On June 5 the President signed into law new laws related to the PPP program and forgiveness of those requirements. Last week, SBA gave us additional guidance on the details of these changes and how they will be administrated.
For those of you requiring more information, we have outlined the detailed provisions below, but in short the following changes were made:
- The 8 week fulfillment period was extended to 24 weeks (you can elect either period).
- The total payroll costs of owners that was allowed was changed to a maximum of $20,833, regardless of the total payroll costs and benefit costs paid.
- The total required payroll component was reduced from 75% to 60%.
- The total FTE requirement was eased by extending to December 31, 2020 the rehire eligibility date and expanding exceptions to the FTE requirements.
- For any portion of the PPP not forgiven, the repayment period was increased from two years to five years.
- The SBA has updated the PPP forgiveness application forms (Forms 3508 and 3508EZ). We have attached a copy of the 3508EZ, which we believe most of our clients will use.
As we noted, the SBA has issued additional guidance. A portion of this guidance is to adjust the program for the Paycheck Protection Flexibility Act of 2020. However, the guidance also makes other changes to the program. In addition, the SBA released two different forms that can be used to apply for loan forgiveness.
CHANGES TO THE 8 WEEK PERIOD REQUIREMENT
This requirement is huge for a number of reasons. First because there were many businesses shut down that couldn’t reopen and secondly, because there were a number of businesses that were forced to reopen slowly (many are still not reopened) and were not able to meet the payroll requirements in eight weeks.
First the 8 week period was extended from 8 weeks to 24 weeks. We STRONGLY recommend that businesses consider closely when to file their application. We will be updating our customers on these regulations, because of not only the qualified payroll requirements but also the FTE requirements. These rules are likely to be modified, but for now, it appears because of the FTE requirements there may be some important strategies as to when to file. While we are not yet sure what happens if you accidentally file early and then want to rework your form, we urge you to not file until SBA has been given time to fully catchup with the additional new laws and we have time to fully digest the requirements. We are always available to respond to your questions and assist in filling out the forms. While the forgiveness application has to be filed with your bank, the form ultimately has to be submitted to the SBA. Accordingly, we believe many banks will provide online applications for their customers. We are here to help with that if needed.
One example of why there may be strategy as to when to file: The new regulations allow businesses to choose between the eight-week period in the initial law and the 24-week period in the new law. The form and instructions provide that the business can apply for forgiveness before the end of the 24-week covered period. If the business does so, the forgiveness application includes the activity through the date of the application and only takes into account changes in FTEs or wages through that date. Also, the exception to the FTE (see below) rule for the business being limited by the COVID-19 restrictions applies if the restrictions have gone through the date of the forgiveness application.
For example, assume that it takes a business twelve-weeks to spend enough funds on qualified purposes for full PPP loan forgiveness. If that business is still limited due to the COVID-19 restrictions at the end of that twelve-week period, it can apply for the loan forgiveness at the end of the period. Since it is still subject to the operating limitations at the end of the period, it qualifies for the exception to the FTE reduction calculation. That means that the business will receive the full forgiveness if they file the application then. If the business is later able to fully open before the end of 2020 but does not restore its FTE count, those facts don’t appear to affect the loan forgiveness. However, if the business waits to file the loan forgiveness application until after it is allowed to fully reopen, the FTE exception would no longer apply. The date that the business files for the loan forgiveness can change the amount of loan forgiveness, so it is very important to think through all requirements and be sure that you have utilized all allowances made in the bill.
CHANGES TO ALLOWABLE OWNER PAYROLL COSTS
The second significant change is a modification to the calculation of wages or income of a business owner. The maximum period that an owner’s wages or income can be calculated toward loan forgiveness is now 2½ months. Thus, the maximum compensation of an owner that can be counted toward debt forgiveness is $20,833. In addition, the guidance indicates that non-cash benefits paid to owners are not included in the forgivable expenses. This would preclude loan forgiveness for owner health care premiums, retirement contributions, or state taxes that are paid for an owner. The previous guidance allowed these costs for owners but included them in the amount subject to the limit based on annualized $100,000 pay. It isn’t clear that the SBA intended to change that treatment. If they did not intend to totally exclude those benefit costs for owners, we expect them to issue further guidance to clarify the issue.
TOTAL PAYROLL REPAYMENT REQUIREMENT REDUCED
In the previous regulations, companies were required to repay 75% of the loan in payroll costs and the other 25% could be used for “other qualified costs”. The new regulations require 60%. Since the list of “other qualified expenses” wasn’t long, this may not be significant and it is our belief that most businesses will be able to use the extended 24 week period to use payroll to meet their requirements.
CHANGES TO THE FTE REQUIREMENTS
Under the regulations, businesses had to achieve 100% of their pre-covid FTE count by the end of the eight week period to achieve forgiveness. Now that has been extended to the 24 week period, or in other cases it can be extended to December 31, 2020. The new regulation also allows for exceptions to the FTE requirements:
- If a business is unable to rehire similarly qualified employees by December 31, 2020.
- If a business can demonstrate that it was unable to return to the level of activity it was operating at pre-covid (2/15/2020).
It is unclear at this point how businesses will demonstrate these exceptions to the SBA. We will update you as the SBA clarifies its position.
REPAYMENT PERIOD OF UNFORGIVEN PORTION
The new guidance eases the repayment requirements in the event that some / all of your PPP loan is not forgiven or if you choose to repay the loan. A business will now have five years, not three to repay the loan. Additionally, the interest rate charged will be 1%. Finally, the first payment will be deferred for six months after the determination by your bank and the SBA of forgiveness amounts (likely early 2021).
LOAN APPLICATION FORMS
We have attached to this email a copy of the 3508EZ, which we believe will be used in most cases. However, the SBA released two versions of the form to apply for debt forgiveness on a PPP loan. The longer form (Form 3508) is pretty extensive and very complicated. The second form is Form 3508EZ and is a much shorter form. Companies can use the shorter form if they meet the following criteria:
- The business did not reduce salaries by more than 25% during the covered period for any employee who received an annualized wage of less than $100,000 during every pay period in 2019.
- The business met one of the two following criteria:
- The business did not reduce its FTEs during the covered period from the base period, or
- The business qualified for the exception based on the inability to operate at the same level of business activity due to COVID-19 restrictions between February 15 and the end of the covered period.
Once the applications are filed with the banks, they have 60 days to make a decision on their acceptance (or nonacceptance). They are also required to notify you of their findings by the end of the 60 days. If there is disagreement, we are still waiting on guidance on how that is handled. Once the bank makes their decision, they will forward the paperwork to the SBA who will have another 90 days to agree or disagree. Again, we will need clarification on how to proceed if there is disagreements.
MORE CHANGES TO COME
Business owners should expect the SBA to continue making changes to the rules for the program. There were a number of items in the latest round of guidance that left more questions than answers. We will strive to keep you informed about these changes. However, for now, we stand ready to review and assist in your attempts to receive the SBA guidance. Often these changes are beneficial to the business. However, some changes have limited business’s ability to qualify for loan forgiveness. Watch for new updates to see how they will affect your business.