New SBA Rules on PPP Loan ForgivenessMay 25, 2020 | Category: Asset Protection, Corporate and Taxation, Estate Planning and Probate, News
Late Friday, May 22, 2020, the SBA issued new interim rules, providing further guidance for borrowers on forgiveness of their Paycheck Protection Program (PPP) loans. The following is a summary of some of the highlights of these rules. First, a quick overview of the PPP.
Paycheck Protection Program (PPP) Requirements for Loan Forgiveness
The CARES Act was enacted to provide immediate assistance to individuals, families, and organizations affected by the COVID-19 emergency. Among the provisions contained in the CARES Act are provisions authorizing the SBA to temporarily guarantee loans under the PPP. Loans under the PPP will be 100% guaranteed by the SBA, and the full principal amount of the loans may qualify for loan forgiveness. Next, highlights of the newly issued SBA Rules on PPP loan forgiveness.
The PPP provides that, subject to several important limitations, borrowers shall be eligible for forgiveness of their PPP loan in an amount equal to the sum of the following costs incurred and payments made during the covered period (as described in section 3 below):
(1) Payroll costs which consist of compensation to employees (whose principal place of residence is the US) in the form of salary, wages, commissions, or similar compensation; cash tips or the equivalent (based on employer records of past tips or, in the absence of such records, a reasonable, good-faith employer estimate of such tips); payment for vacation, parental, family, medical, or sick leave; allowance for separation or dismissal; payment for the provision of employee benefits consisting of group health care coverage, including insurance premiums, and retirement; payment of state and local taxes assessed on compensation of employees; and for an independent contractor or sole proprietor, wages, commissions, income, or net earnings from self-employment, or similar compensation;
(2) Interest payments on any business mortgage obligation on real or personal property that was incurred before February 15, 2020 (but not any prepayment or payment of principal);
(3) Payments on business rent obligations on real or personal property under a lease agreement in force before February 15, 2020; and
(4) Business utility payments for the distribution of electricity, gas, water, transportation, telephone, or internet access for which service began before February 15, 2020.
This interim final rule uses the term “nonpayroll costs” to refer to the payments described in (2), (3), and (4). Eligible nonpayroll costs cannot exceed 25% of the loan forgiveness amount.
- Loan Forgiveness Process
Q: What is the general process to obtain loan forgiveness?
A: To receive loan forgiveness, a borrower must complete and submit the Loan Forgiveness Application (SBA Form 3508 or lender equivalent) to its lender (or the lender servicing its loan). As a general matter, the lender will review the application and make a decision regarding loan forgiveness. The lender has 60 days from receipt of a complete application to issue a decision to the SBA. If the lender determines that the borrower is entitled to forgiveness of some or all the amount applied for under the statute and applicable regulations, the lender must request payment from the SBA at the time the lender issues its decision to the SBA. The SBA will, subject to any SBA review of the loan or loan application, remit the appropriate forgiveness amount to the lender, plus any interest accrued through the date of payment, not later than 90 days after the lender issues its decision to the SBA. If applicable, the SBA will deduct EIDL Advance Amounts from the forgiveness amount remitted to the Lender. If the SBA determines in the course of its review that the borrower was ineligible for the PPP loan based on the provisions of the CARES Act, the SBA rules or guidance available at the time of the borrower’s loan application, or the terms of the borrower’s PPP loan application (for example, because the borrower lacked an adequate basis for the certifications that it made in its PPP loan application), the loan will not be eligible for loan forgiveness. The lender is responsible for notifying the borrower of the forgiveness amount. If only a portion of the loan is forgiven, or if the forgiveness request is denied, any remaining balance due on the loan must be repaid by the borrower on or before the two-year maturity of the loan. If the amount remitted by the SBA to the lender exceeds the remaining principal balance of the PPP loan (because the borrower made scheduled payments on the loan after the initial deferment period), the lender must remit the excess amount, including accrued interest, to the borrower.
The general loan forgiveness process described above applies only to loan forgiveness applications that are not reviewed by the SBA prior to the lender’s decision on the forgiveness application.
- Payroll Costs Eligible for Loan Forgiveness
Q: When must payroll costs be incurred and/or paid to be eligible for forgiveness?
A: In general, payroll costs paid or incurred during the eight-consecutive week (56 days) covered period are eligible for forgiveness. Borrowers may seek forgiveness for payroll costs for the 8 weeks beginning on either:
- the date of disbursement of the borrower’s PPP loan proceeds from the Lender (i.e., the start of the covered period); or
- the first day of the first payroll cycle in the covered period (the “alternative payroll covered period”).
Payroll costs are considered paid on the day that paychecks are distributed, or the borrower originates an ACH credit transaction. Payroll costs incurred during the borrower’s last pay period of the covered period or the alternative payroll covered period are eligible for forgiveness if paid on or before the next regular payroll date; otherwise, payroll costs must be paid during the covered period (or alternative payroll covered period) to be eligible for forgiveness. Payroll costs are generally incurred on the day the employee’s pay is earned (i.e., on the day the employee worked). For employees who are not performing work but are still on the borrower’s payroll, payroll costs are incurred based on the schedule established by the borrower (typically, each day that the employee would have performed work).
The SBA recognized that the 8-week covered period will not always align with a borrower’s payroll cycle. For administrative convenience of the borrower, a borrower with a bi-weekly (or more frequent) payroll cycle may elect to use an alternative payroll covered period that begins on the first day of the first payroll cycle in the covered period and continues for the following 8 weeks.
If payroll costs are incurred during this 8-week alternative payroll covered period but paid after the end of the alternative payroll covered period, such payroll costs will be eligible for forgiveness if they are paid no later than the first regular payroll date thereafter.
Example: A borrower has a bi-weekly payroll schedule (every other week). The borrower’s eight-week covered period begins on June 1 and ends on July 26. The first day of the borrower’s first payroll cycle that starts in the covered period is June 7. The borrower may elect an alternative payroll covered period for payroll cost purposes that starts on June 7 and ends 55 days later (for a total of 56 days) on August 1. Payroll costs paid during this alternative payroll covered period are eligible for forgiveness. In addition, payroll costs incurred during this alternative payroll covered period are eligible for forgiveness as long as they are paid on or before the first regular payroll date occurring after August 1. Payroll costs that were both paid and incurred during the covered period (or alternative payroll covered period) may only be counted once.
Q: Are salary, wages, or commission payments to furloughed employees; bonuses; or hazard pay during the covered period eligible for loan forgiveness?
A: Yes. The PPP defines the term “payroll costs” broadly to include compensation in the form of salary, wages, commissions, or similar compensation. If a borrower pays furloughed employees their salary, wages, or commissions during the covered period, those payments are eligible for forgiveness if they do not exceed an annual salary of $100,000, as prorated for the covered period. Also, additional wages paid to tipped employees are eligible for forgiveness. Further, if an employee’s total compensation does not exceed $100,000 on an annualized basis, the employee’s hazard pay and bonuses are eligible for loan forgiveness because they constitute a supplement to salary or wages, and are thus a similar form of compensation.
Q: Are there caps on the amount of loan forgiveness available for owner-employees and self-employed individuals’ own payroll compensation?
A: Yes, the amount of loan forgiveness requested for owner-employees and self-employed individuals’ payroll compensation can be no more than the lesser of 8/52 of 2019 compensation (i.e., approximately 15.38 percent of 2019 compensation) or $15,385 per individual in total across all businesses. In particular, owner-employees are capped by the amount of their 2019 employee cash compensation and employer retirement and health care contributions made on their behalf.
The term “owner-employee” is new and has not yet been defined by the SBA. As a result, shareholders of S-Corporations or C-Corporations that paid low compensation amounts in 2019 may have limited forgiveness. This will also severely punish new businesses where owners may not have taken a full year of compensation or had limited earnings in 2019. Hopefully, future guidance will clarify that businesses that were not in operation for all of 2019 will be able to use some alternative calculation to apply this limitation.
Schedule C filers are capped by the amount of their owner compensation replacement, calculated based on 2019 net profit. General partners are capped by the amount of their 2019 net earnings from self-employment, limited to $100,000 as prorated for the 8-week period (reduced by claimed section 179 expense deduction, unreimbursed partnership expenses, and depletion from oil and gas properties) multiplied by 0.9235. No additional forgiveness is provided for retirement or health insurance contributions for self-employed individuals, including Schedule C filers and general partners, as such expenses are paid out of their net self-employment income.
In the event you were wondering where the 92.35% comes from, this percentage is from Form 1040 Schedule SE, which assesses Self-Employment Taxes on partnership income. Self-employment income is reduced to 92.35% of net partnership income or net Schedule C income to consider the “employer’s” share of payroll taxes (7.65% consisting of 6.2% social security and 1.45% Medicare). By multiplying partnership income by this percentage, payroll costs for partner’s self-employment income more closely resembles gross wages received by employees, which are not increased by the employer’s share of payroll taxes.
- Non payroll Costs Eligible for Loan Forgiveness
Q: When must nonpayroll costs be incurred and/or paid to be eligible for forgiveness?
A: A nonpayroll cost is eligible for forgiveness if it was:
- paid during the covered period; or
- incurred during the covered period and paid on or before the next regular billing date, even if the billing date is after the covered period.
Example: A borrower’s covered period begins on June 1 and ends on July 26. The borrower pays its May and June electricity bill during the covered period and pays its July electricity bill on August 10, which is the next regular billing date. The borrower may seek loan forgiveness for its May and June electricity bills, because they were paid during the covered period. In addition, the borrower may seek loan forgiveness for the portion of its July electricity bill through July 26 (the end of the covered period), because it was incurred during the covered period and paid on the next regular billing date. The SBA has determined that this interpretation provides an appropriate degree of borrower flexibility. The SBA also notes that the 25% cap on nonpayroll costs will avoid excessive inclusion of nonpayroll costs.
Q: Are advance payments of interest on mortgage obligations eligible for loan forgiveness?
A: No. Advance payments of interest on a covered mortgage obligation are not eligible for loan forgiveness because the CARES Act’s loan forgiveness provisions regarding mortgage obligations specifically exclude “prepayments.” Principal on mortgage obligations is not eligible for forgiveness under any circumstances.
- Reductions to Loan Forgiveness Amount
The PPP specifically requires certain reductions in a borrower’s loan forgiveness amount based on reductions in full-time equivalent employees or in employee salary and wages during the covered period, subject to an important statutory exemption for borrowers who have rehired employees and restored salary and wage levels by June 30, 2020 (with limitations). In addition, the SBA and Treasury are adopting a regulatory exemption to the reduction rules for borrowers who have offered to rehire employees or restore employee hours, even if the employees have not accepted. The instructions to the loan forgiveness application and the guidance below explains how the statutory forgiveness reduction formulas work.
Q: Will a borrower’s loan forgiveness amount be reduced if the borrower laid-off or reduced the hours of an employee, then offered to rehire the same employee for the same salary and same number of hours, or restore the reduction in hours, but the employee declined the offer?
A: No. Employees whom the borrower offered to rehire are generally exempt from the PPP’s loan forgiveness reduction calculation. This exemption is also available if a borrower previously reduced the hours of an employee and offered to restore the employee’s hours at the same salary or wages. Specifically, in calculating the loan forgiveness amount, a borrower may exclude any reduction in full-time equivalent employee headcount that is attributable to an individual employee if:
- the borrower made a good faith, written offer to rehire such employee (or, if applicable, restore the reduced hours of such employee) during the covered period or the alternative payroll covered period;
- the offer was for the same salary or wages and same number of hours as earned by such employee in the last pay period prior to the separation or reduction in hours;
- the offer was rejected by such employee;
- the borrower has maintained records documenting the offer and its rejection; and
- the borrower informed the applicable state unemployment insurance office of such employee’s rejected offer of reemployment within 30 days of the employee’s rejection of the offer.
A Footnote  indicates that further guidance on how borrowers will report rejected rehire offers to state unemployment insurance offices will be provided on the SBA’s website. The Rules have added a new requirement that employers will be required to report employees who do not come back to work and may be receiving the $600 a week federal unemployment compensation as part of the application process.
The PPP reduces the amount of the PPP loan that may be forgiven if the borrower reduces full-time equivalent employees during the covered period as compared to a base period selected by the borrower. The PPP waives this reduction in the forgiveness amount if the borrower eliminates the reduction in full-time equivalent employees occurring during a different statutory reference period (February 15 – April 26, 2020) by not later than June 30, 2020.
Q: What effect does a reduction in a borrower’s number of full-time equivalent (FTE) employees have on the loan forgiveness amount?
A: In general, a reduction in FTE employees during the covered period or the alternative payroll covered period reduces the loan forgiveness amount by the same percentage as the percentage reduction in FTE employees. The borrower must first select a reference period: (i) February 15, 2019 through June 30, 2019; (ii) January 1, 2020 through February 29, 2020; or (iii) in the case of a seasonal employer, either of the two preceding methods or a consecutive 12-week period between May 1, 2019 and September 15,2019. If the average number of FTE employees during the covered period or the alternative payroll covered period is less than during the reference period, the total eligible expenses available for forgiveness is reduced proportionally by the percentage reduction in FTE employees. For example, if a borrower had 10.0 FTE employees during the reference period and this declined to 8.0 FTE employees during the covered period, the percentage of FTE employees declined by 20 percent and thus only 80 percent of otherwise eligible expenses are available for forgiveness.
Q: What does “full-time equivalent employee” mean?
A: Full-time equivalent employee means an employee who works 40 hours or more, on average, each week. The hours of employees who work less than 40 hours are calculated as proportions of a single full-time equivalent employee and aggregated.
The PPP does not define the term “full-time equivalent employee,” and the SBA has determined that full-time equivalent is best understood to mean 40 hours or more of work each week. The SBA considered using a 30 hour standard, but determined that 40 hours or more of work each week better reflects what constitutes full-time employment for the vast majority of American workers.
Q: How should a borrower calculate its number of full-time equivalent (FTE) employees?
A: Borrowers seeking forgiveness must document their average number of FTE employees during the covered period (or the alternative payroll covered period) and their selected reference period. For purposes of this calculation, borrowers must divide the average number of hours paid for each employee per week by 40, capping this quotient at 1.0. For example, an employee who was paid 48 hours per week during the covered period would be an FTE employee of 1.0. For employees who were paid for less than 40 hours per week, borrowers may choose to calculate the full-time equivalency in one of two ways. First, the borrower may calculate the average number of hours a part-time employee was paid per week during the covered period. For example, if an employee was paid for 30 hours per week on average during the covered period, the employee could be an FTE employee of 0.75. Similarly, if an employee was paid for ten hours per week on average during the covered period, the employee could be an FTE employee of 0.25. Alternatively, for administrative convenience, borrowers may elect to use a full-time equivalency of 0.5 for each part-time employee.
Borrowers may select only 1 of these 2 methods and must apply that method consistently to all of their part-time employees for the covered period or the alternative payroll covered period and the selected reference period. In either case, the borrower shall provide the aggregate total of FTE employees for both the selected reference period and the covered period or the alternative payroll covered period, by adding together all the employee-level FTE employee calculations. The borrower must then divide the average FTE employees during the covered period, or the alternative payroll covered period by the average FTE employees during the selected reference period, resulting in the reduction quotient.
Q: What effect does a borrower’s reduction in employees’ salary or wages have on the loan forgiveness amount?
A: Under the PPP, a reduction in an employee’s salary or wages in excess of 25% will generally result in a reduction in the loan forgiveness amount, unless an exception applies. Specifically, for each new employee in 2020 and each existing employee who was not paid more than the annualized equivalent of $100,000 in any pay period in 2019, the borrower must reduce the total forgiveness amount by the total dollar amount of the salary or wage reductions that are in excess of 25% of base salary or wages between January 1, 2020 and March 31, 2020 (the reference period), subject to exceptions for borrowers who restore reduced wages or salaries (see below). This reduction calculation is performed on a per employee basis, not in the aggregate.
Example: A borrower reduced a full-time employee’s weekly salary from $1,000 per week during the reference period to $700 per week during the covered period. The employee continued to work on a full-time basis during the covered period with an FTE of 1.0. In this case, the first $250 (25 percent of $1,000) is exempted from the reduction. Borrowers seeking forgiveness would list $400 as the salary/hourly wage reduction for that employee (the extra $50 weekly reduction multiplied by eight weeks). The PPP provides that “the amount of loan forgiveness shall be reduced by the amount of any reduction in total salary or wages of any employee [who did not receive, during any single pay period during 2019, wages or salary at an annualized rate of pay in an amount more than $100,000] during the covered period that is in excess of 25 percent of the total salary or wages of the employee during the most recent full quarter during which the employee was employed before the covered period.”
Q: How should borrowers seeking loan forgiveness account for the reduction based on a reduction in the number of employees relative to the reduction relating to salary and wages?
A: To ensure that borrowers are not doubly penalized, the salary/wage reduction applies only to the portion of the decline in employee salary and wages that is not attributable to the FTE reduction.
The PPP does not address the intersection between the FTE employee reduction provision and the salary/wage reduction provision. To help ensure uniformity across all borrowers in applying the FTE reduction provision and the salary/wage reduction provision, the SBA has determined that the salary/wage reduction applies only to the portion of the decline in employee salary and wages that is not attributable to the FTE reduction. This approach will help ensure that borrowers are not doubly penalized for reductions.
Example: An hourly wage employee had been working 40 hours per week during the borrower selected reference period (FTE employee of 1.0) and the borrower reduced the employee’s hours to 20 hours per week during the covered period (FTE employee of 0.5).
There was no change to the employee’s hourly wage during the covered period. Because the hourly wage did not change, the reduction in the employee’s total wages is entirely attributable to the FTE employee reduction and the borrower is not required to conduct a salary/wage reduction calculation for that employee.
Q: If a borrower restores reductions made to employee salaries and wages or FTE employees by not later than June 30, 2020, can the borrower avoid a reduction in its loan forgiveness amount?
A: Yes. The PPP provides that if certain employee salaries and wages were reduced between February 15, 2020 and April 26, 2020 (the safe harbor period) but the borrower eliminates those reductions by June 30, 2020 or earlier, the borrower is exempt from any reduction in loan forgiveness amount that would otherwise be required due to reductions in salaries and wages. Similarly, if a borrower eliminates any reductions in FTE employees occurring during the safe harbor period by June 30, 2020 or earlier, the borrower is exempt from any reduction in loan forgiveness amount that would otherwise be required due to reductions in FTE employees.
Q: Will a borrower’s loan forgiveness amount be reduced if an employee is fired for cause, voluntarily resigns, or voluntarily requests a schedule reduction?
A: No. When an employee of the borrower is fired for cause, voluntarily resigns, or voluntarily requests a reduced schedule during the covered period or the alternative payroll covered period (FTE reduction event), the borrower may count such employee at the same full-time equivalency level before the FTE reduction event when calculating the FTE employee reduction penalty.
The SBA has determined that such an exemption is de minimis, because a limited number of borrowers will face an FTE reduction event during the covered period, or the alternative payroll covered period. Further, borrowers should not be penalized for changes in employee headcount that are the result of employee actions and requests. Borrowers that avail themselves of this de minimis exemption shall maintain records demonstrating that each such employee was fired for cause, voluntarily resigned, or voluntarily requested a schedule reduction. The borrower shall provide such documentation upon request.
This raises the question as to whether borrowers will be penalized for a headcount reduction in situations where employees have died or are incapacitated as a result of the virus or other circumstances. Do they have to make an offer to rehire such employee and document that it cannot be accepted with a death certificate? It may be possible that the above emphasized language can be used to show that the reduction due to death was not due to an employer action and that no reduction in loan forgiveness should occur.
- Documentation Requirements
Q: What must borrowers submit for forgiveness of their PPP loans?
A: The loan forgiveness application form details the documentation requirements; specifically, documentation each borrower must submit with its Loan Forgiveness Application (the SBA Form 3508 or a lender equivalent), documentation each borrower is required to maintain and make available upon request, and documentation each borrower may voluntarily submit with its loan forgiveness application. The PPP requires borrowers to submit to their lenders an application, which includes certain documentation, and they shall not receive forgiveness without submitting the required documentation. For purposes of administrative convenience for both lenders and borrowers, the SBA has determined that requiring borrowers to submit certain documentation, maintain certain documentation, and choose whether to submit additional documentation will reduce initial reporting burdens on borrowers and reduce initial recordkeeping burdens on lenders.
- Additional Information
The SBA may provide further guidance, if needed, through the SBA notices that will be posted on the SBA’s website at www.the SBA.gov.