Bruce Claassen

June 25, 2020

On Monday evening, the U.S. Small Business Administration (SBA) released new Paycheck Protection Program (PPP) guidance.  In the new guidance, the SBA declared that PPP recipients can apply for loan forgiveness early but that doing so could cost them money in the form of reduced forgiveness.

 

In this new interim final rule (IFR), the SBA addresses a number of issues related to the PPP.  Of course, unless you've been living on a deserted island, you probably know that this program was created by the CARES Act to provide forgivable loans to small businesses, not-for-profits, and certain other entities negatively impacted by the economic impacts of the COVID-19 pandemic and associated government-imposed shut-downs/quarantines.  

 

The new interim final rule revises previous guidance to reflect the changes made by the Paycheck Protection Program Flexibility Act of 2020.  The most notable changes addressed in this IFR:

• Expansion of the "covered period" from eight weeks to 24 weeks.  The "covered period" is a period during which PPP loan recipients can spend the funds and still qualify for loan forgiveness. The new 24-week period applies to all loans made on or after June 5. Borrowers that received loans before June 5, 2020, can elect an eight-week period if they choose.

• The proportion of PPP funding that must be used on payroll costs to qualify for full forgiveness has been lowered to 60% from 75%.

• New loans made after June 5, 2020, will have a five-year term, rather than the two-year term in the original legislation.  Borrowers with loans received before June 5 can extend their loan term to five years if their lender agrees.

 

Many of the changes covered by the new IFR were covered in previous SBA guidance and in the PPP loan forgiveness applications released last week. Easily the most important topic in the new material is the explanation of the process for applying early for loan forgiveness.

When the Flexibility Act was passed, many small businesses raised questions about how the 24-week covered period would impact the forgiveness application process.  Chief among those questions was whether they can apply for PPP loan forgiveness before their covered period expires. 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 25%, the borrower must account for the excess salary reduction for the full eight-week or 24-week covered period, whichever one applies to its loan.  

 

PPP borrowers that apply early for loan forgiveness will forfeit a safe-harbor provision that allows them to restore salaries or wages by Dec. 31 and avoid a reduction in loan forgiveness. For example, if a borrower has a 24-week period that ends in November but applies for forgiveness in October, any wages reduced more than of 25% as of October would be calculated for the entire 24-week period, even if the borrower restores salaries by Dec. 31, 2020.

 

An example provided in the interim final rule shows how the calculations work:

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% 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:  There is still a big elephant in the room that the SBA has not addressed:

PPP recipients have signed loan documents that in many cases make specific reference to the 8-week covered period, date by which the borrower must apply for forgiveness, and maybe even references to the old rule that payroll costs must be at least 75% (reduced to 60% as mentioned above).

We encourage you to contact your bank to see if they can provide any further guidance on this question.

 

Other interim final rule provisions

The IFR also clarifies that it is the borrower’s responsibility to provide an accurate calculation of the loan forgiveness amount.  Lenders will be expected to perform a good-faith review of the borrower’s calculations and supporting documents, in a reasonable amount of time.  However, the lenders do not have to independently verify the borrower’s reported information provided that the borrower:

• Supplies documentation supporting its request, and

• Attests that it has accurately verified the payments for eligible costs.

 

The IFR also references the fact that the SBA will deduct Economic Injury Disaster Loan (EIDL) Advance Amounts from your PPP forgiveness amount. This was also iterated in previous guidance, as well as:

 

• Employer health insurance premiums paid for S corporation owners are not included in the calculation of payroll costs.  Employer retirement contributions for S corporation owners are eligible costs, though.

• For owner-employees and self-employed individuals, including those who file Schedule C, or Schedule F, forgiveness for owner compensation is calculated for the eight-week period as 8 ÷ 52 × 2019 compensation, 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, also in total for all businesses.  This last part means that if you have multiple entities who have received PPP loans, The maximum $15,385 or $20,833 will apply across all of your entities, not that amount for each one.  

 

As of Monday, the SBA has approved nearly 4.7 million loans for a total of $515 billion. That leaves more than $130 billion available for getting a PPP loan.  If you haven't applied, you'll need to do so quickly.  June 30, 2020 is the final deadline for getting a PPP loan.

 

Please contact us with any questions.  There are still questions that the SBA needs to answer, but we are getting closer to having what we need to apply for forgiveness.

 

Stay safe!