The Small Business Administration (SBA) and Department of the Treasury jointly released updates to the Paycheck Protection Program (PPP) Loan Forgiveness Application and instructions for the application. In addition to these revisions, a simplified, or “EZ”, application was created for eligible borrowers that meet specific criteria.
These releases came shortly after the SBA issued a new interim final rule guiding borrowers on the calculation of owner, and employee compensation for loan forgiveness under the new 24-week covered period.
The revised PPP Loan Forgiveness application and instructions include notable items such as:
- Borrowers receiving loans prior to June 5th have the option to use the original 8-week covered period or the new 24-week covered period.
- This update comes as relief to those borrowers that were not able to meet payroll and eligible expense requirements under the 8-week period, but will be able to do so under the 24-week covered period.
- Safe harbors for excluding salary and wage reductions and full-time equivalent employee reductions from loan forgiveness reductions can be applied using the loan forgiveness application submission date, as opposed to waiting until December 31, 2020.
- Retirement contributions for S Corporation shareholders qualify as eligible payroll costs, however health insurance paid for S Corporation shareholders are still excluded.
New “EZ” Application
The newly released EZ forgiveness form (Form 3508EZ) requires less calculations and documentation compared to the full forgiveness application. The EZ application is available to borrowers that:
- 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
- Were unable to operate at the same level of business activity due to Covid-19 related issued health directives, and did not reduce the salaries or wages of their employees by more than 25%; or
- Are self-employed and have no employees.
New interim final rule released
The Paycheck Protection Flexibility Act extended the time in which PPP recipients could spend the funds and still qualify for loan forgiveness from 8 weeks to 24 weeks. The newly released interim final rule clarifies how borrowers will calculate compensation for loan forgiveness purposes.
Employee compensation currently is limited for the 24-week period, as three times the original eight-week covered period limit, or $46,154 per person. The Interim final rule clarifies that employees with an annual salary of $100,000 or more will be included in this extended compensation calculation, and no longer limited to the 8-week calculation.
Although there is clarity needed between the new Interim Final Rules and updated loan forgiveness application instructions, it appears that amounts paid to owners (owner-employees, a self-employed individual, or general partner) during the 24-week covered period limit are capped at the lower of 1) the 2.5 month equivalent of their applicable compensation in 2019 or 2) $20,833 which is the 2.5 month equivalent of an annualized salary of $100,000.
The interim final rule also modifies earlier guidance to account for changes included in the Payroll Protection Flexibility Act including:
- The minimum repayment term for PPP loans is raised to five years for all loans originated after June 4. For loans originated before June 5, the two-year minimum maturity remains in effect unless both the borrower and the lender agree to extend it to five years.
- The proportion of PPP funding that must be used on payroll costs to qualify for full forgiveness is reduced from 75% to 60%.
- The application deadline for PPP loans remains June 30.
While the guidance issued was generally consistent with what was expected, the new Interim Final Rules aren’t exactly in line with the new instructions and certifications on the new PPP Forgiveness application, and EZ application, which leaves a need for additional guidance and clarification. Most uncertainty is surrounding the Self-employed and Owner-Employee calculations of salary eligible for forgiveness. Employers have until 10 months from the earlier of the last day of the Covered Period or December 31, 2020 to apply for forgiveness with their bank, so there is still time for the uncertainties to be clarified.
For reference, a link to the updated application can be found here.