In continued changes that make PPP loans more borrower friendly, on June 22, 2020, the SBA released revisions to the Loan Forgiveness Interim Final Rule and the SBA Loan Review Procedures Interim Final Rule (the IFRs). These changes provide additional clarity around certain provisions of the PPP program – and one in particular that should be welcome news to borrowers – whether a borrower can apply for forgiveness before the end of the 24-week forgiveness period.
Timing for filing PPP Forgiveness Application
Until the publication of these changes, many borrowers anticipated having to wait until the expiration of the 24-week forgiveness period to submit their forgiveness applications. However, changes to the IFRs to address this issue seem to eliminate this concern by stating that “a borrower may submit a loan forgiveness application any time on or before the maturity date of the loan – including before the end of the covered period – if the borrower has used all of the loan proceeds for which borrower is requesting forgiveness.” Note, however, that if the borrower applies for forgiveness before the end of the covered period and has reduced any salaries or wages of employees earning under $100,000 annualized per year by more than 25%, the borrower “must account for the excess salary reduction for the full 8-week or 24-week covered period.”
While this is a borrower-friendly change, borrowers with FTE reductions that are considering applying for forgiveness before the end of the 24 weeks should be cognizant of the impact of the FTE haircut on loan forgiveness. If the borrower elects a period of less than 24 weeks, the haircut would likely be applied to a lesser amount than if the borrower extends its forgiveness period to the full 24 weeks.
Other changes for borrowers
The SBA also made other changes impacting borrowers by providing more clarification around owner-employee compensation limitations and by explaining to borrowers how to document FTE reductions that are exempt from consideration for purposes of the FTE haircut.
1. Owner-employee compensation. Earlier rules noted limitations on the use of loan proceeds to compensate owner-employees and self-employed individuals. For the eight-week forgiveness period, payroll compensation of owner-employees and self-employed individuals is capped at the lesser of eight weeks of 2019 compensation or $15,385. Borrowers electing the 24-week forgiveness period can use PPP proceeds to cover the lesser of two and a half months’ worth of 2019 compensation or $20,833 for owner-employees and self-employed individuals. The changes to the IFRs further clarify how owner-employee and self-employed individuals are to be treated based on entity structure.
a. C-Corporation owner-employees are capped by the amount of their 2019 employee cash compensation and employee retirement and health insurance contributions made on their behalf.
b. S-Corporation owner-employees are capped by the amount of their 2019 employee cash compensation and employer retirement contributions made on their behalf. Employer health insurance contributions made on their behalf cannot be separately added because those payments are already included in their employee cash compensation.
c. Schedule C and F filers are capped by the amount of their owner compensation replacement, calculated based on 2019 net profit.
d. General partners are capped by the amount of their 2019 net earnings from self-employment (reduced by claimed Section 179 expense deductions, unreimbursed partnership expenses and depletion from oil and gas properties) multiplied by 0.9235.
The SBA has previously provided that the owner-employee compensation limitations apply across all businesses (i.e., an owner-employee cannot exceed the limitations in the aggregate). The IFRS do not change this guidance.
2. Adjustments for certain FTE reductions. With the extension of the available loan forgiveness period to 24 weeks, the SBA has adjusted the FTE safe harbor date to Dec. 31, 2020. Borrowers that have experienced headcount reductions now have until Dec. 31, 2020 to restore that headcount without penalty – regardless of whether they elect to use the 8-week or the 24-week forgiveness period. Importantly, however, borrowers with FTE reductions should consider how the timing of the filing of the forgiveness application will impact the FTE adjustments. Borrowers who file their forgiveness applications prior to Dec. 31, 2020 will have their FTE reductions evaluated as of the filing date of the forgiveness application. Accordingly, borrowers that have exhausted funding and may need to reduce workforce due to current economic uncertainty may wish to apply as soon as the funds as exhausted as the application date becomes the FTE reduction safe harbor date (i.e., borrowers must maintain FTEs through the date of application or Dec. 31, 2020, whichever is earlier).
In addition to the FTE reduction adjustments, the PPP Flexibility Act also established two new exemptions based on employee availability and business activity that would eliminate a reduction in the loan forgiveness amount otherwise required. The changes to the IFRs provide borrowers with additional information regarding the substantiation and documentation of these exemptions.
a. Borrowers that are able to document an inability to rehire individuals by Dec. 31, 2020 who were employees of the borrower on Feb. 15, 2020 and an inability to hire similarly qualified employees in unfilled positions can qualify for an FTE reduction exception for these positions. In order to document this exception, a borrower must inform the applicable state un-insurance office within 30 days of the employee’s rejection of the offer. Borrower should maintain the written offer to re-hire the individual, a written record of the offer’s rejection, a written record of the efforts to hire a similarly qualified individual and any other documentation showing compliance with this exception.
b. Borrowers that can document an inability to return to the same level of business activity as Feb. 15, 2020 because of compliance with Health and Human Services (HHS), Centers for Disease Control (CDC) or Occupational Safety and Health Administration (OSHA) requirements during the period March 1, 2020 through Dec. 31, 2020 can qualify for an FTE reduction exception and must provide documentation of applicable COVID Requirements or Guidance for each business location and relevant borrower financial records. The SBA recognizes that many of the sanitation requirements, social distancing standards, or other worker or customer safety requirements may be issued by state or local authorities and provides that borrowers can certify a reduction in business activity that stems directly or indirectly from the HHS, CDC, or OSHA requirements. In plain language, this allows borrowers to document a decrease in business activity based as a result of state and local government shutdown orders.
Changes for Lenders
In addition to making changes to borrower requirements, the revisions also establish certain procedures for lenders to follow with regard to forgiveness.
1. Lender review. When a borrower submits an application for forgiveness, the lender is required to review the application and confirm receipt of the following:
a. Borrower certifications;
b. Documentation required to aid in verifying payroll and non-payroll costs as specified on the forgiveness application.
c. Borrower’s calculations including the dollar amount for cash and non-cash compensation, owner compensation, and non-payroll costs.
d. Borrower calculation of the amount of loan proceeds spent on payroll correctly.
2. Timeline for lender’s decision on forgiveness. Lenders are required to issue decisions to SBA on a complete loan forgiveness application within 60 days of receipt. Lenders may issue an approval (in whole or in part), denial, or, if directed by the SBA, a denial without prejudice due to pending SBA review of the loan. A lender decision on forgiveness issued to the SBA must include the PPP loan forgiveness calculation form and the optional PPP Borrower Demographic Information form for all borrowers and the PPP Schedule A for those borrowers who use SBA Form 3058 or a lender equivalent form for their forgiveness application.
If the lender determines that the borrower is entitled to forgiveness of some or all of the loan amount, the lender must request payment from the SBA at the time the lender issues its decision to the SBA. The SBA then has 90 days to review and remit the appropriate forgiveness amount to the lender along with any interest accrued through the date of payment.
If the lender issues its decision to the SBA determining that the borrower is not entitled to forgiveness in any amount, the lender must provide the SBA the reason for the denial in addition to the items noted above. The lender is also required to notify the borrower in writing of the decision. A borrower that has had its forgiveness application denied has 30 days after receiving notice from its lender to notify its lender that it is requesting an SBA review. The lender is required to notify SBA of the borrower’s request within five days of receipt. SBA has the right to review the lender’s decision at its sole discretion.
Ultimately these changes continue the SBA’s efforts to provide clarity to the PPP forgiveness process and also continue efforts to make the PPP increasingly borrower friendly.