SBA Issues Updated PPP Loan Forgiveness Applications and Additional Clarifications
Date: June 24, 2020
Now that the eight-week covered period for early recipients of Paycheck Protection Program (PPP) loans is complete, the focus is turning to the forgiveness process. The Small Business Administration (SBA) has issued updated PPP loan forgiveness application forms, including a new simplified EZ application that will be available for borrowers that have not reduced employee headcount or wages and satisfy certain other criteria discussed below. The forms and additional recent SBA guidance provide some further clarification on forgiveness, including that proportional forgiveness is permitted, as well as some additional guidance on other discrete issues. Some lenders are creating online portals through which the PPP loan forgiveness applications can be completed, so please check with your PPP lender on the forgiveness process they are using. Also, the last date for applying for a PPP loan is June 30, 2020, so it is now or never if you have not yet applied – at least for now!
Loan Forgiveness Applications – Updated and New EZ Form
The updated PPP loan forgiveness application and instructions can be found on Treasury’s website: PPP Loan Forgiveness Application and PPP Loan Forgiveness Application Instructions for Borrowers. Recognizing that this application is complex and has several pieces that are inapplicable to some borrowers, the SBA also issued the EZ version of the loan forgiveness application form with instructions: PPP Loan Forgiveness Application Form 3508EZ and PPP Loan Forgiveness Application Form 3508EZ Instructions for Borrowers.
The EZ application is available for those borrowers that generally did not reduce employee headcount or wages or fall within one of the exemptions that negate any such reductions. Specifically, borrowers can use this EZ application if they satisfy one of the following three criteria:
- The borrower is a self-employed individual, independent contractor or sole proprietor that did not include any employee salaries in the loan application;
- The borrower did not reduce (i) annual salary or hourly wages of any employee by more than 25% during the applicable covered period compared to the prior reference period (see prior client update for details) OR (ii) the number of employees or the average paid hours of employees between January 1, 2020 and the end of the applicable covered period, not including reductions that arose from an inability to rehire individuals or where the employee rejected the borrower’s offer to restore the hours (see prior alert for details on the reduction exemptions); OR
- The borrower did not reduce annual salary or hourly wages of any employee by more than 25% during the applicable covered period compared to the period between January 1, 2020 and March 31, 2020 and the borrower was unable to operate during the covered period at the same level of business activity as before February 15, 2020, due to compliance with health and safety guidelines issued as a result of the COVID-19 pandemic (see previous client update for details on this exemption).
Proportional Forgiveness and Required Use of PPP Funds
Early guidance by the SBA created the requirement that a certain percentage of any PPP loan amount must have been used for payroll costs to obtain forgiveness, but that a borrower could obtain partial forgiveness even if the borrower did not meet that threshold. In the recently enacted PPP Flexibility Act (Act) (see prior alert), the percentage required to be used for payroll costs was reduced from 75% to 60%, but the language of the Act suggested that at least 60% of all loan proceeds must be used for payroll costs to obtain forgiveness for any portion of the loan. This was a significant departure from prior guidance, which made clear that forgiveness was not an all or nothing proposition but would be reduced on a sliding scale depending on the amount of loan proceeds used for payroll costs. The new guidance and the applications confirm that the original understanding of partial loan forgiveness was correct, and the SBA will permit forgiveness in an amount of which at least 60% was used for payroll costs.
This new guidance still also provides that at least 60% of PPP loan proceeds must be used for payroll costs. However, it is unclear what the penalty, if any, for failing to do so would be. Despite this admonition about required use, the guidance and applications make clear that proportional forgiveness is permitted even if the 60% threshold for payroll costs is not satisfied. While requiring at least 60% of the loan proceeds to be used for payroll costs would be consistent with the goal of the PPP for borrowers to continue to keep employees employed, even when employees are not able to perform any work, it is unclear what the penalty (if any) will be if a borrower spends the loan proceeds but does not meet the 60% threshold for payroll costs.
The new guidance also stated that payments of mortgage interest, rent and utilities must be deductible on Form 1040 Schedule C to be eligible for forgiveness. This does not appear to be intended as any change in policy but may provide some further guidance to borrowers that had questions about certain expenses and whether they could be included in the “permitted uses” as outlined by the PPP.
Owner Compensation Replacement
The new guidance also highlights the concept of owner compensation replacement, which permits certain payments to non-employee owners to be included as permissible, forgivable expenses. The amount that can be paid to a non-employee owner is calculated based on 2019 net profit, as stated on line 31 of the borrower’s 2019 Form 1040 Schedule C. Owners can be paid up to eight weeks’ worth (8/52) of 2019 net profit (up to $15,385) for an eight-week covered period or 2.5 months’ worth (2.5/12) of 2019 net profit (up to $20,833) for a 24-week covered period, but excluding any qualified sick leave equivalent amount or qualified family leave equivalent amount for which a credit is claimed under Section 7002 or 7004 of the Families First Coronavirus Response Act.
Disclosure of Large PPP Borrowers
Previously, the SBA indicated that it would not be disclosing large PPP borrowers because such information could raise sensitive or confidential information regarding private businesses. However, in a turnabout, the SBA and Department of the Treasury have now announced that information regarding loans in excess of $150,000, which account for almost 75% of all PPP loans, will be publicly disclosed. Business names, addresses, demographic data, the number of jobs supported, and other data will now be publicly disclosed in some unannounced fashion. In the event that a party is still contemplating taking on a PPP loan, this is certainly something that should be considered by larger borrowers.
Keep Abreast of What’s Next
Thompson Hine is staying abreast of continuing developments related to the CARES Act and the PPP. Please visit our COVID-19 Task Force page for details on this and other information and resources.
FOR MORE INFORMATION
For more information, please contact:
Jennifer L. Maffett-Nickelman
Riccardo M. DeBari
Lindsay Karas Stencel
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