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Paycheck Protection Update for 6/30/2020

June 30, 2020

Following is this week's status update for you in regards to the Paycheck Protection Program. There is a lot covered in this update as a result of the recent release of new information about PPP loan forgiveness.

15 items you need to know about the PPP Loan Forgiveness Application

Over the last couple of weeks the U.S. Small Business Administration (SBA), in consultation with Treasury, has released additional guidance on the Paycheck Protection Program (PPP) loans and a revised loan forgiveness application. The SBA also unveiled a new EZ application for forgiveness of PPP loans. The revised PPP Loan Forgiveness Application and instructions include a number of notable items. The interim final rule also modifies earlier guidance to account for changes included in the Payroll Protection Flexibility Act.

1. S corporation owner compensation Health insurance costs for S corporation owners cannot be included when calculating payroll costs; however, retirement costs for S corporation owners are eligible costs.

2. Revised maximum payroll per employee The PPP allows loan forgiveness for payroll costs — including salary, wages, and tips — for up to $100,000 annualized per employee, or $15,385 per individual over the eight-week period. The new interim final rule establishes the 24-week maximum for full loan forgiveness at $46,154 per individual.

3. No 60% Cliff The proportion of PPP funding that must be used on payroll costs to qualify for full forgiveness dropped to 60% from 75%. The SBA clarified that it does not consider the 60% requirement to be a “cliff.” If a PPP borrower cannot spend 60% or more of the loan proceeds during the 8- or 24-week testing period on payroll, state and local payroll taxes, group health insurance and retirement plan contributions, then there will nevertheless be PPP loan forgiveness based upon whatever is spent on the above “payroll costs,” plus up to 66% of the amount spent on the above items, to the extent of permissible rent, interest and utility expenses.

4. 24-Week Testing Period (and the 8-week testing period) Post-June 5 PPP borrowers will only be able to use the 24-week testing period, while borrowers who received their loans before June 5th can elect to use either an 8-week expenditure period or a 24-week expenditure period.

  • The 24-week period is advantageous if the borrower would not be able to spend sufficient amounts and satisfy the 60% test within an 8-week period. The 8-week test is much more advantageous for borrowers who are able to spend the appropriate amounts during the 8-weeks, and then apply for forgiveness and have the loan over and done with, and off of their balance sheets, in order to be able to borrow conventionally going forward.
  • The FTE safe harbor rule was extended until December 31, 2020, which could be a good or a bad thing, depending on the employer’s situation. This is now clarified in that the FTE Safe Harbor is now the earlier of the application date for forgiveness or December 31, 2020.

5. Extended Maturity Date Some loans made before June 5, 2020 have a 2-year maturity, and loans made on or after June 5th have a 5-year maturity.

  • Post-June 5th borrowers will not have to repay their loans until five years after the loan date, as long as they file their Applications for Forgiveness within ten months after the end of the 24-week testing period that they are required to use.
  • Pre-June 5th borrowers will still have a due date that is two years after the loan date, but banks and borrowers can agree to extend these loans to five years.

6. Loan Date Clarified For these purposes, a loan is considered to be made when the SBA assigns a loan number to the PPP loan, notwithstanding that the loan monies may not be received until several days later. This will cause some confusion, since the expenditure rules provide that a loan is to have been received when funded with the first dollars deposited into the bank account of the borrower. As a result of this, many borrowers who received their funds on or after June 5th will still be stuck with a 24-week testing period, and a long wait for confirmation of forgiveness.

7. Deadline for Forgiveness Application The new regulations indicate that those borrowers who do not submit an Application for Forgiveness within ten months after the end of the 8- or 24-week period must begin paying principal and interest after that date, with no specificity as to how much principal and how much interest would need to be paid before the 2- or 5-year balloon payment of all remaining interest, at 1% per annum, and principal would be due and payable.

8. Reduced Restrictions for Felons Individuals that have had felony convictions within five years before applying in order to qualify was changed to one year, based upon other considerations, except that five years still applies if the charges were for fraud, robbery, embezzlement or a false statement in a loan application or an application for federal financial assistance. It is noteworthy that when a borrower entity has an ex-felon who owns more than 20%, then this prohibition will apply, but there is nothing to prevent the ex-felon from transferring enough ownership to get down below 20% in order for the business to qualify. A felony is considered to have occurred if there was a conviction, a guilty plea, a plea of nolo contendere or any form of parole or probation, “including probation before judgment.”

9. Additional Guidance for Sole Proprietors Needed While the employee compensation limit for the 24-week period is three times the eight-week limit, the interim final rule does not do the same with the owner compensation replacement for businesses that file Schedule C, Profit or Loss From Business, or Schedule F, Profit or Loss From Farming, tax returns. For those businesses, forgiveness for the owner compensation replacement is calculated for the eight-week period as 8 ÷ 52 × 2019 net profit, up to a maximum of $15,385. For the 24-week period, the forgiveness calculation is limited to 2.5 months’ worth (2.5 ÷ 12) of 2019 net profit, up to $20,833.

  • There was no mention of whether independent contractors will be automatically forgiven based upon the ability to elect the 24-week period.
  • Under the separate rules that apply to individuals who are considered to be independent contractors or sole proprietors who file a Schedule C to their personal Form 1040, which is entitled “Profit or Loss From Business,” it would be impossible under an 8-week testing period to have all debt qualify for forgiveness.
  • Under the independent contractor PPP regulations, the amount of the loan would be equal to 20.8333% (2.5 divided by 12) of the borrower’s 2019 Schedule-C net income. 15.3846% of the PPP loan to an independent contractor who does not have employees is automatically forgiven based on an 8-week testing period, because 8/52nds of 100% is 15.3846%, and 15.38% divided by 20.83% is 73.835%. This happens regardless of how that money is spent, because it is assumed to be compensation received and paid to or for the independent contractor.
    The remaining 5.4487% would have to be spent on qualified rent, interest and utilities to get close to having total forgiveness. Total forgiveness was impossible under the 75% rule, but is now hopefully going to be automatic for all independent contractors who choose the 24-week period, unless future guidance takes this away, because 24/52nds equals much more than 20.8333%.

10. A newly revised Form 3508 A revised form was released by the SBA, which reflects the new 60% forgiveness requirement that was changed by the June 5, 2020 PPPFA (Payroll Protection Program Forgiveness Act) from the old 75% requirement. (Instructions for Form 3508)

11. New Form 3508EZ issued This new form was also released the SBA, which allows an employer that meets any 1 of 3 exceptions to use the abbreviated forgiveness form. The simplified version is helpful because it doesn’t require the complicated forgiveness reduction calculations or excessive forms attachments that were previously required. (Instructions for Form 3508EZ)

The 3 situations where the short form may be used are:
* The borrower is a self-employed individual, independent contractor or sole proprietor who had no employees at the time of the PPP loan application did not include any employee salaries in the computation of average monthly payroll in the borrower application.


* The Borrower did not reduce salaries or hourly wages by more than 25 percent for any employee during the Covered Period or Alternative Payroll Covered Period compared to the period between January 1, 2020 and March 31, 2020. For purposes of this certification, the term “employee” includes only those employees that did not receive, during any single period during 2019, wages or salary at an annualized rate of pay in an amount more than $100,000. And
The Borrower did not reduce the number of employees or the average paid hours of employees between January 1, 2020 and the end of the Covered Period (other than any reductions that arose from an inability to rehire individuals who were employees on February 15, 2020, if the Borrower was unable to hire similarly qualified employees for unfilled positions on or before December 31, 2020, and reductions in an employee’s hours that a borrower offered to restore and were refused).

* The Borrower did not reduce salaries or hourly wages by more than 25 percent for any employee during the Covered Period or Alternative Payroll Covered Period compared to the period between January 1, 2020 and March 31, 2020. For purposes of this certification, the term “employee” includes only those employees that did not receive, during any single period during 2019, wages or salary at an annualized rate of pay in an amount more than $100,000. And
The Borrower was unable to operate between February 15, 2020, and the end of the Covered Period at the same level of business activity as before February 15, 2020 due to compliance with requirements established or guidance issued between March 1, 2020 and December 31, 2020, by the 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 the maintenance of standards of sanitation, social distancing, or any other work or customer safety requirement related to COVID-19.

Relying on the 3rd exception may be difficult if the borrowers relied on state or local restrictions, which do not meet this standard.

12. Paid or incurred The qualified payroll and non-payroll costs include those paid OR incurred during the 8 or 24 week covered or alternate covered period. The biggest mistake that may be made in calculating forgiveness is failure to accrue those utilities/wages/rent/interest/health insurance/pension expenses incurred from the last pay date through the end of the covered period.

13. Disclosure of borrowers The SBA did announce that it will disclose the business names, addresses and other select data about businesses that received PPP funds.

14. Safe harbor for calculating FTEs A borrower with reduced headcount or salary throughout 2020 will not experience a reduction in the forgiveness amount provided headcount or salary was restored prior to December 31, 2020.

A borrower who is unable to replace its FTE headcount or salary by 12/31/2020 may still receive a complete loan forgiveness if any of the following applies:

  • there was an inability rehire individuals who were employees of the eligible recipient on February 15,
  • there was an inability to hire similarly qualified employees for unfulfilled positions on or before 12/31 2020, or,
  • the Borrower was unable to return to the same level of business activity as the business was operating at before February 15, 2020 due to compliance with requirements established or guidance issued between March 1, 2020 and December 31, 2020, by the 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 the maintenance of standards of sanitation, social distancing, or any other work or customer safety requirement related to COVID-19.

15. Filing prior to December 31 Safe harbor for excluding salary and hourly wage reductions and reductions in the number of employees (full-time equivalents) from loan forgiveness reductions can be applied as of the date the loan forgiveness application is submitted. Borrowers don’t have to wait until December 31 to apply for forgiveness to use the safe harbors.

Our Recommendations

Be Patient You should not be in a hurry to fill out the forgiveness application. This will be particularly true if you anticipate ending up with a loan balance. The application is not required until the earlier of 10 months from the end of the covered 8 or 24 week period, or December 31, 2020. Then the bank has 2 months to decide and then the SBA has 3 months to agree, then 6 months after that the payments start. If you are unsure about terms, definitions, etc., wait for further guidance since no payments are due yet.

  • Do not fill out the regular Form 3508 until after you have filed the 2nd quarter payroll forms. The lender will need these so, again, don’t rush it.

Get your documents in order Because these applications will need to be filed no later than 12/31/20 and because many businesses will wait in hopes that the 24 week period will be better, December will be busy. Many borrowers will need to calculate everything at least 4 times. Once for the covered period and once for the alternate covered period. In addition, since earlier borrowers get their choice of the 8 or 24 week covered periods, it is quite likely that 2 additional calculations may be required in many cases. And because the safe harbor could use a different period, it could add even more calculations.

Use your payroll software to its fullest The FTE calculations are the most difficult and obtuse guidelines on the application and your payroll reporting software needs to provide you with much of the data needed.

Documents submitted and/or maintained There is a substantial list of documents which must be submitted and/or maintained to support your calculations. These documents must be maintained for at least 6 years after the date to Leon is forgiven or repaid in full and the SBA will have full access to such files upon request.

You can find the updated applications HERE on our COVID-19 Resource Page. For additional assistance in filling out the loan forgiveness applications, please contact us.

We will continue to provide you with updates as information becomes available.