductions in the loan forgiveness they receive. So if a borrower applies for forgiveness before the end of the covered period and has reduced any employee’s salaries or wages in excess of 25 percent, the borrower must account for the excess salary reduction for the full 8-week or 24-week covered period. An example provided in the Updated Loan Forgiveness Interim Rule shows how the calculations would work:
Example: A borrower is using a 24-week covered period. This borrower reduced a full-time employee’s weekly salary from $1,000 per week during the reference period to $700 per week during the covered period. The employee continued to work on a full-time basis during the covered period, with an FTE of 1.0. In this case, the first $250 (25% of $1,000) is exempted from the loan forgiveness reduction. The borrower seeking forgiveness would list $1,200 as the salary/hourly wage reduction for that employee (the extra $50 weekly reduction multiplied by 24 weeks). If the borrower applies for forgiveness before the end of the covered period, it must account for the salary reduction for the full 24-week covered period (totaling $1,200).
The current guidance does not address other potential adjustments based on FTE levels in the event a borrower applies for forgiveness before the end of the covered period.
New Simplified Forgiveness Application for Certain Borrowers
In addition to updating the prior version of the Loan Forgiveness Application (SBA Form 3508) to conform with the Flexibility Act changes described above, the SBA created an additional simplified application form – PPP Loan Forgiveness Application Form 3508EZ. According to the Instructions, this Form can only be used by borrowers who meet at least one of the following criteria:
- The borrower is a self-employed individual, independent contractor or sole proprietor with no employees;
- The borrower did not reduce salary or wages of any employee by more than 25% during the applicable covered period compared to the period between January 1, 2020 and March 31, 2020, and the borrower did not reduce the number of employees or average paid hours of employees between January 1, 2020 and the end of the applicable covered period; or
- The borrower did not reduce salary or wages of any employee by more than 25% during the applicable covered period compared to the period between January 1, 2020 and March 31, 2020, and the borrower was unable to operate during the applicable covered period at the same level of business at which it operated prior to February 15, 2020, due to compliance with requirements established or guidance issued between March 1, 2020 and December 31, 2020 by the Secretary of Health and Human Services, the Director of the Centers for Disease Control and Prevention, or the Occupational Safety and Health Administration, related to the maintenance of standards of sanitation, social distancing, or any other work or customer safety requirement related to COVID-19.
Borrowers eligible to use Form 3508EZ will not be required to complete former PPP Schedule A and the related worksheets which are used to calculate full-time equivalents, salary reductions and related forgiveness reductions.
As borrowers begin the process of completing their loan forgiveness applications, it is expected that the SBA and Treasury Department will continue to issue guidance in response to questions as they arise and we will continue to provide updates.