On June 22, 2020, the Small Business Administration (SBA) issued a new Interim Final Rule to revise previous guidance released concerning PPP loan forgiveness and loan review procedures, officially updating the language of the PPP’s Final Rules to include the changes made by the Paycheck Protection Program Flexibility Act of 2020 (PPP Flexibility Act). The new guidance mostly updates the rules for changes we already knew about but also provides answers to several questions that had been troubling borrowers. Notably, the new rule clarifies when a borrower may apply for loan forgiveness, and what payroll costs qualify for forgiveness for certain owner-employees.
When Can Borrowers Apply for Loan Forgiveness?
One question that arose when the PPP Flexibility Act extended the Covered Period to 24 weeks was whether borrowers had to wait for the end of the 24-week period to file for forgiveness. The new Interim Final Rule confirms that a borrower may apply for loan forgiveness before the end of the Covered Period (or Alternative Payroll Covered Period) if the borrower has used all the loan proceeds for which the borrower is requesting forgiveness. This flexibility to apply for loan forgiveness prior to the end of the Covered Period is a welcome change and applies whether the borrower uses the 24-week Covered Period or elects to use the original eight-week period if the loan was received prior to June 5, 2020.
Note: If the borrower applies for loan 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 salary reduction for the full Covered Period.
Example: Assume the borrower uses the 24-week Covered Period, applies for forgiveness after 12 weeks when the loan proceeds have been exhausted, and has reduced an employee’s weekly salary from $1,000 per week during the reference period to $700 per week during the Covered Period. The first $250 (25 percent of $1,000) is exempted from the loan forgiveness reduction, and the borrower would report $1,200 as the salary reduction for that employee (the extra $50 weekly reduction multiplied by the full 24 weeks).
Note: In the above example, we understand that the borrower would use the same 12-week period to initially determine whether there was a reduction in FTEs compared to the reference period (i.e. February 15, 2019 through June 30, 2019 or January 1, 2020 through February 29, 2020) chosen by the borrower, although this is not explicitly stated in the new guidance. In other words, after a borrower applies for loan forgiveness, there does not appear to be a requirement for the borrower to maintain employee headcount throughout the entire 24-week period.
Finally, the new guidance confirms that a borrower must apply for forgiveness within ten months after the last day of the Covered Period, or the loan will no longer be deferred, and the borrower must begin making payments. Any amount not forgiven is automatically converted to a loan with a maturity of either two or five years. According to FAQ 49 posted on June 25, 2020, if a PPP loan received an SBA loan number on or after June 5, 2020, the loan has a five-year maturity. If a PPP loan received an SBA loan number before June 5, 2020, the loan has a two-year maturity, unless the borrower and lender mutually agree to extend the term of the loan to five years.
Eligible Payroll Costs for Owner-Employees
The new guidance confirms that “owner-employees” include C-Corporation shareholders in addition to S-Corporation shareholders. Regarding the payroll costs paid during the Covered Period that are eligible for loan forgiveness, C-Corporation owner-employees are capped by the amount of their 2019 employee cash compensation plus employer retirement and health insurance contributions made in 2019 on their behalf. S-Corporation owner-employees are also capped by the amount of their 2019 employee cash compensation plus employer retirement contributions made on their behalf, but employer health insurance contributions made on their behalf cannot be separately added because these payments are already included in their employee cash compensation.
Note: The new Interim Final Rule does not include any reference limiting the forgiveness of employer retirement plan contributions for owner-employees. However, the EZ loan forgiveness application caps forgiveness at 2.5 months’ worth of the 2019 contribution amounts. This limitation, which is not found in the long version of the application, may be an error that will be deleted from the EZ application.
Employee Reduction Exception
The PPP Flexibility Act provides that a borrower can calculate loan forgiveness without regard to a proportional reduction in the number of FTEs if the borrower was unable to operate during the Covered Period at the same level of business activity as before February 15, 2020 due to compliance with requirements established or guidance issued by the Secretary of Health and Human Services, the CDC or OSHA. When this exemption was first created, borrowers questioned whether they could only claim the exemption if they were affected by guidance from one of the federal agencies listed.
The SBA recognized that many state and local authorities have been imposing restrictions based on guidance from these agencies, and the new Interim Final Rule confirms that borrowers are eligible for this exemption if the reduction in their business activity was caused by either direct or indirect compliance with COVID-19 requirements or guidance, including state or local government shutdowns based in part on guidance from the three federal agencies.
We will continue to monitor developments with the Paycheck Protection Program and communicate any significant changes that will impact our clients. For further questions or guidance regarding the loan forgiveness process, please contact your BT advisor by calling 770.396.2200.