On June 17, 2020, the U.S. Small Business Administration and the Department of the Treasury released a revised form of the PPP Loan Forgiveness Calculation Form to implement changes made by the Paycheck Protection Program Flexibility Act of 2020, which was signed by President Trump on June 5, 2020.
The SBA also published a new “EZ Version” of the forgiveness application, which requires fewer calculations and less documentation for eligible borrowers. The EZ Forgiveness Application applies to PPP borrowers that:
- Are self-employed and have no employees; or
- Did not reduce the salaries or wages of their employees by more than 25%, and did not reduce the number or hours of their employees; or
- Experienced reductions in business activity as a result of health directives related to COVID-19 and did not reduce the salaries or wages of their employees by more than 25%.
In a joint press release announcing the new application forms, the SBA and Treasury stated: “Both applications give borrowers the option of using the original 8-week covered period (if their loan was made before June 5, 2020) or an extended 24-week covered period. These changes will result in a more efficient process and make it easier for businesses to realize full forgiveness of their PPP loan.”
The SBA also released another Interim Final Rule relating to the Payroll Protection Program. The official version of the new Interim Final Rule is to be published in the Federal Register on Friday, June 19, 2020.
Here are some key highlights:
- Certain changes are retroactive. Changes related to the deferral of PPP loan payments and the forgiveness of PPP loans are retroactive. The extension of the loan maturity date from two to five years, as enacted by the PPP Flexibility Act, take effect on June 5, 2020. Lenders and borrowers may mutually agree to modify PPP loans made before June 5, 2020.
- Deadline to apply for PPP loans is still June 30, 2020. The SBA clarified that the new Interim Final rule will go into effect immediately because it was necessary to provide further clarification to borrowers because the last day a lender can obtain an SBA loan number is June 30, 2020.
- “Covered Period” revised. Pursuant to the PPP Flexibility Act, the new Interim Final Rule extends the covered period to December 31, 2020.
- Adoption of new 60% rule. Pursuant to the PPP Flexibility Act, the portion of PPP loan proceeds that must be used for payroll costs is reduced from 75% to 60% for the full amount of the PPP loan to be eligible for forgiveness.
- Clarification of payroll costs eligible for forgiveness. If a PPP loan was made before June 5, 2020, the borrower may elect to use the 8-week covered period following loan disbursement (with a maximum of $15,385 in eligible payroll costs per employee) or the new 24-week period enacted by the PPP Flexibility Act (for which the maximum payroll costs per employee is $46,154).
- Clarification on owner compensation replacement. Forgiveness of PPP loans based on owner compensation replacement for self-employed individuals is limited to 8-weeks’ worth (8/52) of 2019 net profit (up to $15,385) for an 8-week covered period or 2.5 months’ worth (2.5/12) of 2019 net profit (up to $20,833) for a 24-week covered period per owner. The new Interim Final Rule includes this example to express the purpose of this new limitation:
“For example, a borrower with one other employee would receive a maximum loan amount equal to five months of payroll (2.5 months of payroll for the owner plus 2.5 months of payroll for the employee). If the owner laid off the employee and availed itself of the safe harbor in the Flexibility Act from reductions in loan forgiveness for a borrower that is unable to return to the same level of business activity the business was operating at before February 15, 2020, the owner could treat the entire amount of the PPP loan as payroll, with the entire loan being forgiven. This would not only result in a windfall for the owner, by providing the owner with five months of payroll instead of 2.5 months, but also defeat the purpose of the CARES Act of protecting the paycheck of the employee. For borrowers with no employees, this limitation will have no effect, because the maximum loan amount for such borrowers already includes only 2.5 months of their payroll.”
Author: J. Michael Vaughn, Shareholder, Enterprise Counsel Group