Updated PPP Forgiveness Applications and Guidance
By: Tiffany Rankin, Shareholder, and Chris Anderson, Shareholder
On June 16, 2020, the Small Business Administration (“SBA”) released new documents pertaining to the forgiveness of the Paycheck Protection Program (“PPP”) loans. The documents are (1) a revised PPP loan forgiveness application (Form 3508) and instructions and (2) a new “EZ” option (Form 3508EZ) and instructions for those borrowers that qualify.
The EZ option has three pages opposed to the five-page full version of the form. The EZ form requires fewer calculations and less documentation. Borrowers may use the EZ form if:
- the borrower is a self-employed individual, independent contractor, or sole proprietor who has no employees;
- there was no reduction in salaries or hourly wages of more than 25% and no work hours reduction occurred or;
- there was no reduction in salaries or hourly wages of more than 25% and reduced business operations were due to health, social distancing and other health compliance requirements.
PPP Loan Forgiveness Application:
The revised PPP forgiveness application clarifies the following provided by the Paycheck Protection Program Flexibility Act:
- Owner Compensation: Owner-employees and self-employed borrowers compensation forgiveness is limited to either:
- 8 weeks’ worth of 2019 net profit/compensation (up to $15,385) for an 8- week covered period, or
- 2.5 months’ worth of 2019 net profit/compensation (up to $20,833) for a 24-week covered period
The type of entity in which the business operates also impacts the amount of maximum compensation forgiveness, as follows:
- C-corporation owner-employees are capped at their 2019 cash compensation and employer retirement and health insurance contributions made on their behalf.
- S-corporation owner-employees are capped at their 2019 cash compensation and employer retirement contributions made on their behalf. Employer health contributions made on their behalf cannot be separately added because those are already included in employee cash compensation.
- Schedule C filers, Schedule F filers and other self-employed individuals are capped by the amount of their owner compensation replacement, calculated based on 2019 profit. Retirement and health insurance contributions are included in their net self-employment income and therefore cannot be separately added to their payroll calculation.
- General partners are capped by the amount of their 2019 net earnings from self-employment multiplied by 0.9235. The rules for self-employed retirement and health insurance contributions noted above also apply to general partners.
Borrowers without employees are not impacted because the maximum loan amount includes 2.5 months of payroll.
M+N Comment: It is worth noting that owner-employees do not receive the same amount of compensation forgiveness for the 24-week period as employee compensation below.
The amount of loan forgiveness will depend on the amount spent to be capped at the following:
- $15,385 per employee for an 8-week period or
- $46,154 per employee for a 24-week period
- Non-payroll expenses have also been extended to 24 weeks (both paid and incurred)
- For borrowers completing Form 1040-Schedule C, only payments of mortgage interest, rent payments and utilities deducted on this schedule are eligible for forgiveness.
Revisions to prior Interim Final Rules
The Department of the Treasury and the SBA have provided partial guidance on the timing for the submission of the loan forgiveness application. A borrower is permitted to submit the application before the end of the covered period if the borrower has spent all of the PPP loan proceeds. However, there is an important consideration:
“If the borrower applies for forgiveness before the end of the covered period and has reduced any employee’s salaries or wages in excess of 25 percent, the borrower must account for the excess salary reduction for the full 8-week or 24-week covered period…”
M+N Comment: While the guidance addresses the 25% wage reduction matter, it does not address whether the borrower is required to use the full covered period for determining its average full-time equivalent (“FTE”) employee count.
The revised Interim Final Rules also specify timelines for the forgiveness process. The lender has 60 days from the receipt of a complete application to issue a decision about forgiveness to the SBA. At that time, the lender must request payment from the SBA of the forgiveness amount. The SBA has 90 days to remit the forgiveness amount plus any accrued interest to the lender, subject to any SBA review of the loan or loan application. If the SBA determines in the course of its review that the borrower was ineligible for the PPP loan, the loan will not be eligible for forgiveness. For the amount of the loan that is not forgiven (if any), the lender is responsible for notifying the borrower the date on which the first loan payment is due. If the borrower does not apply for forgiveness within 10 months after the last day of the covered period, the borrower must begin paying principal and interest.
Do you have questions regarding PPP Forgiveness Applications? Reach out to your Maloney + Novotny representative or use this online contact form today!