PPP Loan Forgiveness Updates: October 22, 2020

The U.S. Treasury Department and the SBA continue to issue numerous FAQs and interim rules to clarify the PPP loan and forgiveness process. In October alone, at least three separate publications have been released thus far. In summary, the SBA’s October 8 Final Interim Rules advise:
  • Borrowers receiving PPP loans of $50,000 or less (excluding those, with affiliates, receive loans totaling in excess of $2 million) may use SBA Loan Forgiveness Application Form 3508S. Form 3508S exempts eligible borrowers from reductions in their forgiveness amounts based on (i) reductions in full-time equivalent employees or (ii) reductions in employee salary or wages that would otherwise apply. 
  • The extension of the deferral period from six months to ten months under the PPP Flexibility Act automatically applies to all PPP loans; all PPP borrowers can defer payment of the loan principal, interest and fees until either (i) the SBA remits the borrower’s loan forgiveness amount to the lender, or (ii) if the borrower does not apply for loan forgiveness, ten months after the end of the borrower’s loan forgiveness covered period. Lenders must automatically provide this deferral, and promissory notes need not be formally modified.
  • Even if a borrower submits documentation of eligible payroll and nonpayroll costs that exceed the total amount of such borrower’s PPP loan, the borrower may not receive loan forgiveness in excess of the principal amount of its PPP loan.
Meanwhile, the SBA’s October 7 and October 13 FAQs reiterate, clarify and instruct:
Payroll Costs:
  • Payroll costs incurred during the applicable covered period, but paid after the covered period are eligible for loan forgiveness, if the payroll costs are paid on or before the next regular payroll date after the applicable covered period.
  • Payroll costs incurred before the covered period, but paid during the covered period are also eligible for loan forgiveness.
  • The exclusion of employee compensation in excess of $100,000 only applies to cash compensation, not to non-cash compensation.  Cash compensation includes salary, wages, tips, commissions, bonuses, and hazard pay, and housing stipends or allowances.  Non-cash compensation includes benefits for which the employee does not receive direct payment, such as contributions to retirement plans, payment of employee group health care benefits, and payment of state and local taxes. 
  • For purposes of calculating cash compensation, borrowers should use the gross amount before deductions for taxes, employee benefits payments, and similar payments, not the net amount paid to employees.
  • Group health care benefits include benefits paid or incurred during the applicable covered period, including insurance premiums for medical, vision and dental benefits. However, payroll costs do not include expenses for group health care benefits paid by employees (or beneficiaries of the plan) either pre-tax or after tax, such as the employee’s share of their health care premium. Forgiveness is not provided for expenses for group health benefits accelerated for periods outside the applicable covered period. 
  • Sick leave is a payroll cost, excluding qualified sick and family leave wages for which a credit is allowed under the Families First Coronavirus Response Act. 
  • Contributions for employee retirement benefits that are paid or incurred by the borrower during the applicable covered period qualify as “payroll costs” eligible for loan forgiveness, although these amounts cannot include any retirement contributions deducted from employees’ pay or otherwise paid by employees. Forgiveness is not provided for employer contributions for retirement benefits accelerated for periods outside the applicable covered period.
  • When accounting for federal taxes, payroll costs are calculated on a gross basis irrespective of federal taxes, such as the employee’s and employer’s share of FICA and income taxes required to be withheld from employees. Accordingly, payroll costs are not reduced by taxes imposed on an employee and required to be withheld by the employer, but payroll costs do not include the employer’s share of payroll tax.
  • To determine the number of employees and payroll costs to calculate maximum loan amounts, calculate aggregate payroll costs using data either from the previous 12 months or from calendar year 2019. For seasonal businesses, the applicant may use the average monthly payroll for the period between February 15, 2019 or March 1, 2019, and June 30, 2019. An applicant that was not in business from February 15, 2019 to June 30, 2019 may use their average monthly payroll costs for the period January 1, 2020 through February 29, 2020. 
  • Any amounts paid to an independent contractor or sole proprietor are excluded from the borrower’s payroll costs.
  • If the borrower uses a biweekly or more frequent payroll cycle, the borrower may elect to calculate eligible payroll costs using the eight-week (for borrowers that received their loans before June 5, 2020 and elect this Covered Period length) or 24-week covered period (the “Alternative Covered Period”).  If a borrower pays twice a month or less frequently, it will need to calculate payroll costs for partial pay periods. The Covered Periods always start on the first day of the first payroll cycle following the loan disbursement date. The Covered Period or Alternative Covered Period for any borrower ends no later than December 31, 2020.
However, the Alternative Covered Period to payroll costs, not to nonpayroll costs. Nonpayroll costs must be paid or incurred during the Covered Period to be eligible for loan forgiveness.
Nonpayroll Costs
  • Nonpayroll costs (mortgage interest costs, rent or lease costs, utility costs, etc.) incurred prior to the applicable covered period, but paid during the covered period are eligible for loan forgiveness. 
  • Likewise, nonpayroll costs are eligible for loan forgiveness if they were 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. 
  • Payments of interest on business loans secured by real or personal property (such as a property mortgage or auto loan) are eligible for loan forgiveness. However, interest on unsecured credit is not eligible for loan forgiveness because the loan is not secured by real or personal property.
  • Payments made on recently renewed leases or interest payments on refinanced mortgage loans are eligible for loan forgiveness if the original lease or mortgage existed prior to February 15, 2020.
  • Transportation costs, including transportation utility fees assessed by state and local government, are covered utility payments which are eligible for forgiveness.
  • Electricity supply charges, distribution charges, and other charges such as gross receipts taxes are eligible for loan forgiveness if they are charged or invoiced separately from electricity distribution charges.
Seasonal Employers
  • When evaluating a seasonal borrower’s eligibility, a lender may consider whether a seasonal borrower was in operation on February 15, 2020 or for an 8-week period between February 15, 2019 and June 30, 2019.
  • Seasonal employers which use a 12-week period between May 1, 2019 and September 15, 2019 to calculate their maximum PPP loan amount must use the same 12-week period as the reference period for calculation of any reduction in the amount of loan forgiveness.
Loan Forgiveness
  • The loan forgiveness amount will not be negatively impacted by FTEs who decline offers of rehire, provided the borrower makes a good faith, written offer to rehire the employee at the same wages and hours, the employee rejects the offer, and the borrower informs the state unemployment office within 30 days of the employee’s rejection. 
To qualify, borrowers must document the following: (1) the inability to rehire individuals who were employees of the borrower on February 15, 2020, and (2) the inability to hire similarly qualified individuals for unfilled positions on or before December 31, 2020.The required documentation includes (1) the written offer to rehire an individual, (2) a written record of the offer’s rejection, and (3) a written record of efforts to hire a similarly qualified individual. The borrower’s notification of the rejected rehire offer to the state unemployment office within 30 days of the employee’s rejection is required.
  • Only decreases in salaries or wages, not decreases in all forms of compensation, are considered for calculating salary/hourly wage reductions in excess of 25%.
  • The FTE reduction exceptions apply to all employees, not just those who made more than $1000,000 in 2019.
Sole Proprietors, Independent Contractors, Owner Employees and Self-Employed Individuals
  • Sole proprietors, independent contractors, and self-employed individuals who (1) had no employees at the time of their PPP loan application, and (2) did not include any employee salaries in the average monthly payroll on their PPP loan application automatically qualify to use, and should use, Loan Forgiveness Application Form 3508EZ.
  • The forgiveness amount of an owner-employee’s compensation depends on the business and whether the borrower is using an eight-week or 24-week covered period.  The amount of loan forgiveness requested for owner-employees and self-employed individuals’ payroll compensation is capped at $20,833 per individual in total across all businesses in which the owner has an ownership stake. This cap is $15,385 for borrowers receiving a PPP loan before June 5, 2020 who elect to use an eight-week covered period.  If their total compensation across businesses that receive a PPP loan exceeds the cap, owners can choose how to allocate the capped amount across their different businesses. The analysis for borrowers using a 24-week covered period depends on whether the business is a C-Corp or an S-Corp, whether the owner-employee is an IRS Form 1040 Schedule C or Schedule F filer, a general partner or an owner of a limited liability company.
Administrative Issues
  • PPP lenders may accept (1) scanned copies of signed applications and certifications, (2)  any form of e-consent or e-signatures which comply with the requirements of the Electronic Signatures in Global and National Commerce Act, and (3) signatures from a single individual who is authorized to sign on behalf of the business. 
  • Provided the borrower submits its loan forgiveness application within ten months of the completion of its applicable covered period, the borrower is not required to make any payments until the SBA remits the forgiveness amount to the lender.  However, interest accrues on any unforgiven amounts for the time between loan disbursement and the SBA’s remittance of the forgiveness amount.
  • If a PPP loan is not fully forgiven, the borrower must repay the loan by the maturity date. The lender must notify the borrower of the loan forgiveness amount remitted by SBA, and the date on which the borrower’s first loan payment is due. The lender must continue to service the loan. If a borrower is determined to have been ineligible for a PPP loan for any reason, SBA may seek immediate repayment of the outstanding PPP loan balance, or pursue other available remedies.
  • If a borrower received an EIDL advance, the SBA is required to reduce the borrower’s loan forgiveness amount by the amount of the EIDL advance. Due to this deduction, a borrower that received an EIDL advance in excess of the amount of its PPP loan will not receive any forgiveness on the PPP loan. 

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