Jun 18 The SBA Releases Revised Loan Forgiveness Application Form and Supporting Guidance

On June 16, 2020, the Small Business Administration (SBA) released the revised Form 3508, Paycheck Protection Program (PPP) Loan Forgiveness Application Form. Additionally, the SBA released Form 3508EZ, PPP Loan Forgiveness Application Form, a streamlined version of the application for borrowers meeting the criterion set forth below.

Lastly, the SBA also released a new Interim Final Rule, a copy of which can be found here, to provide further clarity surrounding some of the changes detailed in the revised PPP Loan Forgiveness Application Forms.

Updated and revised guidance includes:

 

Who Can Use the Streamlined Form 3805EZ?

• Eligibility Requirements: Borrowers meeting at least one of the three criteria set forth below can apply for PPP loan forgiveness using this form:

1. The borrower is a self-employed individual, independent contractor, or sole proprietor who had no employees at the time of the PPP loan application; or
2. The borrower did not reduce salaries of any employee earnings less than $100,000 annualized by more than 25% when comparing the Covered Period to Q1 2020 and the borrower did not reduce the number of employees or the average paid hours of employees between January 1, 2020 and the end of the Covered Period.
   • Note that reductions may be ignored if they are attributable to the borrower’s inability to rehire personnel employed on February 15, 2020 and to refill those positions with similarly qualified employees on or before December 31, 2020, as well as situations where job offers to restore hours were rejected.; or
3. The borrower did not reduce salaries of any employee earnings less than $100,000 annualized by more than 25% when comparing the Covered Period to Q1 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 requirements established or guidance issued between March 1, 2020 and December 31, 2020 by the Secretary of Health and Human Services, the Director of the Centers for Disease Control and Prevention, or the Occupational Safety and Health Administration, related to the maintenance of standards of sanitation, social distancing, or any other work or customer safety requirement related to COVID-19.

Irrespective of whether applicants use the EZ form or the long form, the following items apply:

 

Payroll Cost/Non-Payroll Cost Allocation

• 60%/40% Split: As stipulated by the Paycheck Protection Program Flexibility Act of 2020, applicants must spend at least 60% of the funds on Payroll Costs to be eligible for full forgiveness.

 

Forgiveness-Eligible Compensation

• Employee Compensation: Borrowers selecting the 24-week Covered Period can annualize employee (but not owner) compensation at the rate of 24/52 (e., $46,154 per individual). Borrowers who opt to use the 8-week Covered Period continue to annualize at the rate of 8/52 (i.e., $15,385 per individual).  Compensation is still limited to an annualized amount of $100,000 irrespective of the length of the Covered Period.
• Owner Compensation: Borrowers selecting the 24-week Covered Period are limited to owner compensation of 2.5 months’ worth of 2019 profit (up to $20,833 per individual). Similar to employee compensation, borrowers who opt to use the 8-week Covered Period are limited to owner compensation of $15,385 per individual.  The $100,000 annualization rate applies to owner compensation as well.

 

Forgiveness-Eligible Non-Cash Benefits

• Health Insurance: While employer contributions for employee health insurance, including employer contributions to a self-insured, employer-sponsored health group are forgiveness-eligible. Employer health insurance contributions made on behalf of self-employed individuals, general partners or owner-employees of S-Corporations are excluded.
• Retirement Contributions: Employer contributions made on behalf of self-employed individuals and general partners are excluded from forgiveness, whereas employer contributions to employee retirement plans continue to be eligible for forgiveness.

Applicants should be aware of two potential dichotomies surrounding these non-cash benefits:

• The PPP Loan Forgiveness Application Forms indicate that health insurance contributions made on behalf of C-Corporation owner-employees appear to be forgiveness eligible, despite the fact that other forms of ownership are not provided with similar benefits.; and
• Retirement benefits paid on behalf of S-Corporation and C-Corporation owner-shareholders also appear to be forgiveness-eligible, despite the fact that applicants are precluded from including costs incurred on behalf of self-employed individuals and general partners.

Adding to that, the new Interim Final Rule indicates that covered benefits, including health care expenses, retirement contributions and state taxes imposed on employee payroll paid by the employer are forgiveness-eligible only to the extent incurred on the respective employees’ behalf.  This new Interim Final Rule specifically carves out the covered benefits for owners from forgiveness, thus requiring further clarity in corporate scenarios where the shareholders are also employees.

 

Full-Time Equivalent Reduction Exceptions

• Additional FTE Information (Form 3508): Applicants enter the total FTEs as of the earlier of the application date or December 31, 2020.
• Representations & Certifications (Form 3508): Applicants can check a box to indicate that they were unable to return to pre-February 15, 2020 levels of activity due to compliance with the requirements and guidance issued between March 1, 2020 and December 31, 2020 by the governmental agencies referenced above related to the maintenance of standards of sanitation, social distancing, or any other work or customer safety requirement related to COVID-19.
• Representations & Certifications (Form 3508EZ): Applicants must check a box indicating that they meet the Eligibility Requirement #2 or #3 as detailed above.
  • Note that the guidance here appears contradictory, as the instructions indicate that applicants need only meet one of the three criteria above.

 

While the release of the new forgiveness application forms and corresponding Interim Final Rule provides much needed guidance in certain areas, questions and open items still remain.  Tune into our weekly recovery webinars every Thursday at 10:00 am for additional information.  You can register for upcoming webinars and view past recordings here.

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Sax will continue to update you as further details are made available.  Reach out to your Sax advisor or email [email protected] with questions.  For more and on-going information relative to your state and business, visit Sax’s COVID-19 Resource Center.