Acknowledging that all gave some and some gave all, allow us to take a moment to thank those of you who served or had family members who made the ultimate sacrifice in service to our country – whether on the battlefield, or in the battle we now face.
On Memorial Day weekend, the Treasury and Small Business Administration (“SBA”) released two new Interim Final Rules (“IFR”) – one on Loan Forgiveness and one covering Loan Review Procedures. You can read the IFR on Loan Forgiveness here and the IFR on Loan Review Procedures and Related Borrower and Lender Responsibilities here.
The major changes and clarifications with regard to Loan Forgiveness rules are:
- It is now clear that the alternative covered period is available only for employers with pay periods that are biweekly or more frequent. Semi-monthly pay periods do not qualify. The first payroll paid during the covered period may include days before the start of the period and the payment of wages for the last period during the covered period may occur after the end of the eight week covered period.
- Bonuses and hazard pay are included as long as annualized pay doesn’t exceed $100,000. No reference is made to prorating the bonus amount.
--Unfortunately, there is still no clarity on what can be included in retirement plan contributions.
- Forgiveness for salary paid to owner employees is limited to the lesser of 8/52 of 2019 pay or self-employment income, if applicable, or $15,385. This cap is per individual, in total, across all businesses.
--We believe that this limit applies to owner/employees of corporations.
--No additional forgiveness is provided for retirement or health insurance contributions for self-employed individuals (including Schedule C filers and general partners) as such, expenses are paid out of their net self-employment income.
--Loan forgiveness requested for shareholder employees is limited to the lesser of $15,385 or 8/52 of 2019 compensation. It appears that this amount may be increased by applicable employer paid health and retirement benefits. We expect further clarification.
- With respect to non-payroll costs you can get full forgiveness on bills PAID during the 8 weeks PLUS what you pay after the 8 week period that relates to the 8 weeks.
--There is no prohibition against increasing rent or interest expense to fair market value.
--You can get forgiveness of up to 25% of the loan amount for non-payroll costs based on the payroll costs included in the forgiveness amount.
- If an employee is terminated and you offer them re-employment, it will not count as a forgiveness reduction but you must notify the state unemployment agency.
- In computing the forgiveness reduction ratios, the salary reduction comes first and excludes the Full Time Equivalent reduction so there is no double penalty.
The IFR on Loan Review Procedures puts much of the onus on the borrower but does provide some guidance to lenders as to how they should proceed. Among the most significant points are:
- The SBA can review any loan of any amount at any time and will look at a few things, but will prioritize eligibility qualifications.
- Paycheck Protection Program (“PPP”) loan documentation must be kept for at least 6 years after date loan is forgiven or repaid in full.
- If the SBA determines a borrower was ineligible “the SBA may seek repayment of the outstanding PPP loan balance or pursue other available remedies.
- The SBA has included a detailed list of what a lender needs to review. Use this as your guide as to how the process will work.
--“For example, minimal review of calculations based on a payroll report by a recognized third-party payroll processor would be reasonable. By contrast, if payroll costs are not documented with such recognized sources, more extensive review of calculations and data would be appropriate."
- The borrower has the responsibility of providing the bank with an accurate calculation of forgiveness.
- Finally, the lender doesn’t get a processing fee if the SBA determines loan is ineligible. Processing fees paid to a lender are subject to a clawback.
We have reason to believe that further guidance will be issued. Additionally, Congress is considering legislation that will extend the 8 week covered period, extend the program until December 31, 2020, and eliminate the 75% requirement. As always, we will keep you informed of any new developments. And, please contact your Friedman LLP professional with any question.
