By Andy Smetana, Joe Bailey and Teri Lindquist
The U.S. Small Business Administration (SBA) and the U.S. Department of Treasury (Treasury), on June 22, 2020, issued new guidance in their interim final rule #20 with respect to the terms of and process for applying for loan forgiveness under the Paycheck Protection Program (PPP). This new guidance modifies prior rulemaking based on the Paycheck Protection Program Flexibility Act of 2020 enacted on June 5, 2020 (Flexibility Act) and the new “EZ” form of loan forgiveness application released by the SBA on June 16, 2020. (For our earlier updates on the Flexibility Act and the EZ form, see here and here.) Interim final rule #20 also creates a new limit for business owners and expands a safe harbor created under the Flexibility Act for borrowers who have not been able to restore their prior business activity due to certain government orders related to COVID-19. Highlights from interim final rule #20 are as follows:
Calculation of Maximum Loan Forgiveness Amount
- Prior changes providing that (1) no more than 40% of PPP loan proceeds (rather than 25%) may be used for non-payroll costs and qualify for forgiveness, and (2) payroll costs and non-payroll costs paid or incurred during the applicable covered period qualify for forgiveness, are each now incorporated into the SBA’s and Treasury’s First Loan Forgiveness Rule.
- The concept of the “Alternative Payroll Covered Period” for borrowers with payroll periods that are bi-weekly or more frequent applies with respect to borrowers that use the 24-week covered period, extending to these borrowers the same option for administrative convenience as previously provided to borrowers using the eight-week covered period.
- Prior guidance stated that the payroll compensation for certain owner-employees and self-employed individuals under a 24-week period would be limited to 2.5 times their 2019 monthly payroll compensation or $20,833, whichever is less. This limitation applies on a per-owner basis across all businesses. This limitation was clarified in interim final rule #20 as follows:
- For self-employed individuals, including Schedule C or F filers and general partners, contributions for retirement and health insurance are included in net self-employment income and therefore cannot be separately added to the individual’s payroll calculation.
- For owner-employees who are general partners, the limit referenced above is to be calculated based on 2019 net earnings from self-employment (reduced by claimed section 179 expense deductions, unreimbursed partnership expenses, and depletion from oil and gas reserves) multiplied by 0.9235.
- The limitation of $20,833 or 2.5 times 2019 monthly payroll compensation applies to owner-employees of C corporations and S corporations. This clarifies references in prior guidance to the use of IRS Schedule C or F amounts, which led some to infer that this limit would not apply to owners of C corporations or S corporations.
- Interim final rule #20 does not specify the ownership amount that would result in an employee who owns stock or other equity interests in a borrower to be deemed an “owner-employee” subject to this limitation. We note that the original PPP loan application focused on owners of 20% or more of a business, and it is possible that the SBA and Treasury intend to use this same threshold.
Safe Harbors from Forgiveness Reductions Based on FTE Reductions
- The Flexibility Act codified an exception to the formulaic reduction to loan forgiveness based on reductions to full-time employee equivalents (FTEs) that was previously adopted by the SBA and Treasury regarding employees who were provided a written offer to return to work but declined to do so. In the case of an employee who has rejected a rehire offer, Borrowers are required to inform the applicable state unemployment insurance office of an employee’s rejection of a rehire offer within 30 days of the employee’s rejection of the offer.
- Interim final rule #20 also clarifies that employers who offer to restore an employee’s hours after a prior reduction in hours can receive the same exception from FTE-based reductions to loan forgiveness, if the employee declines the offer to restore the reduction in hours.
- The Flexibility Act created a new exception to the formulaic reduction to loan forgiveness based on FTE reductions. This exception applies to borrowers that can document that they have been unable to restore their business activity to the levels in existence prior to 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 (HHS), the Director of the Centers for Disease Control and Prevention (CDC), or the Occupational Safety and Health Administration (OSHA), related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID-19 (the COVID Requirements or Guidance). The references to HHS, CDC, and OSHA requirements or guidance was notably narrow and could be read to not include businesses impacted as a result of their compliance with state and local orders. Interim final rule #20 expands this exception by saying that this exception based on COVID Requirements is available to borrowers whose business activity has been impacted by either direct or indirect compliance with such federal COVID Requirements or Guidance. Accordingly, this exception has been expanded to include borrowers whose business activity has not been restored to pre-COVID levels due to the borrower’s continued compliance with state and local government shutdown orders that are based in part on guidance or requirements from HHS, CDC or OSHA.
Reduction to Loan Forgiveness Based on Salary or Wage Reductions
- The updated “long-form” loan forgiveness application issued by the SBA on June 16, 2020 clarified that the safe harbor for formulaic-based reductions to forgiveness based on employee salary or wage reductions is to be measured based on the restoration of salaries or wages as of the earlier of the date of the loan forgiveness application or December 31, 2020. However, for companies that do not fall within this safe harbor, interim final rule #20 clarified that reductions to loan forgiveness based on salary or wage reductions will be calculated based on the borrower’s applicable covered period. For example, if a borrower had reduced an employee’s salary or wages by $200 per week for the full covered period, then the reduction would be based on $4,800 if the borrower uses a 24-week covered period (or $1,600 if the borrower uses an eight-week covered period), even though the borrower applies for loan forgiveness before the end of the covered period.
Process for Applying for Loan Forgiveness
- Borrowers may apply for loan forgiveness at any time on or before the maturity of the PPP loan, including before the end of the covered period, if the borrower has used all of the loan proceeds for which the borrower is seeking forgiveness.
- Interim final rule #20 updated an earlier interim final rule on loan reviews to conform with changes required under the Flexibility Act and to incorporate references to both the new EZ form and the lender’s responsibilities in the forgiveness application review process when using the new EZ form. In addition, interim final rule #20 included a reminder that the accurate calculation of the loan forgiveness amount is the responsibility of the borrower.
- Consistent with the prior interim final rule on loan reviews, interim final rule #20 provides that lenders have 60 days after receipt of a complete loan forgiveness application from the borrower to consider whether to approve, deny, or approve in part an application for loan forgiveness; the SBA then has a period of 90 days to remit payment to the lender to give effect to loan forgiveness. \
- Importantly, the period referenced above may be extended if the SBA elects to conduct a closer review. The SBA may deny loan forgiveness if the borrower was ineligible for the PPP loan (including on the basis that the borrower lacked an adequate basis for the certifications it made in its PPP loan application).
Repayment of PPP Loans
- The Flexibility Act extended the payment deferral for PPP loans until the earlier of a forgiveness determination or, by no later than 10 months after the last day of the applicable covered period. Interim final rule #20 incorporates this timeline.
- In the case of PPP loans that are not forgiven, they have a maturity of five years if made on or after June 5, 2020. Borrowers that received their loans before June 5, 2020 may negotiate with their lender to extend the original two-year maturity of their loan. Neither interim final rule #20 nor other rulemakings to date, however, provide any criteria for lenders to apply in considering such extension requests.