In a departure from its previous practice, the Small Business Administration (“SBA”) chose to release its latest update – clarifications to the Interim and Final Rules on forgiveness application timelines, owner compensation and other aspects of the forgiveness process – on a Monday night (June 22). The release provides revisions to the Loan Forgiveness Interim Final Rule and the SBA Loan Review Procedures Interim Final Rule (“IFR”).
The updated rules outline the forgiveness process for both the borrower and the bank, including when a borrower may apply for forgiveness and expanding limits on what owner compensation qualifies for forgiveness. It also clarifies that any amount not forgiven is automatically converted to a loan with a maturity of between two and five years.
When can I apply for forgiveness?
- A borrower may submit a loan forgiveness application any time on or before the maturity date of the loan – including before the end of the covered period – if the borrower has used all of the loan proceeds for which the borrower is requesting forgiveness.
- Note – If the borrower applies for forgiveness before the end of the covered period and has reduced any employee’s salaries or wages in excess of 25 percent, the borrower must account for the excess reduction for the full 8-week or 24-week covered period.
- Comment – The new loan forgiveness applications allow a borrower to use the Full Time Exemption (“FTE”) Reduction Safe harbor as of the earlier of December 31, 2020 or the date that the application is submitted to the lender. The same is true for the Wage Reduction Safe Harbor.
- Question – Assume the borrower spent all of their funds in 12 weeks and applied for forgiveness. How would the borrower calculate the average FTE during the loan period? It would seem likely that the 12 week period would be used to initially determine whether there was an FTE reduction but the guidance so far doesn’t say.
- Question – The guidance says that a borrower may submit a loan forgiveness application any time on or before the maturity date of the loan. Does that mean that the borrower can pick any period between 8 and 24 weeks, even if the application is filed after the end of the 24 week covered period? Or, is a shorter period available only for forgiveness applications filed at the time that the borrower has used all of the loan proceeds for which the borrower is requesting forgiveness?
- Comment - Unless and until Congress changes the rules about the deductibility of expenses paid for with forgiven PPP loan funds, you should discuss the potential tax implications arising from your decision about when to apply for PPP loan forgiveness with your Friedman LLP advisor.
What costs may I include as forgivable?
- The new guidance states that “[i]n general, payroll costs paid or incurred during the covered period are eligible for forgiveness. For purposes of loan forgiveness, the covered period is the 24-week period beginning on the date the lender disburses the PPP loan.”
- Comment – So, this answers a question from our last Client Alert. It now appears that all payroll costs paid during the 24 week covered period, even those paid with funds from sources other than the PPP loan, are included in the forgiveness calculation.
- The same rule holds true for non-payroll costs. All amounts 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, are eligible for forgiveness.
What are the limits on owner compensation?
- Prior to the issuance of the revised guidance there was some question as to the amount of compensation of owner-employees and self-employed individuals that could be included in the loan forgiveness amount. The release confirms our expectation that the cap is $15,385 for an 8-week covered period and $20,833 for a 24-week covered period.
- C-corporation owner-employees are capped by the amount of their 2019 employee cash compensation plus 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 plus employer retirement contributions made on their behalf, but employer health insurance contributions made on their behalf are not included.
- Question – For both S-Corporation and C-Corporation owner employees, the guidance says the amount of 2019 employer retirement contributions made on their behalf. The guidance is silent, however, as to whether the amounts need to be prorated and, if so, is the proration based on 8/52 or 2.5/12?
- Schedule C or F filers are capped by the amount of their owner compensation replacement, calculated based on 2019 net profit. No retirement or health insurance costs allowed.
- Partners and LLC members who are active in the business are capped by the amount of their 2019 net earnings from self-employment (reduced by certain items) multiplied by 0.9235. No retirement or health insurance costs allowed.
Has anything changed with the rehiring exemptions?
- The new guidance retains the original exemption for rehiring employees from the prior IFR and confirms that the borrower must inform the applicable state unemployment insurance office of the employee’s rejected hire offer within 30 days of the rejected offer.
- The guidance says that further information regarding how borrowers will report such info will be provided on SBA’s website.
- The Paycheck Protection Program Flexibility Act (“PPPFA”) included an exemption 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 certain federal guidance issued. The SBA is interpreting this to be both direct and in direct compliance with COVID Requirements or Guidance.
- Brand new – This also answers an unanswered question from our previous Client Alert. State and local government shutdown orders qualify if the state and local government shutdown orders were based in part on guidance from the Department of Health and Human Services, the Centers for Disease Control and Prevention, or the Occupational Safety and Health Administration.
We anticipate additional guidance from Treasury and SBA. We know that there are 30 FAQs that Treasury delayed issuing when the PPPFA was passed. We hope those will be released soon. We also know that Congress is considering some form of CARES-2 which may include some or all of the provisions of the HEROES Act passed by the House in mid-May. We will update you as new guidance is released or new legislation is passed. In the meantime, please feel free to contact your Friedman LLP advisor with any questions.