By Andrew (Andy) Smetana, Teri A. Lindquist, Joe Bailey, and Wendy L. Moore,
While debates in Congress continue regarding extending or providing additional COVID-19 relief legislation, the Small Business Administration (SBA), U.S. Department of Treasury (Treasury), and lenders under the Paycheck Protection Program (PPP) are preparing for the next wave of activity for PPP loans. Specifically, the deadline to obtain a PPP loan is tomorrow, August 8, 2020. In addition, other key milestones related to PPP loan forgiveness are rapidly approaching. The SBA previously announced that it intends to make an electronic portal available on August 10, 2020 to begin processing PPP loan forgiveness applications, and on August 4, 2020 the SBA and Treasury released new FAQs regarding loan forgiveness. The new FAQs largely reiterate prior guidance but include some clarifications that may impact borrowers’ applications for loan forgiveness. Highlights of these developments and key reminders regarding the loan forgiveness process are provided below.
PPP loan forgiveness process
- Loan forgiveness applications can be submitted on SBA Form 3508, 3508EZ, or a lender equivalent form. The “EZ” form provides a streamlined process in that it does not require listing employee-by-employee details, but only certain borrowers are eligible to use the “EZ” form (see instructions to the “EZ” form here). It is currently unclear whether lenders will use forms for loan forgiveness that deviate from the SBA’s forms.
- Applications for PPP loan forgiveness and supporting documentation are required to be submitted to the lender that is servicing the applicable PPP loan, and not to the SBA directly. Accordingly, PPP borrowers should contact their respective lender or loan servicer to confirm the process that will be required when applying for forgiveness of their PPP loan. We expect that lenders will require that the forgiveness application and all supporting documentation be provided electronically through an online portal specific to that lender.
- Once a complete loan forgiveness application and supporting documents are provided to the PPP lender or loan servicer, the lender or servicer will have 60 days to review and process the forgiveness application. Upon completing its review, the lender or servicer is required to notify the SBA regarding its determination of whether all or a portion of the PPP loan may be forgiven. Because of the requirement to report to the SBA within 60 days after receipt of a complete loan forgiveness application, many lenders have been unwilling to accept PPP loan forgiveness applications while the SBA’s process remained unclear. Lenders are now starting to accept forgiveness applications in anticipation of the SBA opening its online portal. We expect this process to accelerate once the SBA’s portal goes live on August 10, 2020.
- The SBA has a period of 90 days after its receipt of the lender’s or loan servicer’s determination of loan forgiveness to remit payment to the lender to give effect to the loan forgiveness. This 90-day period may be extended if the loan is subject to SBA review.
- The SBA has announced that all loans in amounts in excess of $2 million will be subject to SBA review. This means that borrowers with loans in excess of $2 million should expect the forgiveness process to take 150 days or longer. Other loans may also be subject to SBA review on a case-by-case basis.
New FAQs regarding loan forgiveness generally
- The new FAQs regarding general loan forgiveness (#1-3) address the use of Form 3508EZ by sole proprietors, independent contractors, and self-employed individuals with no employees, confirm the ability to use scanned copies of documents and e-signatures and e-consents, and confirm that payment obligations are deferred for borrowers during the loan forgiveness process.
- Specifically, as long as the borrower submits its application for loan forgiveness within ten months after the expiration of the borrower’s applicable “covered period,” the borrower will not be required to make any payments (principal or interest) until the forgiveness amount is remitted to the lender by the SBA. If the loan is fully forgiven, the borrower is not responsible for making any This suggests that a borrower will not be required to pay accrued interest on their PPP loan; however, this still remains somewhat uncertain due to language in the CARES Act that provides that only principal is subject to forgiveness and formulas in the SBA’s loan forgiveness forms that do not contemplate forgiveness of accrued interest. If a portion of the loan is not forgiven, then the lender is responsible for notifying the borrower of the date on which the borrower’s first payment is due. The FAQ does not specify the mechanics for paying accrued interest and whether that would be a lump sum due on the date of the first payment or whether it can be added to principal and amortized over the life of the loan.
New FAQs Regarding Payroll Costs.
- FAQs #1-3 under the heading “Loan Forgiveness Payroll Costs FAQs” (the latest SBA FAQs have numbering that is different for each heading, rather than providing continuous numbering) confirm that (i) payroll costs paid during the “covered period” are eligible for forgiveness, even if “earned” or accrued prior to the “covered period,” (ii) payroll costs incurred during the “covered period” but paid by the next regular payroll date are eligible for forgiveness, and (iii) this method of calculation could require including payroll costs from a partial payroll period at the end of the borrower’s “covered period” (or Alternative Payroll Covered Period, if applicable).
- FAQs #4-5 under this heading confirm that gross compensation (and not net compensation) should be used in calculating payroll costs. This calculation can include payments made by the employer with respect to lost tips, lost commissions, bonuses, and hazard pay, subject to a limit on cash compensation of $100,000 on an annualized basis per employee. Note that this $100,000 limitation does not apply to non-cash compensation that is eligible as part of “payroll costs,” such as the employer’s contributions toward retirement plans or health care plans.
- The corresponding FAQs #6 and 7 under this heading detail the scope of health care benefits expenses and retirement benefits expenses that are permitted for forgiveness. Importantly, these FAQs provide that the acceleration and payment of benefits for periods outside of the Covered Period or Alternative Payroll Covered Period will not be eligible for forgiveness.
- For owner-employees of PPP borrowers, there are special rules regarding the portion of “payroll costs” that are eligible for loan forgiveness. For other employees, the forgivable cash compensation limits are $15,385 for an eight-week covered period or $46,154 for a 24-week covered period. For owner-employees, the limit for an eight-week covered period is the same $15,385 amount, but the limits for a 24-week covered period depend on the owner-employee’s 2019 employee cash compensation and the borrower’s legal entity type. FAQ #8 under the heading “Loan Forgiveness Payroll Costs FAQs” provides significant clarification regarding the treatment of owner-employees across differing entity types as summarized in the chart below. It remains unclear what degree of ownership interest in a business is required to be considered its “owner.”
Base cash compensation
|Employer paid state & local taxes||Employer contributions to health insurance||Employer retirement contributions||Other|
|C-corporation||2.5/12 x 2019 employee cash compensation||Yes||Yes||2.5/12 x 2019 employer contribution||$20,833 cap for cash compensation; cap does not apply to non-cash compensation (lines 6-8 of Schedule A)|
|S-corporation||2.5/12 x 2019 employee cash compensation||Yes||Yes if < 2% stake; No if >/= 2% stake (or if family member of such an owner)||2.5/12 x 2019 employer contribution||$20,833 cap for cash compensation; cap does not apply to on non-cash compensation (lines 7-8 of Schedule A)|
|Self-employed Schedule C/F||2.5/12 x 2019 net profit on Form 1040||No||No||No||Must submit 2019 Form 1040 Schedule C/F with forgiveness application if not submitted with loan application|
|General Partners||2.5/12 x 2019 net earnings subject to self-employment tax x 0.9235, but only if made during applicable covered period||No||No||No||Must submit 2019 Form 1065 K-1 with forgiveness application if not submitted with loan application|
Follow instructions that apply to how the business was organized for tax filing purposes for tax year 2019
New FAQs Regarding Non-Payroll Costs
- With respect to non-payroll costs, FAQs #1-3 under the heading “Loan Forgiveness Nonpayroll Costs FAQs” confirm prior guidance regarding amounts paid or accrued during the “covered period” — specifically, that eligible non-payroll costs that were paid during the “covered period” (even if accrued prior to the “covered period”) are allowed, and that eligible non-payroll costs incurred during the “covered period” but paid after the “covered period” are allowed, as long as they are paid by the next regular billing date. These FAQs also reiterate that the Alternative Payroll Covered Period cannot be used when calculating non-payroll costs. Importantly, these FAQs and prior guidance do not expressly address how to treat non-payroll costs such as rent that are paid in advance, rather than being paid in arrears. In the absence of guidance from the SBA on this point, many borrowers will likely seek forgiveness with respect to the full amount paid during the “covered period” since bank records and other supporting documentation can be provided to support the payment of such expenses and since there is no clear guidance on how to pro-rate or otherwise address such expenses that were paid before the covered period for usage during the covered period.
- FAQ #4 under this heading provides that interest on unsecured credit is not eligible for loan forgiveness but constitutes a permissible use of PPP loan proceeds. More importantly, the FAQ reiterates language from the SBA’s Interim Final Rule #3 that refers to an auto loan as an example of a business mortgage on real or personal property. Although a “mortgage” is typically understood to refer only to a security interest in real property, the auto loan example and corresponding language seems to add further support for the conclusion that interest on any secured loan incurred before February 15, 2020 may be included as a forgivable expense.
- With respect to lease obligations and mortgage interest, prior guidance specified that the underlying lease obligation or debt obligation must have been in place prior to February 15, 2020 for the payments to be eligible for loan forgiveness. FAQ #5 under the heading “Loan Forgiveness Nonpayroll Costs FAQs” clarifies that if such pre-existing lease or mortgage obligation was renewed or refinanced after February 15, 2020, payments on such renewed or refinanced obligations would be eligible for loan forgiveness.
- In defining “covered utility payments,” the CARES Act referred to transportation. Some had speculated that this phrase could be construed broadly to include a wide variety of transportation expenses, such as mileage reimbursement, etc. The SBA’s Interim Final Rule #3 referred to gas for a business vehicle as an example of a “utility” expense. However, FAQ #6 under this heading provides that the reference to “transportation” is meant to refer to transportation utility fees assessed by state and local governments, not costs of business transportation generally.
New FAQs Regarding Loan Forgiveness Reductions
- FAQ #1 under the heading “Loan Forgiveness Reductions FAQs” reiterates an exception to the reduction to loan forgiveness that would otherwise apply based on a reduction to the borrower’s number of full-time equivalent employees (FTEs). Importantly, the FAQ notes that if the borrower is relying on the exception based on efforts to rehire a previously released employee, then the borrower must maintain documents reflecting (i) the written offer to rehire the individual, (ii) a written record of the offer’s rejection, and (iii) a written record of the borrower’s efforts to hire a similarly qualified individual.
- For seasonal employers, FAQ #2 under this heading clarifies that if the borrower elects a 12-week period between May 1, 2019 and September 15, 2019 to calculate its loan amount, it must use that same time period as the reference period for calculating any reduction to loan forgiveness.
- With respect to completing the “long-form” SBA Form 3508, FAQ #3 under this heading provides a needed fix with respect to an aspect of the form that otherwise did not work correctly. Specifically, Table 1 of the PPP Schedule A Worksheet calls for employee-by-employee information regarding employees who made less than or equal to $100,000 on an annualized basis for all pay periods in 2019 or were not employed by the borrower in 2019. At the bottom of Table 1, a line calls for the number of “FTE Reduction Exceptions”. Table 2 of the PPP Schedule A Worksheet calls for information regarding employees who made more than $100,000 on an annualized basis for any pay period in 2019 but does not include a line for “FTE Reduction Exceptions”. This omission could imply that offering to rehire employees who made more than $100,000 on an annualized basis for any pay period in 2019 would not be counted as an “FTE Reduction Exception.” The new FAQ addresses this issue by stating directly that FTE Reduction Exceptions for employees who made more than $100,000 on an annualized basis for any pay 2019 should be included in the “FTE Reduction Exception” line in Table 1, even though information about those employees otherwise would not appear in Table 1.
- FAQ #4 under this heading provides examples of how reductions to the salary or hourly wage of employees who make less than $100,000 on an annualized basis impact the loan forgiveness calculation. FAQ #4 also clarifies that, if an employee paid an hourly wage had a reduction in hours, but no reduction in hourly wage, there would be no loan forgiveness reduction based on a wage reduction. Nonetheless, this could still result in a reduction to loan forgiveness under the formulaic FTE reductions, unless a safe harbor applies.
- FAQ #5 under this heading also clarified that for purposes of loan forgiveness decreases in salaries or hourly wages cannot be offset by increases in other forms of compensation, and only the cash payment amounts will be considered for purposes of loan forgiveness.