SBA Issues Guidance and Forgiveness Applications to Conform with PPP Flexibility Act
On June 16, the Small Business Administration and the Treasury issued guidance on forgiveness, as it applies to the self-employed, in light of the Paycheck Protection Flexibility Act enacted June 5. The same day, the agencies released new forgiveness applications and instructions for everyone, including a new EZ form for many self-employed borrowers (links to these forms are at the bottom of this post).
The new guidance (called the Interim Final Rule on Revisions to the Third and Sixth Interim Final Rules) specifically revises only the interim final rules posted on SBA’s website on April 14, 2020 (for self-employed borrowers) and April 28, 2020 (regarding lender disbursements), by changing those provisions to conform to the Flexibility Act. The guidance clarifies what qualifies as owner-compensation under the new law. It ensures that self-employed borrowers with no employees who opt for the 24-week covered period will receive full forgiveness.
Covered Period Revised
The guidance follows the Flexibility Act by extending the end of the covered period that applies to the issuance and use of PPP loans from June 30, 2020, to December 31, 2020.
- Guidance issued by Treasury and SBA on June 11 confirmed that lenders may not issue new PPP loans past June 30, 2020.
Maturity Provisions Revised
The guidance provides that the maturity of PPP loans made before June 5, 2020, is two years, unless the borrower and lender mutually agree to extend the maturity of such loans to five years. The maturity of PPP loans made on or after June 5 is five years.
Use Restrictions Revised
The guidance provides that at least 60 percent (down from the original 75 percent) of the PPP loan proceeds shall be used for payroll costs. For purposes of determining the percentage of use of proceeds for payroll costs (but not for forgiveness purposes), the amount of any refinanced EIDL will be included.
Amounts Eligible for Forgiveness Revised
The guidance states that the amount of loan forgiveness can be up to the full principal amount of the loan, plus accrued interest. Borrowers who received their PPP loan before June 5 may choose to spend the proceeds over an eight-week or 24-week period following the disbursement of the loan. Those who receive their loan June 5 or later are limited to a 24-week period. The actual amount of loan forgiveness will depend, in part, on the total amount spent over the 24-week period (or, if the borrower chooses, the eight-week period) beginning on the date the PPP loan is disbursed on the following eligible costs:
- 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
- For eight weeks, a maximum of $15,385 per individual
- Covered benefits are additionally allowed 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);
- The application instructions state, “Do not add employer health insurance contributions made on behalf of a self-employed individual, general partners, or owner-employees of an S-corporation, because such payments are already included in their compensation.” They also state, “Do not add employer retirement contributions made on behalf of a self-employed individual or general partners, because such payments are already included in their compensation.”
- Covered benefits are additionally allowed 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);
- Owner Compensation Replacement
- Calculated based on 2019 net profit, with forgiveness of such amounts limited to eight weeks’ worth (8/52) of 2019 net profit (up to $15,385) for an eight-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
- Borrower must exclude any qualified sick leave or family leave equivalent amount for which a credit is claimed under the Families First Coronavirus Response Act;
- Calculated based on 2019 net profit, with forgiveness of such amounts limited to eight weeks’ worth (8/52) of 2019 net profit (up to $15,385) for an eight-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
- Interest on mortgage obligations on real or personal property incurred before February 15, 2020, to the extent they are deductible on Form 1040 Schedule C (business mortgage payments);
- Rent payments on lease agreements in force before February 15, 2020, to the extent they are deductible on Form 1040 Schedule C (business rent payments); and
- Utility payments under service agreements dated before February 15, 2020 to the extent they are deductible on Form 1040 Schedule C (business utility payments).
- The guidance does not change the requirement that the borrower must have claimed or be entitled to claim a deduction for mortgage interest, rent, and utility expenses on the 2019 Form 1040 Schedule C for them to be a permissible use during the eight-week or 24-week period following the disbursement of the loan.
The guidance explains that restricting the owner compensation replacement to 2.5 months of payroll, even with the 24-week covered period, upholds the intent of the CARES Act to protect the paycheck of employees. If, for example, a self-employed owner laid off his only employee and availed himself of the safe harbor in the Flexibility Act from reductions in loan forgiveness, the owner could treat the entire amount of the PPP loan as payroll, with the entire loan being forgiven. This would be a windfall to the owner. For borrowers with no employees, the 2.5-month limitation has no effect, because the maximum loan amount for such borrowers already includes only 2.5 months of their payroll.
Owner Restrictions
While this guidance does not define “owner-employee,” or provide specific guidance regarding those employees, the application revises the statement that all borrowers must affirm. This affirmation includes a cap on forgiveness for compensation paid to an owner-employee, as well as a self-employed borrower or partner.
Links to New Forgiveness Applications
Note that the new EZ application is available for borrowers who:
- Are self-employed and have no employees; OR
- Did not reduce the salaries or wages of their employees by more than 25%, and did not reduce the number or hours of their employees; OR
- Experienced reductions in business activity as a result of health directives related to COVID-19, and did not reduce the salaries or wages of their employees by more than 25%.
· Loan Forgiveness Application Form EZ Instructions
· Loan Forgiveness Application Form EZ
· Loan Forgiveness Application Instructions (revised 6/16/2020)
· Loan Forgiveness Application (revised 6/16/2020)