Under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), the Small Business Administration (SBA) is tasked with administering the Paycheck Protection Program (PPP), the loan program intended to allow employers to continue to pay their employees and assist with certain other expenses resulting from the COVID-19 pandemic.
As the PPP went into immediate effect without the standard comment period, the SBA continues to issue additional guidance in the form of Frequently Asked Questions (FAQs) and responses as well as Interim Final Rules (IFRs). The most recently updated FAQs, current as of June 25, 2020, is available here and the most recently issued IFRs are available here. Importantly, the U.S. government will not challenge lender PPP actions that conform to the FAQs and to IFRs, as well as any subsequent rulemaking in effect at the time.
On June 23, 2020, the SBA released a new IFR that makes revisions to previous guidance to reflect changes necessitated by the Paycheck Protection Program Flexibility Act of 2020 (the Act), which was signed into law on June 5, 2020, including:
• Expanding to 24 weeks, from eight weeks, the covered period during which PPP loan recipients can spend the funds and still qualify for loan forgiveness. NOTE: The 24-week period applies to all loans made on or after June 5 – borrowers that received loans before June 5 can choose to elect an eight-week period.
• Lowering to 60% from 75% the proportion of PPP funding that must be used on payroll costs to qualify for full forgiveness, the remaining 40% may be used on eligible non-payroll costs such as rent, mortgage interest and utilities.
• Expanding the term for new loans to five years from two years. NOTE: Borrowers with loans received before June 5 may extend their loan term to five years if their lender agrees.
Early Loan Forgiveness Applications
Many borrowers have inquired whether they can apply for PPP loan forgiveness before their covered period expires. The new IFR makes it clear that borrowers who spend all of their PPP loan funds prior to the expiration of their covered period may apply for forgiveness, subject to important caveats.
The new IFR says that if a borrower applies for loan forgiveness before the end of the covered period and has reduced any employees’ salaries or wages by more than the 25% allowed for full forgiveness, the borrower must account for the excess salary reduction for the full 8-week or 24-week covered period, whichever one applies to its loan. Under this guidance, PPP borrowers that apply early for loan forgiveness forfeit a safe-harbor provision allowing them to restore salaries or wages by December 31, 2020 – an extension of the initial June 30, 2020 deadline per the Act – and avoid reductions in the loan forgiveness they receive.
The following example provided in the IFR shows how the calculations would work: A borrower is using a 24-week covered period. This borrower reduced a full-time employee’s weekly salary from $1,000/week during the reference period to $700/week during the covered period. The employee continued to work on a full-time basis during the covered period. In this case, the first 25% (i.e., $250) 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 the full 24 weeks). If the borrower applies for forgiveness before the end of the covered period (e.g., after 18 weeks), it must account for the salary reduction for the full 24-week covered period totaling $1,200 (not just the $900 reduction in salary that occurred during the course of the 18 weeks).
Additional Safe Harbor
In addition to the existing safe harbor that provides that a borrower’s forgiveness will not be reduced if the borrower offered to rehire an employee, the employee refused the offer and the borrower informed the state unemployment office of such refusal. The Act provides that a PPP borrower will not have its loan forgiveness reduced if the borrower can establish in good faith that it was unable to return to the same level of business activity it was at before February 15, 2020, due to compliance with the U.S. Department of Health and Human Services (HHS), the Center for Disease Control and Prevention (CDC) or Occupational Safety and Health Administration (OSHA) guidance. Importantly, the SBA has interpreted this exemption to include both direct and indirect compliance because a significant amount in the reduction of business activity has been a result of state and local shutdown orders based in part on the guidance of the HHS, CDC and OSHA. This is a meaningful clarification to many businesses affected by various state and local orders that may vary significantly depending upon the borrower’s business geography.
Forgiveness Application
In order to receive loan forgiveness, a borrower must complete and submit a loan forgiveness application to its lender either SBA Form 3508, 3508EZ (if applicable), or the lender’s equivalent. NOTE: Before beginning the forgiveness process borrowers should confirm with their lender whether the lender has their own form. The lender has up to 60 days to review the application and issue a decision to the SBA, and request payment for the forgiven amount and the SBA then has up to 90 days to review the loan application and remit the appropriate forgiveness amount to the lender. It is then incumbent upon the lender to inform the borrower whether the loan has been fully or partially forgiven.
The IFR clarifies that it is the borrower’s responsibility to provide an accurate calculation of the loan forgiveness amount. Lenders are expected to perform a good-faith review, in a reasonable time, of the borrower’s calculations and supporting documents, but lenders do not have to independently verify the borrower’s reported information provided that the borrower:
• Supplies documentation supporting its forgiveness request, and
• Attests that it has accurately verified the payments for eligible costs.
The IFR reinforces previous guidance that the SBA will deduct Economic Injury Disaster Loan (EIDL) Advance Amounts from PPP forgiveness amounts – i.e. the up to $10,000 EIDL advance that does not have to be repaid. It also reiterates previous guidance, including:
• For C corporations – owner-employees are capped by the amount of their 2019 employee cash compensation and employer retirement and health insurance contributions made on their behalf.
• For S corporations – employer health insurance contributions cannot be included when calculating owner payroll costs, however, employer retirement contributions are eligible costs.
• For owner-employees and self-employed individuals, including those who file Schedule C, Profit or Loss From Business, or Schedule F, Profit or Loss From Farming, forgiveness for owner compensation is calculated for the eight-week period as (2019 compensation ÷ 52) x 8, up to a maximum of $15,385, in total for all businesses. For the 24-week period, the forgiveness calculation is limited to 2.5 months’ worth (2.5 ÷ 12) of 2019 compensation, up to $20,833, in total for all businesses.
Additional Changes
The IFR makes a number of other changes, including:
• Extending the deferral period from 6 to 10 months after the last day of the covered period.
• Specifying that if a borrower does not apply for forgiveness within 10 months, or if the SBA determines the loan is not eligible for forgiveness, deferment is terminated and the lender must notify the borrower to begin making loan payments.
• Providing new general guidance regarding a borrower’s rights, to, in some circumstances, request that its lender reconsider a decision to deny a forgiveness application or to request that the SBA review the lender’s decision to deny the forgiveness application.
