SBA and Treasury Publish Interim Final Rule on PPP

Today, June 30, 2020, is the last day a business can apply for a PPP (Paycheck Protection Program) loan. Businesses will now need to focus on applying for loan forgiveness, if they have not already done so. On June 25 and 26, the Small Business Administration (SBA), in consultation with the Department of Treasury, provided additional guidance for businesses applying for PPP loans. There was also a Federal Register notice published on June 26 to finalize Interim Rules about PPP loan forgiveness and loan review procedures. Among the items covered by the Interim Final Rules:

Early loan forgiveness

Businesses may apply for loan forgiveness early, if they have spent all of the loan amount, but the interim final rule published on June 26 warns that those businesses may face some reductions in loan forgiveness. These two examples from the interim final rule illustrate how:

24-week covered period example:

A borrower is using a 24-week covered period. This borrower reduced a full-time employee’s weekly salary from $1,000 per week during the reference period to $700 per week during the covered period. The employee continued to work on a full-time basis during the covered period, with an FTE of 1.0. In this case, the first $250 (25% of $1,000) is exempted from the loan forgiveness reduction. The borrower seeking forgiveness would list $1,200 as the salary/ hourly wage reduction for that employee (the extra $50 weekly reduction multiplied by 24 weeks). If the borrower applies for forgiveness before the end of the covered period, it must account for the salary reduction for the full 24-week covered period (totaling $1,200).

Eight-week covered period example:

A borrower that received a PPP loan before June 5, 2020 has elected to use an eight-week covered period. This borrower reduced a full-time employee’s weekly salary from $1,000 per week during the reference period to $700 per week during the covered period. The employee continued to work on a full-time basis during the covered period, with an FTE of 1.0. In this case, the first $250 (25% of $1,000) is exempted from the loan forgiveness reduction. The borrower seeking forgiveness would list $400 as the salary/hourly wage reduction for that employee (the extra $50 weekly reduction multiplied by eight weeks).

Maturity dates

The PPP Flexibility Act, which was enacted on June 5, 2020, provides a minimum maturity of five years for all PPP loans made on or after that date and permits lenders and borrowers to extend the maturity date of earlier PPP loans by mutual agreement.

10-month limit

The interim final rule highlights a provision in the Flexibility Act that if the borrower does not apply for forgiveness of a loan within 10 months after the last day of the covered period, the PPP loan is no longer deferred and the borrower must begin paying principal and interest. The lender must notify the borrower of the date the first payment is due.

Caps on loan forgiveness

To prevent windfalls that Congress had not intended through the CARES Act, the interim final rule states that borrowers who received a PPP loan before June 5, 2020 and elect to use an eight-week covered period will have the amount of loan forgiveness capped.

• For owner-employees and self-employed individuals, payroll compensation is capped at eight weeks’ worth (8/52) of 2019 compensation (i.e., approximately 15.38% of 2019 compensation) or $15,385 per individual, whichever is less, in total across all businesses.
• For all other borrowers, the amount of loan forgiveness requested for owner-employees and self-employed individuals’ payroll compensation is capped at 2.5 months’ worth (2.5/12) of 2019 compensation (i.e., approximately 20.83% of 2019 compensation) or $20,833 per individual, whichever is less, in total across all businesses.
• C-corporation owner-employees are capped by the amount of their 2019 employee cash compensation and employer retirement and health insurance contributions made on their behalf.
• S-corporation owner-employees are capped by the amount of their 2019 employee cash compensation and employer retirement contributions 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.
• Schedule C or F filers are capped by the amount of their owner compensation replacement, calculated based on 2019 net profit.
• General partners are capped by the amount of their 2019 net earnings from self-employment (reduced by claimed section 179 expense deduction, unreimbursed partnership expenses, and depletion from oil and gas properties) multiplied by 0.9235.
• For self-employed individuals, including Schedule C or F filers and general partners, retirement and health insurance contributions are included in their net self-employment income and therefore cannot be separately added to their payroll calculation.

Exemptions

Borrowers are exempted from the loan forgiveness reduction even if their employment numbers were affected during the loan period if they can prove in good faith that they attempted to rehire employees or similarly qualified individuals for unfilled positions but were unable to do so, or were unable to return to their previous level of activity. This includes:

• proving the employment offer was rejected
• showing they were complying with COVID requirements or guidance

As you move forward with plans to complete your forgiveness application, it is best to consider the potential scenarios associated with headcount and salary increases or reductions. You must also consider how this is impacted by applying for forgiveness after eight weeks, 24 weeks or at some point in between.

If you need more information or help with your PPP loan forgiveness application, please fill out the form below and someone from Smith and Howard will contact you.