It’s been a busy week for those of us involved with the Paycheck Protection Program (“PPP”). Late Tuesday evening, the Small Business Administration (“SBA”) and Treasury released an updated PPP Loan Forgiveness Application, a simplified Application, and instructions for both to account for the changes to PPP in the new Payroll Protection Program Flexibility Act of 2020 (“PPPFA”). SBA also issued changes to the Third and Sixth Interim Final Rules (“IFR”), foreshadowing changes to other IFRs in the not too distant future.

As noted above, there are two versions of the Loan Forgiveness Application. (Here’s the EZ Form and its instructions (hard to believe the word EZ and PPP go together) and the standard form and its instructions). 

The guidance does provide more flexibility and some clarity, but still leaves some questions unanswered and even manages to raise some new ones. The highlights are:

Extension of the Covered Period

• The Covered Period for Loan Forgiveness is extended to the earlier of 24 weeks after funding or December 31, 2020. Borrowers who received their loan prior to June 5, 2020 may elect to use 8 weeks as their covered period for forgiveness.
• ThePPPFA extended the covered period of the entirePPP program until December 31, 2020, instead of the original date of June 30, 2020.
  • –Unanswered Question: According to the CARES ACT, during the entire covered period of the program, which is now through December 31, 2020, the loan proceeds can be used only for very specific items. There is still uncertainty as to whether and/or how borrowers may use any unexpended  PPP loan funds that remain once the loan is forgiven.

More can be spent on non-payroll costs

• The PPPFA reduced the 75 percent payroll requirement to 60 percent. The SBA confirmed in a recent IFR that this amount is not a cliff and that the loan forgiveness is proportional. The forms reflect that forgiveness is based on payroll costs representing at least 60% of the forgiveness amount.

The “cure” period is longer and the requirements are easier to meet

• The safe harbor period for both salary reduction and Full Time Equivalent (“FTE”) reduction was changed in the PPPFA from June 30 to December 31. Additionally, the forms now state that you can meet this safe harbor if you have cured the reduction ”as of the earlier of December 31, 2020 and the date this application is submitted.”
  • –New Unanswered Question – It is not clear whether a borrower who spends all their funds part way through the 24 week period will be able to file for forgiveness at that point. For example, if a borrower were to choose the 24 week covered period and spend all of the funds in the first 10 weeks, assuming they were eligible for full forgiveness, could they apply at that point or are they obligated to wait until the end of the 24 weeks and either maintain employment levels or cure at that point?
• There is a new FTE Reduction Safe Harbor – The borrower is exempt from the reduction in loan forgiveness based on a reduction in FTE employees if the borrower, in good faith, is able to document that it was unable to operate between February 15, 2020 and the end of the Covered Period for Loan Forgiveness at the same level of business activity as before February 15, 2020 due to compliance with requirements established or guidance issued between March 1, 2020 and December 31, 2020 by the Secretary of Health & Human Services, The Director of the CDC and Prevention or OSHA, related to the maintenance of standards for sanitation, social distancing or any other worker or customer safety requirementrelatedtoCOVID-19.
  • –New Unanswered Question: Does this include any shutdown of non-essential workers and businesses ordered by the local and state governments? The above entities are all Federal entities that did not shut down or order the closure of many businesses. 
• The new form 3508EZ streamlines the loan forgiveness process for borrowers who meet at least one of the following three criteria:
  • –The borrower is a self-employed individual, independent contractor, or sole proprietor who had no employees at the time of the PPP loan application and did not include any salaries in their initial application.
  • –The borrower did not reduce annual salary or hourly wages of any employee who made $100,000 or less in the prior year by more than 25% during the Covered Period or the Alternative Covered Period AND the borrower did not reduce the number of employees or the average paid hours of employees between January 1, 2020 and the end of the Covered Period.
    • –You can ignore reductions that arose from an inability to rehire individuals who were employees on February 15, 2020 if the borrower was unable to hire similarly qualified employees for unfilled positions on or before December 31, 2020.
    • –You can also ignore reductions in an employee’s hours that the borrower offered to restore and the employee refused.
  • –During the Covered Period, the borrower did not reduce annual salary or hourly wages of any employee who made $100,000 or less in the prior year by more than 25% compared to the first quarter of 2020 AND the borrower was unable to operate during the Covered Period for Loan Forgiveness at the same level of business activity as before February 15, 2020, due to compliance with requirements established or guidance issued between March 1, 2020 and December 31, 2020 by the Secretary of Health & Human Services, the Director of CDC and Prevention or OSHA, related to the maintenance of standards for sanitation, social distancing or any other work or customer safety requirement related to COVID-19.
• Borrowers may still choose to use either the normal Covered Period, which begins on the date the loan was first disbursed and runs either 8 or 24 weeks, or the Alternate Payroll Covered Period, determined as the 8 or 24 week period commencing at the beginning of the borrower’s first full pay period following the PPP loan disbursement date.

Payroll costs and Owners’ compensation

• The amount of compensation that may be used for each employee is still capped at $100,000, prorated for whichever covered period the borrower chooses. For an 8 week period it will be capped at $15,385. For a 24 week period, it will now be capped at $46,154.
• A separate cap applies to owner or self-employed compensation and is based on the original amount borrowed. For an eight week covered period it is the lesser of eight weeks’ worth (8/52) of 2019 compensation or $15,385; for a 24 week covered period it is the lesser of 2.5 months’ worth (2.5/12) of 2019 compensation or $20,833.
• Health insurance contributions made on behalf of a self-employed individual, general partner or owner-employee of an S-corporation are not allowed as part of payroll costs.
  • –Observation – The limitation on S-Corp owner employees has been added.
  • –Unanswered Question – There is still no definition of owner in these instructions. 
• Employer retirement contributions made on behalf of a self-employed individual or general partner are notincludable in payroll costs. Contributions on behalf of owner-employees are capped at 2.5 months’ worth of the 2019 contribution amount.
  • –Unanswered Question – It is not entirely clear what the “2019 contribution amount” means. Is that the amount paid in 2019, which could have been for 2018 or 2019 contributions, or the amount on the tax return that could have been paid through Sept 2020.
  • –Observation – Although not specifically mentioned, it would appear that owner-employees of corporations are included in this limitation. Otherwise what would owner-employees mean, being that partners, LLC members and self-employed individuals cannot be employees of their respective entities.
  • –Observation – The cap on owner-employees of 2.5 months’ worth of the 2019 contribution amount is only stated in the EZ form and not in the regular application. Stay tuned for more guidance.

More time to repay loans that aren’t forgiven

• In an IFR released last week, the SBA and Treasury confirmed that for loans made before June 5, 2020, the maturity date of the loan is 2 years; however borrowers and lenders may mutually agree to extend the maturity of such loans to 5 years. For loans made on or after June 5, the maturity date is 5 years.
• In that sameIFR, they also stated that with regard to the deferral period for loan repayment:
  • –If a borrower submits to their lender a loan forgiveness application within 10 months after the end of the loan forgiveness covered period (either the 8 or 24 week period beginning on the date the loan is disbursed), they will not have to make any payments of principal or interest on the loan before the date on which the SBA remits the loan forgiveness amount on the loan to the lender, or notifies the lender that no forgiveness is allowed.
  • –If the borrower does not submit a loan forgiveness application within 10 months after the end of the loan forgiveness covered period, principal and accrued interest payments are required to begin on or after the 10 months following the loan forgiveness covered period.

One very significant new unanswered question is based on an inference drawn from the application. It appears as if extending the Covered Period to 24 weeks greatly increases the likelihood of full forgiveness. The instructions say to include “total eligible payroll costs incurred or paid during the Covered Period.” The loan was based on 2 ½ months (10 weeks) of payroll but the forgiveness would be based on 24 weeks of payroll resulting in a pool of forgivable expenses more than double the actual loan. Even if a borrower can’t retain all its FTEs, it might still be possible to get 100% forgiveness. This may have been the intent of Congress but we recommend waiting for further guidance before relying on this “gift.”