On Friday night, May 22, 2020, the Small Business Administration (SBA) issued an updated Interim Final Rule providing guidance on how forgiveness will work for the Paycheck Protection Program (PPP) loans. Below please find highlights of how the update addresses some of the questions that borrowers have been asking over the last few weeks.
Loan Forgiveness Process
To apply for loan forgiveness, each borrower must complete and submit the Loan Forgiveness Application with its lender or loan servicer. Each lender will have 60 days from receipt of the application to render a decision to the SBA. The SBA, subject to any review, will remit the forgiveness amount with interest to the bank within 90 days of the lender’s decision to the SBA. If the SBA determines that the loan was not eligible for forgiveness, the lender must notify the borrower that the application will be denied in full or in part. The SBA will describe its procedures for reviewing the PPP loan applications and loan forgiveness applications in a separate interim final rule.
Payroll Costs Eligible for Loan Forgiveness
Payroll costs paid or incurred during the eight consecutive week (56 days) covered period are eligible for forgiveness. The eight weeks can begin on either (i) the date the loan proceeds were disbursed or (ii) the first day of the first payroll cycle starting after the loan proceeds were disbursed. Payroll costs are considered paid on the day paychecks are distributed or the borrower originates an ACH credit transaction. Payroll costs that are incurred must be paid on or before the next regular payroll date.
The guidance permits payments of compensation to furloughed employees, bonuses, and hazard pay to be considered as part of eligible payroll costs regardless of whether the employees are able to perform their day-to-day duties (subject to compensation not exceeding annualized compensation of $100,000).
Owner-Employees and Self-Employed Individuals’ Payroll Compensation
The loan forgiveness amount is the lesser of approximately 15.38% of the 2019 compensation or $15,385 per individual in total across all businesses. The amount are capped as follows:
Owner-employees are capped to the amount of their 2019 employee cash compensation and employer retirement and health contributions made on their behalf;
Schedule C filers are capped by the amount of their owner compensation replacement calculated based on 2019 profits; and
General partners are capped by the amount of their 2019 net earnings from self-employment (subject to certain reduction) multiplied by 92.35%.
No forgiveness is allowed for retirement or health insurance contributions for self-employed individuals.
Eligible Nonpayroll Costs
Nonpayroll costs are eligible for forgiveness if they were (i) paid during the covered period or (ii) incurred during the covered period and paid on or before the next regular billing date, even if the date is after the covered period. Additionally, advance payments of interest on a covered mortgage or debt obligation are not eligible for loan forgiveness.
Reductions to Loan Forgiveness Amounts
Employees whom the borrower offered to rehire are exempt from the loan forgiveness reduction calculation. This applies to situations when the employer made a good-faith written offer to rehire and restore the employee’s level of compensation and hours and the offer was rejected. Additionally, if the borrower eliminates any reduction to salaries by June 30, 2020, the borrower is exempt from any reduction in loan forgiveness. Moreover, when an employee is fired for cause, voluntarily resigns, or voluntarily request a reduced schedule, borrowers may count employees at the same full-time equivalency level.
The guidance addresses questions that arose in regards to the concern of being ‘double penalized’ for both an FTE reduction and wage reduction. Specifically, the rule notes that compensation reductions only apply to the portion of a decline in employee salary and wages that are not attributable to an FTE reduction.
Loan Review Procedures and Responsibilities
In a separate Interim Final Rule (so far, we’re up to 15 interim final rules), additional guidance was provided regarding SBA loan review procedures and related borrower and lender responsibilities. The guidance reaffirms that the SBA may review any PPP loan as they deem appropriate. Items that may be reviewed include borrower eligibility, loan amounts and use of proceeds, and loan forgiveness amounts. The SBA may review PPP loans at any time and borrowers must retain PPP documentation for six years after the date their loan is forgiven or repaid in full. If the SBA determines that a borrower is ineligible for a PPP loan or loan forgiveness, the borrower will be able to file an appeal through a process that will be released at a later date.
Finally, this guidance provides detailed information that lenders should follow in order to approve loan forgiveness applications. While the rules are explained under the guidance, borrowers should contact their lenders for additional details regarding how they will process loan forgiveness applications.
As a reminder, RS&F is able to assist clients to determine loan forgiveness. Please contact your RS&F Client Advisor for assistance with PPP loan forgiveness or other program questions.
This communication is intended to provide general information on legislative COVID-19 relief measures as of the date of this communication and may reference information from reputable sources. Although our firm has made every reasonable effort to ensure that the information provided is accurate, we make no warranties, expressed or implied, on the information provided. As legislative efforts are still ongoing, we expect that there may be additional guidance and clarification from regulators that may modify some of the provisions in this communication. Some of those modifications may be significant. As such, be aware that this is not a comprehensive analysis of the subject matter covered and is not intended to provide specific recommendations to you or your business with respect to the matters addressed.