SBA updates PPP forgiveness and loan review rules
June 24, 2020
By: Mark A. Mangano
As we approach the June 30, 2020 deadline for applying for a loan under the Paycheck Protection Program (PPP) the regulatory focus is shifting from eligibility issues to loan forgiveness and loan review. The latest interim final rule from the Small Business Administration (SBA) revises previously issued rules to reflect program changes required by statute and provide additional direction to lenders and borrowers.
On June 22, 2020 the SBA issued its twentieth interim final rule regarding the PPP: “Business Loan Program Temporary Changes; Paycheck Protection Program-Revisions to Loan Forgiveness Interim Final Rule and SBA Loan Review Procedures Interim Final Rule” (IFR)1. The PPP was created by the CARES Act and later modified by the Paycheck Protection Program Flexibility Act (Flexibility Act). The Flexibility Act made substantial retroactive and other changes to provisions of the CARES Act. The IFR addresses the forgiveness related Flexibility Act changes and SBA procedural changes by amending the Fourteenth2 and Fifteenth interim final rules.3
The IFR accomplishes some post Flexibility Act housekeeping by revising references to the expiration of the PPP covered period from June 30, 2020 to December 31, 2020 and increasing the maximum amount of non-payroll costs that can be forgiven from 25 percent to 40 percent.
The IFR revises and clarifies rules related to the covered forgiveness period, forgiveness limitations for owner employees, forgiveness application submission, exemptions from reductions of forgivable payroll, and loan review procedures.
Covered forgiveness period
The covered period for the PPP extends to December 31, 2020. There is also a forgiveness covered period that defines the time within which a borrower must expend the proceeds of a PPP loan for those expenses to be considered for forgiveness. The forgiveness covered period could be either an eight-week period or a 24-week period from the date of loan disbursement depending upon when the borrower’s loan was funded. Borrowers with loans made on or after June 5, 2020 must use the 24-week period. Borrowers with loans made before June 5, 2020 may elect to use the original eight-week period or the 24-week period. The forgiveness covered period cannot extend beyond December 31, 2020. For most borrowers with a choice of forgiveness covered period, it will be most advantageous to elect the 24-week period.
The IFR answered an unresolved question regarding when a borrower is permitted to apply for forgiveness. Borrowers may apply for forgiveness at any time. Prior rules had only focused on the maximum time for submission of the forgiveness application but were silent on the minimum time.
The IFR also confirmed that whether the borrower selects the eight-week or 24-week forgiveness covered period, a borrower with weekly or bi-weekly payroll may avail itself of the option to use an alternative payroll covered period that begins on the first day of the first payroll cycle in the forgiveness covered period. This alternative is intended to make it easier to calculate and document forgivable payroll expenses.
Forgiveness for owner-employees
The IFR provides additional guidance on the forgivable compensation for S-corporation owner-employees. They are capped at the amount of their 2019 employee cash compensation and employer retirement contribution made on their behalf but employer health insurance contributions made on their behalf cannot be separately added because those payments are already included in their employee cash compensation. The SBA has not defined “owner-employees”. Given the distinctions drawn in the rule regarding forgivable payroll expenses, there is some suggestion that they are using a definition drawn from the Internal Revenue Code. The IFR retains the prior guidance for C-corporation owner-employees, general partners, and self-employed schedule C or F filers.
The IFR confirms prior guidance that forgiveness of owner compensation would be limited to either eight weeks or 2.5 months of the owner’s 2019 compensation. The limit will depend upon which forgiveness covered period applies to the borrower’s forgiveness application.
Forgiveness application requirements
The IFR provides guidance on submission of the recently released forgiveness application forms 3508 and 3508EZ. The guidance includes discussion of the documents that must support the applications.
Exemptions from forgiveness reduction
The CARES Act provided for reduction of forgiveness for compensation reductions greater than 25 percent for individual employees and reductions in full time equivalent employees (FTEs). The SBA retained the previous exemption from reduction due to an employee refusing the borrower’s offer to rehire the employee. The SBA also directs borrowers to the SBA web site for guidance on the standards for reporting rejected employment offers to state unemployment insurance offices.
The IFR adds the Flexibility Act exemptions related to the borrower’s inability to rehire or replace workers and the borrowers inability to return to the same level of business activity as the borrower was operating at before February 15, 2020 due to compliance with requirements or guidance from the Director of the Centers for Disease Control and Prevention, Secretary of Health and Human Services, or the Occupational Safety and Health Administration.
The IFR emphasizes the importance of documenting support for any of the exemptions from the payroll forgiveness reductions. The IFR provides guidance regarding minimum documentation standards.
Loan review process
The IFR revises the instructions for lender review and submission of Form 3508 and 3508EZ forgiveness applications. It also, provides lenders with guidance on what to do when notified that the SBA is reviewing a forgiveness application.
This article addresses some of the changes the IFR made to prior rules. For further discussion of the rules that the IFR is revising please refer to previous articles from Jackson Kelly addressing the fourteenth and fifteenth interim final rules.4
2 Business Loan Program Temporary Changes; Paycheck Protection Program-Requirements -Loan Forgiveness; https://home.treasury.gov/system/files/136/PPP-IFR-Loan-Forgiveness.pdf; 85 CFR 33004
3 Business Loan Program Temporary Changes; Paycheck Protection Program-SBA Loan Review Procedures and Related Borrower Lender Responsibilities; https://home.treasury.gov/system/files/136/PPP-IFR-SBA-Loan-Review-Procedures-and-Related-Borrower-and-Lender-Responsibilities.pdf ; 85 CFR 33010
4 New PPP Guidance Continues Promotion of Forgiveness (May 27, 2020); https://www.jacksonkelly.com/tax-monitor-blog/new-ppp-guidance-continues-promotion-of-forgiveness
SBA PPP Loan Reviews Pose Risks for Both Borrowers and Lenders (May 28, 2020); https://www.jacksonkelly.com/tax-monitor-blog/sba-ppp-loan-reviews-pose-risks-for-both-borrowers-and-lenders