PPP Loan Update: Loan Applications Closed; SBA Issues FAQs on PPP Loan Forgiveness
As of August 8, 2020, the U.S. Small Business Administration (the “SBA”) is no longer accepting new Paycheck Protection Program (“PPP”) loan applications from participating lenders.
Borrowers who received a PPP loan before applications closed are turning their attention to loan forgiveness. Although the SBA PPP Forgiveness Platform is now live, lenders remain hesitant to process loan forgiveness applications due to the number of unanswered questions regarding the forgiveness process.
In this regard, the SBA has issued a new set of FAQs to address some of the questions concerning PPP loan forgiveness. The following article summarizes the FAQs issued as of August 11, 2020, the full text of which are available here.
- Forgiveness Application: Sole proprietors, independent contractors and self-employed individuals with no employees may apply for forgiveness on Form 3508EZ. All other borrowers apply for forgiveness on Form 3508. A scanned copy of the forgiveness application is generally sufficient.
- Loan Payments: If a borrower submits its forgiveness application within 10 months of the end of the Covered Period (e.g. the 24-week period (or, if the borrower received its PPP loan before June 5, 2020 and so elects, the 8-week period) beginning on the date PPP loan funds were disbursed; provided that the Covered Period may not extend beyond December 31, 2020), the borrower does not need to make any payments under its PPP loan until the forgiveness amount is remitted by the SBA. If the loan is fully forgiven, the borrower is not responsible for any loan payments. If the loan is not fully forgiven, all interest (which accrues on the unforgiven principal amount from the date of loan disbursement to the date of SBA remittance of the forgiveness amount) and unforgiven principal is due on or before the maturity date.
- Payroll Costs:
- Payroll costs include gross wages (including stipends, tips, lost commissions, bonuses and other incentive pay), costs for vacation and leave, employer expenses for group health care benefits (including vision and dental), employer contributions to retirement benefits, and owner compensation (see below). Generally, payroll costs cannot be accelerated from periods outside the Covered Period (defined above) or the Alternative Covered Period (e.g. for borrower with a biweekly or more frequent payroll schedule, the 24-week period (or, if the borrower received its PPP loan before June 5, 2020 and so elects, the 8-week period) beginning on the first day of the first pay period following the date PPP loan funds were disbursed; provided that the Alternative Covered Period may not extend beyond December 31, 2020).
- Owner Compensation: The maximum allowable amount of owner cash compensation for loan forgiveness purposes is $20,833 per individual (if the borrower elects a 24-week Covered Period) or $15,385 per individual (if the borrower elects an 8-week Covered Period). Such caps are a total across all business in which the individual has an ownership stake. If the total cash compensation of an individual across all businesses that have received a PPP loan exceeds the cap, owners can choose how to allocate the capped amount across the different businesses. Payments other than for cash compensation do not count towards these caps. There are particular rules set forth in the FAQs with respect to C-corp owner-employees, S-corp owner-employees (including that employer contributions for health insurance are not eligible for forgiveness for S-corp owners with at least a 2% stake in the business or for the family members of such owners), self-employed individuals, general partners, and LLC members. This limit is somewhat surprising and not contained in the PPP law or the SBA regulations to date. We anticipate that this issue will be difficult to monitor because an owner of multiple businesses may have PPP loans with different lenders. Owners of multiple businesses should pay particular attention to this limitation.
- Payroll costs incurred but not yet paid during the Covered Period or the Alternative Covered Period are eligible for loan forgiveness, as long as those costs are paid on or before the next regular payroll date.
- Similarly, payroll costs incurred before the Covered Period but paid during the Covered Period are eligible for loan forgiveness.
- A borrower whose pay periods are twice/month or less frequent will need to calculate payroll costs for partial pay periods (such borrowers are ineligible to use the Alternative Covered Period).
- Mortgage Interest, Rent / Lease Payments, Utilities:
- Nonpayroll costs include business mortgage interest, business rent or lease costs, and business utility costs, provided that such mortgage, lease or utility service was in effect as of 2/15/20. However, payments under leases in effect on 2/15/20 that are renewed and payments under mortgages in effect on 2/15/20 that are refinanced are all eligible for loan forgiveness. Although interest on unsecured credit incurred before 2/15/20 is a permissible use of PPP loan proceeds, this type of interest expense is not eligible for forgiveness.
- Nonpayroll costs incurred but not yet paid during the Covered Period are eligible for loan forgiveness, as long as those costs are paid on or before the next regular billing date.
- Similarly, nonpayroll costs incurred before the Covered Period but paid during the Covered Period are eligible for loan forgiveness.
- The Alternative Covered Period does not apply to nonpayroll costs. Nonpayroll costs must be paid or incurred during the Covered Period to be eligible for loan forgiveness.
- Reductions of Forgiveness Amount:
- Reductions in Full-Time Equivalent Employees:
- A borrower is not subject to reduction of its forgiveness amount if the borrower documents in writing (i) an inability to rehire individuals who were employees of the borrower on 2/15/20 and (ii) an inability to rehire similarly qualified individuals for unfilled positions on or before 12/31/20. The borrower is required to inform the state unemployment insurance office of any employee’s rejection of an offer to rehire within 30 days of the rejection.
- All employees are considered when calculating the FTE reduction, including employees who made over $100,000 in 2019.
- Reductions in Wages:
- With respect to covered employees (e.g. US employees employed during the Covered Period or Alternative Covered Period that received annualized compensation of less than $100,000 in 2019 or that were not employed by borrower in 2019), reductions in wages by more than 25% during the Covered Period or Alternative Covered Period reduces the forgiveness amount unless the borrower remedies such salary reduction by the earlier of 12/31/2020 or the date the forgiveness application is submitted. See the instructions to the Form 3508 for further detail.
- Only salary and wage reductions in excess of 25% are considered for purposes of calculating the forgiveness reduction, not all other forms of compensation.
- Seasonal Employers: If a seasonal employer elected to use a 12-week period to calculate its maximum PPP loan amount, the borrower must use the same 12-week period for calculation of reductions in the loan forgiveness amount.
- Reductions in Full-Time Equivalent Employees:
- Effect of Economic Injury Disaster Loans on PPP Loan Forgiveness: The amount of any EIDL advance reduces the borrower’s forgiveness amount by the amount of the advance. If a borrower received an EIDL advance in excess of its PPP loan, the borrower will not receive any forgiveness of its PPP loan.
The KMK Law Coronavirus (COVID-19) Response Team is ready to assist borrowers in understanding PPP forgiveness issues.
Nicholas L. Simon
Emily W. Schott
James C. Kezele
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