On June 16, 2020, the Small Business Administration (“SBA”) released a revised loan forgiveness application for the Paycheck Protection Program (“PPP”), reflecting changes to the PPP made by the Paycheck Protection Flexibility Act of 2020 (“Flexibility Act”) which became law June 5.

The SBA also unveiled a new EZ loan forgiveness application. The EZ application requires fewer calculations and less documentation than the full application, and is intended for use by borrowers that:

• Are self-employed and have no employees;
• 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%.

The SBA’s release of the two new forgiveness applications followed the release of a new interim final rule for determining payroll costs and owner compensation in calculating PPP loan forgiveness under the new 24-week covered period allowed by the Flexibility Act. The PPP allows loan forgiveness for payroll costs — including salary, wages, and tips — for up to $100,000 annualized per employee, or $15,385 per individual over the eight-week period. The new interim final rule caps the 24-week maximum for full loan forgiveness at $46,154 per individual employee.

While the employee compensation limit for the 24-week period is three times the eight-week limit, the interim final rule does not do the same with the owner compensation replacement for businesses that file Schedule C, Profit or Loss From Business, tax returns. For these businesses, forgiveness for the owner compensation replacement was calculated for the old, eight-week covered period as 8 ÷ 52 × 2019 net profit, up to a maximum of $15,385. However, under the new 24-week covered period, the forgiveness calculation for these businesses is limited to 2.5 months’ worth (2.5 ÷ 12) of 2019 net profit, up to $20,833.

The differences in the owner compensation replacement calculations are structured to prevent owners from reaping PPP windfalls that Congress did not intend, according to the interim final rule. Specifically, because the Paycheck Protection Flexibility Act provides a safe harbor from loan forgiveness reductions to any borrower that is unable to return to the same level of business activity it was operating at before Feb. 15, 2020, SBA feared that owners could be unjustly enriched.

As explained by the SBA, because the maximum loan amount for a business is generally based on 2.5 months of the borrower’s average total monthly payroll costs during the one-year period preceding the loan, a borrower with one other employee would receive a maximum loan amount that would be equivalent to five months of payroll for a single owner without employees (2.5 months of payroll for the owner plus 2.5 months of payroll for the employee). If the owner laid off the employee and availed itself of the aforementioned safe harbor, the owner could treat the entire amount of the PPP loan as payroll, with the entire loan forgiven.

“This would not only result in a windfall for the owner, by providing the owner with five months of payroll instead of 2.5 months, but also defeat the purpose of the CARES Act of protecting the paycheck of the employee,” the interim final rule says. “For borrowers with no employees, this limitation will have no effect, because the maximum loan amount for such borrowers already includes only 2.5 months of their payroll.”