The Small Business Administration Issues New Rules and Forms on PPP Loan Forgiveness.
The Small Business Administration (“SBA”) has issued new rules and forms on calculating the amount that a Paycheck Protection Program (“PPP”) loan will be forgiven. The new rules and forms implement the changes to the PPP in the recently enacted PPP Flexibility Act. In addition, SBA has issued two new application forms to request forgiveness of the PPP loan. The new rules and applications provide some clarifications, impose new limits on the amount that can be forgiven, and raise a number of unanswered questions.
New Application Forms
The SBA released two new applications. First, SBA revised its previously published form to make it shorter and incorporate the changes in the PPP Flexibility Act. Second, SBA issued an EZ Forgiveness Application that is much simpler, requiring fewer calculations and less documentation. The new EZ version, however, is limited to borrowers that:
- Are self-employed and have no employees; OR
- If have employees,
- Did not reduce the salaries or wages of their employees by more than 25%, and did not reduce the number or hours of their employees; OR
- Experienced reductions in business activity as a result of health directives from Secretary of Health and Human Services, the Director of the Centers for Disease Control and Prevention, or the Occupational Safety and Health Administration, related to COVID-19, and did not reduce the salaries or wages of their employees by more than 25%.
For loans made before June 5, 2020, both applications give borrowers the option of using the original 8-week covered period or an extended 24-week covered period.
The new regulation limits the amount of the loan that can be paid to “owner-employees, a self-employed individual, or general partners” The maximum amount is $15,385 if the borrower chooses the 8-week covered period, or $20,833 if the 24-week covered period is used. In addition, the costs of covered benefits for owners, (health care expenses and retirement contributions), and state taxes imposed on employee payroll paid by the employer are not included in the payroll costs for owners.
The new regulations apply these limits to “individuals with self-employment income who file a Schedule C,” which are filed by individuals who are self-employed. This definition, however, cannot be complete. While sole proprietors and owners of limited liability corporations file Schedule Cs, partners which are specifically included in the limit do not file Schedule Cs. Moreover, neither the new rules nor the forms define what is included in “owner-employee,” and whether it includes owners of C or S corporations. Finally, it is not clear whether any ownership interest is sufficient, or whether there is a minimum ownership percentage. WFCA has requested clarification on these issues and will advise members once more information is available.
Safe Harbor Rule
As explained in prior updates, the amount of the PPP loan that can be forgiven will be reduced if the business failed to bring back the average number of full-time employee equivalents (FTEs) or reduces employee’s salaries by more than 25%. In calculating any reduction, the average number of FTEs paid and the amount paid during the loan forgiveness period is compared to the average FTEs paid between February 15, 2019 and June 30, 2019 or January 1, 2020 and February 29, 2020. The employer gets to choose the comparison period. The number of FTEs can be reduced if the borrower was unable to rehire employees as a result of health directives from Secretary of Health and Human Services, the Director of the Centers for Disease Control and Prevention, or the Occupational Safety and Health Administration, related to COVID-19, and did not reduce the salaries or wages of the employees they brought back by more than 25%.
The law also had a safe harbor rule, which provides that a borrower could qualify for the full amount for forgiveness if it restores its FTE and salaries to its February 15, 2020 levels by December 31, 2020. The SBA has determined that the safe harbor can be applied as of the date the loan forgiveness application is submitted. Borrowers do not have to wait until Dec. 31 to apply for forgiveness in order to use the safe harbors.
The new SBA rules and forms leave a number of issues open, such as whether the owner compensation limit applies to owner-employees of C or S corporations. WFCA is working with legal counsel and Lobbyit to obtain further clarification and will provide further updates to members on the specificities of the above PPP changes, including updates regarding rules, allowances, and forgiveness.
Notice: The information contained in this update is abridged from legislation, court decisions, and administrative rulings, and should not be construed as legal advice or opinion, and is not a substitute for the advice of counsel.