The constant changes to the Paycheck Protection Program (PPP) and related loan forgiveness continue to leave PPP loan borrowers and potential borrowers seeking answers. Below we address some of the latest guidance provided in the most recent Interim Final Rule (IFR) released by the Small Business Administration (SBA) last week.

When will a borrower be required to begin making payments on their loan?

If the borrower does not apply for loan forgiveness within 10 months after the last day of the covered period, or if SBA determines that the loan is not eligible for forgiveness (in whole or in part), the PPP loan is no longer deferred and the borrower must begin paying principal and accrued interest.

If the borrower has applied for loan forgiveness within the prescribed 10-month period, payments will be required, if applicable, when the determination has been made as to the forgiveness.

Can a borrower apply for loan forgiveness before the end of their covered period?

A borrower may submit a loan forgiveness application any time, including before the end of the covered period, if the borrower has used all the loan proceeds for which the borrower is requesting forgiveness.

If the borrower applies for forgiveness before the end of the covered period and has reduced any employee’s salary or wages in excess of 25 percent, the borrower must account for the excess salary reduction for the full eight-week or 24-week covered period.

Is my covered period eight or 24 weeks?

Borrowers that received loans prior to June 5, 2020, may choose either the eight-week or 24-week covered period.

Borrowers that received loans June 5, 2020, and later must use the 24-week covered period.

Has guidance been provided regarding what payments I can include in payroll costs that I want to be forgiven?

Payroll costs must be paid during the covered period (or alternative payroll covered period) to be eligible for forgiveness. Payroll costs incurred during the borrower’s last pay period of the covered period or the alternative payroll covered period are eligible for forgiveness if paid on or before the next regular payroll date.

The following example, which we have illustrated below, is provided in the Interim Final Rule and shows that both of the following are included: amounts paid during the covered period AND amounts incurred during the covered period and paid on the next regularly scheduled pay date.

“Example: A borrower that received a PPP loan before June 5, 2020 and elects to use an eight-week covered period has a bi-weekly payroll schedule (with payments made every other week). The borrower’s eight-week covered period begins on June 1 and ends on July 26. The first day of the borrower’s first payroll cycle that starts in the covered period is June 7. The borrower may elect an alternative payroll covered period for payroll cost purposes that starts on June 7 and ends 55 days later (for a total of 56 days), on August 1. Payroll costs paid during this alternative payroll covered period are eligible for forgiveness. In addition, payroll costs incurred during this alternative payroll covered period are eligible for forgiveness if they are paid on or before the first regular payroll date occurring after August 1. ”

 

How much forgiveness is available for owners and owner-employees?

Borrowers that elect to use an eight-week covered period are eligible to request loan forgiveness for owner-employees and self-employed individuals’ payroll compensation up to eight weeks’ worth (8/52) of 2019 compensation or $15,385, in total, per individual, whichever is less.

Borrowers that use the 24-week period are eligible to request loan forgiveness for owner-employees and self-employed individuals’ payroll compensation up to 2.5 months’ worth (2.5/12) of 2019 compensation or $20,833, in total, per individual, whichever is less.

Additionally:

  • C-corporation owner-employees are capped by the amount of their 2019 employee cash compensation and employer retirement and health insurance contributions made on their behalf.
  • S-corporation owner-employees are capped by the amount of their 2019 employee cash compensation and employer retirement contributions made on their behalf, but employer health insurance contributions made on their behalf cannot be separately added because those payments are already included in their employee cash compensation.
  • Schedule C or F filers are capped by the amount of their owner compensation replacement, calculated based on 2019 net profit.
  • General partners are capped by the amount of their 2019 net earnings from self-employment (reduced by claimed section 179 expense deduction, unreimbursed partnership expenses, and depletion from oil and gas properties) multiplied by 0.9235.
  • For self-employed individuals, including Schedule C or F filers and general partners, retirement and health insurance contributions are included in their net self-employment income and therefore cannot be separately added to their payroll calculation.

What non-payroll costs may be forgiven?

A nonpayroll cost is eligible for forgiveness if it was paid during the covered period or incurred during the covered period and paid on or before the next regular billing date, even if the billing date is after the covered period.

The below example provided in the IFR specifically allows for a borrower to make past due payments related to allowable costs including rent and utilities, if they are in arrears. Prepayments are not eligible for forgiveness.

“Example: A borrower that received a loan before June 5, 2020 uses a 24-week covered period that begins on June 1 and ends on November 15. The borrower pays its electricity bills for June through October during the covered period and pays its November electricity bill on December 10, which is the next regular billing date. The borrower may seek loan forgiveness for its June through October electricity bills, because they were paid during the covered period. In addition, the borrower may seek loan forgiveness for the portion of its November electricity bill through November 15 (the end of the covered period), because it was incurred during the covered period and paid on the next regular billing date.”

What additional guidance has been provided regarding the salary-based reduction to loan forgiveness?

Salary reduction examples provided in the IFR and reproduced below are intended to provide additional clarity to the guidance the SBA previously provided:

“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 percent 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). ”

“Example: A borrower that received a PPP loan before June 5, 2020 has elected to use an eight-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 percent of $1,000) is exempted from the loan forgiveness reduction. The borrower seeking forgiveness would list $400 as the salary/hourly wage reduction for that employee (the extra $50 weekly reduction multiplied by eight weeks).”

What FTE reduction issues have been clarified in the Interim Final Rule?

A borrower may exclude any reduction in full-time equivalent employee headcount that is attributable to an individual employee if:

  • The borrower made a good faith, written offer to restore the reduced hours of such employee;
  • The offer was for the same salary or wages and same number of hours as earned by such employee in the last pay period prior to the reduction in hours;
  • The offer was rejected by such employee; AND
  • The borrower has maintained records documenting the offer and its rejection.

Borrowers are further exempted from the loan forgiveness reduction arising from a proportional reduction in FTE employees during the covered period if the borrower is able to document in good faith the following:

  • An inability to rehire individuals who were employees of the borrower on February 15, 2020; and
  • An inability to hire similarly qualified individuals for unfilled positions on or before December 31, 2020.

Borrowers are required to inform the applicable state unemployment insurance office of any employee’s rejected rehire offer within 30 days of the employee’s rejection of the offer. The documents that borrowers should maintain to show compliance with this exemption include, but are not limited to:

  • The written offer to rehire an individual,
  • A written record of the offer’s rejection, and
  • A written record of efforts to hire a similarly qualified individual.

Further information regarding how borrowers will report information concerning rejected rehire offers to state unemployment insurance offices will be provided on SBA’s website.

The IFR states that, “Borrowers are also exempted from the loan forgiveness reduction arising from a reduction in the number of FTE employees during the covered period if the borrower is able to document in good faith an inability to return to the same level of business activity as the borrower was operating at 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 and Human Services, the Director of the Centers for Disease Control and Prevention (CDC), or the Occupational Safety and Health Administration related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID-19 (COVID Requirements or Guidance). Specifically, borrowers that can certify that they have documented in good faith that their reduction in business activity during the covered period stems directly or indirectly from compliance with such COVID Requirements or Guidance are exempt from any reduction in their forgiveness amount stemming from a reduction in FTE employees during the covered period. Such documentation must include copies of applicable COVID Requirements or Guidance for each business location and relevant borrower financial records.”

What will lenders review when determining their recommendation for loan forgiveness?

When determining their recommendation for loan forgiveness, lenders will:

  • Review the receipt of the borrower certifications contained in the SBA Form 3508 or lender’s equivalent form.
  • Review the receipt of the documentation the borrower must submit to aid in verifying payroll and nonpayroll costs, as specified in the instructions to the SBA Form 3508 or lender’s equivalent form.
  • Confirm the borrower’s calculations on the borrower’s SBA Form 3508 or lender’s equivalent form, including the dollar amount of the:
    • Cash Compensation, Non-Cash Compensation, and Compensation to Owners claimed on Lines 1, 4, 6, 7, 8, and 9 on PPP Schedule A and
    • Business Mortgage Interest Payments, Business Rent or Lease Payments, and Business Utility Payments claimed on Lines 2, 3, and 4 on the PPP Loan Forgiveness Calculation Form, by reviewing the documentation submitted with the SBA Form 3508 or lender’s equivalent form.
  • Confirm that the borrower made the calculation on Line 10 of the SBA Form 3508 or lender’s equivalent form correctly, by dividing the borrower’s Eligible Payroll Costs claimed on Line 1 by 0.60.

The IFR provides that lenders should perform minimal review of calculations based on a payroll report by a recognized third-party payroll processor; however, if payroll costs are internally prepared, more extensive review of calculations and data would be appropriate. The IFR further provides that the borrower will not receive forgiveness without submitting all required documentation to the lender.

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If Delap can be helpful to you as you evaluate your options during this time, please don’t hesitate to reach out to our team of professionals who are committed to assisting you with all things PPP.

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