The SBA published 2 Interim Final Rules on Paycheck Protection Program (PPP) Loan Forgiveness on Friday, May 22. While there will most likely be updates and additional clarification, they help us to understand how loan forgiveness will work.
Both Rules Are Effective Immediately
The rules both state the importance of this guidance being issued immediately. Both standards state that “Because the first PPP loans were disbursed after April 3, providing borrowers with certainty on SBA’s process for reviewing PPP loan applications and loan forgiveness applications will enhance borrowers’ ability to determine whether, and to what extent, they should apply for PPP loans and loan forgiveness, and thereby carry out the purposes of the CARES Act in keeping their workers employed and paid, while at the same time taking necessary steps to maximize eligible loan forgiveness amounts. An immediate effective date also is necessary for PPP lenders who generally will make the loan forgiveness determinations, as provided in the CARES Act. Specifically, an immediate effective date is necessary for lenders so that they will have both a degree of certainty and sufficient time to develop their systems and policies and procedures to timely process loan forgiveness applications.” The simple translation is that businesses that received funds in early April are rapidly approaching the end of their 8-week coverage periods, and both borrowers and lenders need to know the rules of how forgiveness will work.
Interim Rule 1 – Loan Forgiveness Rules
Definitions of expenses considered for forgiveness
Since the SBA issued the loan forgiveness application on May 15, that seemed to provide some clarification for some of the items considered for forgiveness. The Interim Rule corroborates this thought process and offers additional guidance.
The Rule explains that forgiveness will be given to:
- Payroll costs, as defined in many previous writings and Interim Rules
- Covered mortgage obligations: payments of interest (not including any prepayment or payment of principal) on any business mortgage obligation on real or personal property incurred before February 15, 2020 (“business mortgage interest payments”);
- Covered rent obligations: business rent or lease payments pursuant to lease agreements for real or personal property in force before February 15, 2020 (“business rent or lease payments”); and
- Covered utility payments: business payments for a service for the distribution of electricity, gas, water, transportation, telephone, or internet access for which service began before February 15, 2020 (“business utility payments”).
An eligible nonpayroll cost must be 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. Eligible nonpayroll costs cannot exceed 25% of the total forgiveness amount. Count nonpayroll costs that were both paid and incurred only once. The covered period is the 8-weeks commencing on the day a small business receives PPP proceeds.
When does the 8-week clock start running for payroll costs?
When calculating costs, the 8-week clock begins to run the day funds are received. The form allows small business owners to use an “Alternative Payroll Covered Period” date. This date is defined below with an example.
Alternative Payroll Covered Period: For administrative convenience, Borrowers with a biweekly (or more frequent) payroll schedule may elect to calculate eligible payroll costs using the eight-week (56-day) period that begins on the first day of their first pay period following their PPP Loan Disbursement Date (the “Alternative Payroll Covered Period”). For example, if the Borrower received its PPP loan proceeds on Monday, June 1, and the first day of its first pay period following its PPP loan disbursement is Sunday, June 7, the first day of the Alternative Payroll Covered Period is June 7 and the last day of the Alternative Payroll Covered Period is Saturday, August 1.
Keep in mind, there is no alternative covered period for nonpayroll costs. This Alternative covered period is for payroll only.
Are salary, wages, or compensation to furloughed employees; bonuses; or hazard pay during the covered period eligible for loan forgiveness?
The answer to all the items listed in this question is yes per the Rule if they do not push any individual’s compensation over $100,000. Employees hazard pay and bonuses being included answers a question that borrowers, lenders, and frankly, accountants have had since the law was passed. This might be extremely helpful, considering that many employees were making more money on unemployment than when they were employed. As a result, some employees were not happy about being called back to work by employers that received PPP proceeds. If the employers can provide these employees with a bonus, that may help to encourage them to come back and ease any tension.
There was no mention of how much of a bonus is allowed, and therefore we are left with our own “reasonableness” standard, which makes things difficult. For example, let’s say a small business owner borrows $50k. Let’s further assume that the employer’s payroll for the 8-week covered period was $35k, and rent and utilities were $5k. Can the employer bonus $10k to employees, or is that percentage too high in relation to their pay? Hopefully, more guidance is forthcoming, but certainly, we know that some bonus amount is allowed.
Are there caps on the amount of loan forgiveness available for owner-employees and self-employed individuals’ own payroll compensation?
The Rule explains that Schedule C filers are capped at 8/52 of their 2019 Schedule C income and General partners by 8/52 of their 2019 self-employment income, with reductions for section 179 expenses and unreimbursed partnership expenses. Neither Schedule C filers nor General Partners are allowed, in any circumstance, to exceed $15,385.
Reduction based on Full-time Equivalent Formula and payroll rate reduction
To receive full loan forgiveness, small business owners must maintain the same number of full-time equivalent (FTE) employees as before PPP proceeds were received. A simplified method was introduced, which allows workers to be classified as full-time that work 40 or more hours (1.0 FTE) in the calculation and anyone else to count as 0.5 (FTE). If small business owners prefer, they may calculate FTE by taking the average number of hours each employee worked and dividing by 40. This calculation will be much more difficult (unless the owner uses payroll services that can easily provide such a report) but may be used if it is more beneficial to the loan recipient.
There is also a reduction that can occur if pay rates decline. This could happen if a small business owner replaces employees with less expensive employees.
There are rules in place which allow employers who have a reduction in FTEs to restore these FTEs by June 30 (even if this is outside their covered payroll period). It is possible that since so many PPP loans were not received until May that this June 30 date may eventually be moved back.
Additionally, provisions have been put in place to eliminate individuals that were offered their jobs back and turned them down from reducing the loan forgiveness amount. Per the Rule, a borrower may exclude any reduction in full-time equivalent employee headcount if:
i. the Borrower made a good faith, written offer to rehire such employee (or, if applicable, restore the reduced hours of such employee) during the covered period or the alternative payroll covered period;
ii. the offer was for the same salary or wages and the same number of hours as earned by such employee in the last pay period before the separation or reduction in hours;
iii. such employee rejected the offer;
iv. the Borrower has maintained records documenting the offer and its rejection; and
v. the Borrower informed the applicable state unemployment insurance office of such employee’s rejected offer of reemployment within 30 days of the employee’s rejection of the offer
How will borrowers apply for loan forgiveness?
Borrowers will apply for forgiveness by submitting SBA Form 3508 or lender equivalent to its lender. The lender then has 60 days from the receipts of the application to issue a decision to the SBA.
Interim Rule 2 – Forgiveness Process
This interim rule explains how the process of loan reviews will work. We consider the essential takeaways below.
SBA Reviews of Individual PPP Loans
- SBA may review any loan they deem appropriate for eligibility (remember the certifications that you initialed on the loan application), loan amounts and use of proceeds and forgiveness amounts
- SBA may review any size loan at its discretion. Borrowers must retain PPP documentation for six years after the date the loan is forgiven or paid in full
- A borrower has the right to respond to SBA questions raised in a review.
- If a borrower is determined to be ineligible for a PPP loan, the loan is not eligible for forgiveness.
- Borrowers are permitted to appeal an SBA determination that the Borrower was ineligible for a PPP loan.
The Loan Forgiveness Process for Lenders
The following items are listed under the question “What should a lender review?” in the Rule.
- Confirm receipt of the borrower certifications contained in the Loan Forgiveness Application Form.
- Confirm receipt of the documentation borrowers must submit to aid in verifying payroll and nonpayroll costs, as specified in the instructions to the Loan Forgiveness Application Form.
- Confirm the Borrower’s calculations on the Borrower’s Loan Forgiveness Application, including the dollar amount of the (A) Cash Compensation, Non-Cash Compensation, and Compensation to Owners claimed on PPP Schedule A and (B) Business Mortgage Interest Payments, Business Rent or Lease Payments, and Business Utility Payments claimed on Lines 2, 3, and 4 on the PPP Loan Forgiveness Calculation Form, by reviewing the documentation submitted with the Loan Forgiveness Application.
- Confirm that the Borrower made the calculation on Line 10 of the Loan Forgiveness Calculation Form correctly, by dividing the Borrower’s Eligible Payroll Costs claimed on Line 1 by 0.75.
The rule also states the following:
Providing an accurate calculation of the loan forgiveness amount is the responsibility of the Borrower, and the Borrower attests to the accuracy of its reported information and calculations on the Loan Forgiveness Application. Lenders are expected to perform a good-faith review, in a reasonable time, of the Borrower’s calculations and supporting documents concerning amounts eligible for loan forgiveness. For example, minimal review of calculations based on a payroll report by a recognized third-party payroll processor would be reasonable. By contrast, if payroll costs are not documented with such recognized sources, a more extensive review of calculations and data would be appropriate. The Borrower shall not receive forgiveness without submitting all required documentation to the lender.
If the SBA determines a borrower was ineligible for PPP funds, then the lender is not eligible for a processing fee.
We'll keep you posted on any further developments. As always, if you have any questions, please give us a call at 937-949-7836.