More Forgiveness Questions Addressed in New PPP Guidance
Update: On July 4, 2020, President Trump signed S.4116 into law. This new law allows new PPP loans to be made through August 8, 2020. The law does not allow businesses that have already obtained a loan to receive a second one.
Late June 22, 2020, the SBA and Treasury issued another round of extensive forgiveness guidance. This Interim Final Rule on Revisions to Loan Forgiveness Interim Final Rule and SBA Loan Review Procedures Interim Final Rule updates earlier forgiveness rules in light of the Paycheck Protection Program Flexibility Act. This rule, which follows last week’s guidance on forgiveness for the self-employed, answers a number of questions regarding the forgiveness process.
New Covered Period
The rule notes that the “covered period,” as applied to forgiveness, was originally defined as the eight-week period beginning on the date of the origination of a PPP loan. The rule implements the Flexibility Act, which extends the length of the covered period from eight to 24 weeks. It also provides that borrowers who received PPP loans before June 5, 2020, may elect to use the original eight-week covered period.
New 60 Percent Payroll Limit
The rule conforms the guidance to the Flexibility Act by reducing the portion of the PPP proceeds that must be used for payroll costs, in order for the full loan to be forgiven, from 75 percent to 60 percent. Thus, a borrower may receive full forgiveness, even if up to 40 percent of the proceeds are used for nonpayroll costs.
Loan Maturity and Deferral
The rule states that the Flexibility Act provides a minimum maturity of five years for all PPP loans made on or after June 5, 2020, and permits lenders and borrowers to extend the maturity date of earlier PPP loans by mutual agreement. Prior guidance established a two-year maturity period for these loans.
The Flexibility Act also extended the deferral period for PPP loans to the date that SBA remits the forgiveness amount to the lender. If the borrower does not apply for loan forgiveness within 10 months after the last day of the covered period (or if SBA determines that the loan is not fully eligible for forgiveness), the PPP loan is no longer deferred and the borrower must begin paying principal and interest. If this occurs, the lender must notify the borrower of the date the first payment is due and report that the loan is no longer deferred on the next monthly SBA Form 1502 report filed by the lender.
Applying for Forgiveness
The guidance 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. That is particularly welcome news for borrowers who have spent their proceeds and don’t want to wait until the end of a 24-week period to close out the loan.
Note: Borrowers who have reduced FTEs or salaries of employees should consider the impact of an early application on available exemptions from loan reductions (see below).
Payroll Cost Clarifications
The rule adapts earlier guidance to the new covered period with respect to the necessary timing of forgivable payroll costs. In general, payroll costs paid or incurred during the eight-week or 24-week covered period are eligible for forgiveness. The rule provides borrowers with an alternative commencement time for the covered period for payroll costs only.
Borrowers may seek forgiveness for payroll costs for the applicable covered period beginning on either:
- The date of disbursement of the borrower’s PPP loan proceeds from the lender or
- The first day of the first payroll cycle in the covered period (the “alternative payroll covered period”)
Payroll costs are considered paid on the day that paychecks are distributed or the borrower originates an ACH credit transaction. If payroll costs are incurred during the alternative payroll covered period, but paid after the end of the alternative payroll covered period, the rule provides that these payroll costs will also be eligible for forgiveness if they are paid no later than the first regular payroll date after the covered period. This special rule is limited to bi-weekly or more frequent payroll cycles.
Caps on Compensation for Owner-Employees and Self-Employed Individuals
The rule clarifies that for borrowers who received a PPP loan before June 5, 2020, and elect to use an eight-week covered period, the amount of loan forgiveness requested for owner-employees and self-employed individuals’ payroll compensation is capped at eight weeks’ worth (8/52) of 2019 compensation or $15,385 per individual, whichever is less, in total across all businesses. This accords with earlier guidance.
For those with the longer 24-week covered period, the rule states that the amount of loan forgiveness requested for owner-employees' and self-employed individuals’ payroll compensation is capped at 2.5 months’ worth of 2019 compensation or $20,833 per individual, whichever is less, in total across all businesses. This corresponds to the limits used in calculating the loan amount.
Note: The guidance clarifies that owner-employee means S corporation owners-employee and C-corporation owner-employee. It does not provide any special directives with respect to related parties or minority shareholders.
The cap based upon 8/52 or 2.5 months of 2019 owner compensation is calculated based upon the following:
- Compensation for C-corporation owner-employees: the amount of their 2019 employee cash compensation and employer retirement and health insurance contributions made on their behalf
- S-corporation owner-employees: the amount of their 2019 employee cash compensation and employer retirement contributions made on their behalf, but not health insurance, since that is already part of their cash compensation
- Self-employed Schedule C or F filers: owner compensation replacement, calculated based on 2019 net profit. Retirement and health insurance contributions are part of this net income and cannot be separately added.
- General partners: the amount of their 2019 net earnings from self-employment (reduced by claimed section 179 expense deduction, unreimbursed partnership expenses, and depletion from oil and gas properties) multiplied by 0.9235. Retirement and health insurance contributions are part of this net income and cannot be separately added.
Nonpayroll Cost Clarifications
Prior guidance has defined eligible nonpayroll costs to include:
- Any interest payment on any covered mortgage obligation (which shall not include any prepayment of or payment of principal on a covered mortgage obligation)
- Payment of any covered rent obligation
- Covered utility payments
The new rule states that nonpayroll costs are eligible for forgiveness if they were:
- Paid during the covered period or
- Incurred during the covered period and paid on or before the next regular billing date, even if the billing date is after the covered period
The rule provides this example:
A borrower that received a loan before June 5, 2020 uses a 24-week covered period that begins on June 1 and ends on November 15. The borrower pays its electricity bills for June through October during the covered period and pays its November electricity bill on December 10, which is the next regular billing date. The borrower may seek loan forgiveness for its June through October electricity bills, because they were paid during the covered period. In addition, the borrower may seek loan forgiveness for the portion of its November electricity bill through November 15 (the end of the covered period), because it was incurred during the covered period and paid on the next regular billing date.
Note: This rule provides flexibility for borrowers, and, given the 24-week covered period, significantly expands the non-payroll costs eligible for forgiveness.
Reduction of Forgiveness Because of Reduction in Employees or Salaries
Extension of Rehire or Salary Restoration Exemption Period
The CARES Act, as modified by the Flexibility Act, requires reductions in a borrower’s loan forgiveness based upon reductions in full-time equivalent (FTE) employees or in employee salary and wages. Originally the reductions were subject to a statutory exemption for borrowers that had eliminated the reductions on or before June 30, 2020. The Flexibility Act extended this exemption period through December 31, 2020.
Impact of New Covered Period
The rule explains that borrowers must account for the eight-week or 24-week covered period when determining any required reduction not exempted by a waiver. It provides this 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 percent 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).
Note: The rule provides no similar example or guidance with respect to a reduction in FTEs. In other words, it is not specified whether the employer may apply for forgiveness before the end of the coverage period and consider only whether the FTEs have been reduced as of the date of the application. Further guidance is needed.
The Flexibility Act also added two new exemptions based on employee availability and business activity. In prior guidance, the agencies had adopted a regulatory exemption to the reduction rules for borrowers that had offered to restore employee hours at the same salary or wages, even if the employees have not accepted. The new rule explains how these exemptions now work.
Flexibility Act Exemptions
The Flexibility Act eliminates a reduction in loan forgiveness due to a reduction in full-time equivalent (FTE) employees where:
- The employer is able to document:
- An inability to rehire individuals who were employees of the eligible recipient on February 15, 2020; and
- An inability to hire similarly qualified employees for unfilled positions on or before December 31, 2020; OR
- The employer is able to document an inability to return to the same level of business activity as such business was operating at before February 15, 2020, due to compliance with requirements established or federal guidance during the period beginning on March 1, 2020, and ending December 31, 2020, related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID–19.
Interaction with Prior Regulatory De Minimis Exemptions
The rule says that because the new exemption pertaining to individuals who refuse an offer to be rehired is very similar to the de minimis exemption that was provided in the First Loan Forgiveness Rule, the Flexibility Act’s exemption supersedes the prior regulatory exemption relating to reductions in FTE employees.
The rule notes, however, that a related de minimis exemption in the First Loan Forgiveness Rule is not addressed in the Flexibility Act. For that reason, the agencies are retaining the prior regulatory exemption for borrowers who reduce the hours of an employee and offer to restore the reduction in hours, but the employee declines the offer.
Putting it All Together
The exemptions mean that a borrower’s loan forgiveness amount will not be reduced if the borrower reduced the hours of an employee, then offered to restore the reduction in hours, but the employee declined the offer. Likewise, a borrower may exclude any reduction in FTE headcount that is attributable to an individual employee if:
- The borrower made a good faith, written offer to restore the reduced hours of such employee;
- The offer was for the same salary or wages and same number of hours as earned by such employee in the last pay period prior to the reduction in hours;
- The offer was rejected by such employee; and
- The borrower has maintained records documenting the offer and its rejection.
Borrowers are also exempted from the loan forgiveness reduction arising from a proportional reduction in FTE employees during the covered period if the borrower is able to document in good faith the following:
- An inability to rehire individuals who were employees of the borrower on February 15, 2020; and
- An inability to hire similarly qualified individuals for unfilled positions on or before December 31, 2020.
Borrowers are required to inform the applicable state unemployment insurance office of any employee’s rejected rehire offer within 30 days of the rejection. Borrowers must retain the written offer to rehire an individual, a written record of the offer’s rejection, and a written record of efforts to hire a similarly qualified individual.
Borrowers are also exempted from the loan forgiveness reduction arising from a reduction in the number of FTE employees during the covered period if the borrower is able to document in good faith an inability to return to the same level of business activity as the borrower was operating at 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
Specifically, 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 applicable guidance are exempt from any reduction in their forgiveness amount stemming from a reduction in FTE employees during the covered period. Documentation must include copies of applicable COVID Requirements or Guidance for each business location and relevant borrower financial records.
The rule states that when a borrower submits the standard forgiveness application (SBA Form 3508), the lender shall:
- Confirm receipt of the borrower certifications contained in the application;
- Confirm receipt of the documentation the borrower must submit to aid in verifying payroll and non-payroll costs;
- Confirm the borrower’s calculations on the form by reviewing the documentation submitted with the SBA Form 3508; and
- Confirm that the borrower made the forgiveness calculation on Line 10 of the form, by dividing the borrower’s Eligible Payroll Costs claimed on Line 1 by 0.60.
When the borrower submits the simplified forgiveness application (SBA Form 3508EZ) or lender’s equivalent form, the lender must:
- Confirm receipt of the borrower certifications contained in the SBA Form 3508EZ;
- Confirm receipt of the documentation the borrower must submit to aid in verifying payroll and non-payroll costs.
- Confirm the borrower’s calculations on the borrower’s form by reviewing the documentation submitted with the SBA Form 3508EZ; and
- Confirm that the borrower made the calculation on Line 7 of the SBA Form 3508EZ correctly, by dividing the borrower’s Eligible Payroll Costs claimed on Line 1 by 0.60.
The guidance states that a lender has 60 days from receipt of a complete application to issue a forgiveness decision to the SBA. If the lender determines that the borrower is entitled to forgiveness of some or all of the amount applied for, the SBA will, subject to any SBA review of the loan or loan application, remit the appropriate forgiveness amount to the lender, plus any interest accrued through the date of payment, not later than 90 days after the lender issues its decision to the SBA. If applicable, the SBA will deduct EIDL advance amounts from the forgiveness amount remitted. If the SBA determines in the course of its review that the borrower was ineligible for the PPP loan, the loan will not be eligible for loan forgiveness.
The lender must notify the borrower of the forgiveness amount. If only a portion of the loan is forgiven, or if the forgiveness request is denied, any remaining balance due on the loan must be repaid by the borrower on or before the maturity date.
If the lender denies forgiveness without prejudice, the borrower may ask the lender to reconsider its application for loan forgiveness, unless the SBA has determined that the borrower is ineligible for a PPP loan.
If the SBA determines that the full amount of the loan is eligible for forgiveness and remits the full amount of the loan to the lender, the lender will mark the PPP loan note as “paid in full” and report the status of the loan as “paid in full” on the next monthly 1502 report filed with the SBA by the lender.
Note: These general procedures do not apply to loan forgiveness applications that are reviewed by the SBA prior to the lender’s decision on forgiveness.
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