What PPP Loan Borrowers Need to Know: EZ Loan Forgiveness & Changes in the Loan Forgiveness Process
June 25, 2020
By: Eric N. Fischer, Rod Kubat
On June 16, 2020 SBA published an updated Loan Forgiveness Application and instructions and introduced a new EZ form of the Loan Forgiveness Application. The EZ application and other changes are intended to implement the Paycheck Protection Program Flexibility Act (the “Flexibility Act”). SBA has also released a revised Interim Final Rule on Revisions to Loan Forgiveness Interim Final Rule and SBA Loan Review Procedures (the “Revised Interim Final Rule”).
The revised Loan Forgiveness Application provides an option for borrowers to use the twenty four-week covered period. The revised application also lowers the threshold for the amount of forgivable costs spent on payroll costs from 75% to 60%. The revised application grants Borrowers additional flexibility to restore salary and hourly wage reductions of greater than 25% as of the earlier of December 31, 2020 and the date the forgiveness application is submitted. This favorable clarification allows borrowers to determine the best time to measure average annual salary or hourly wages between now and calendar year-end.
The EZ Loan Forgiveness Application does not require a borrower to submit detailed compensation and hours information for each of its employees and only reduces loan forgiveness for a failure to spend at least 60% of forgivable expenses on payroll costs. Borrowers can use the new EZ Loan Forgiveness Application if they satisfy at least one of the following criteria:
- The borrower is a self-employed individual, independent contractor, or sole proprietor who did not have employees at the time of its PPP loan application and did not include any employee salaries in computing its maximum loan amount;
- The borrower (a) did not reduce annual salary/wages of any employee (considering only those who did not receive an annualized rate of pay in excess of $100,000 in any 2019 pay period) by more than 25% during the Covered Period or Alternative Payroll Covered Period when compared to the period between January 1, 2020 and March 31, 2020, and (b) did not reduce the number of employees or average paid hours of employees between January 1, 2020 and the end of the Covered Period (ignoring certain reductions due to an inability to rehire or due to the employee refusing hours); or
- The borrower (a) did not reduce annual salary/wages of any employee (considering only those who did not receive an annualized rate of pay in excess of $100,000 in any 2019 pay period) by more than 25% during the Covered Period or Alternative Payroll Covered Period when compared to the period between January 1, 2020 to March 31, 2020, and (b) was unable to operate its business during the Covered Period at the same level of business activity as before February 15, 2020 due to compliance with federal health and safety requirements or guidance related to COVID-19 (the “Compliance Safe Harbor”).
The Revised Interim Final Rule indicates that borrowers taking advantage of the Compliance Safe Harbor must be able to certify that they have documented in good faith that their reduction in FTE was related directly or indirectly to applicable federal health and safety requirements. Documentation should include the applicable health and safety requirements for each business location and relevant borrower financial records. The Revised Interim Final Rule clarifies that the Compliance Safe Harbor includes state and local health and safety requirements and guidance that are based upon guidance from the CDC, OSHA and HHS. Because of the broad impact of the direct and indirect health and safety requirements, the Compliance Safe Harbor simplifies loan forgiveness for many borrowers.
The Revised Interim Final Rule clarifies and makes modifications to the forgivable limits of owner-employee, self-employed and partner payroll compensation. For borrowers that received a PPP loan before June 5, 2020 and elect to use an eight-week covered period, the amount of loan forgiveness requested for owner-employees and self-employed individuals’ payroll compensation is capped at eight weeks’ worth of 2019 compensation or $15,385 per individual, whichever is less. For all other borrowers, the amount of loan forgiveness available for owner-employees and self-employed individuals is capped at 2.5 months’ worth of 2019 compensation or $20,833, whichever is less. C-corporation owner-employees are capped by the amount of their 2019 employee cash compensation, employer retirement and health insurance contributions made on their behalf. S-corporation owner-employees are capped by their 2019 employee cash compensation and employer retirement contributions, but employer health insurance contributions cannot be separately added because they are already included in employee cash compensation. General partners are capped by the amount of their 2019 net earnings from self-employment (reduced by claimed section 179 expense deduction, unreimbursed partnership expenses, and depletion from oil and gas properties) multiplied by 0.9235.
In the event you have follow up questions on the Payroll Protection Program Flexibility Act or have other questions about the Paycheck Protection Program or other COVID-19 related relief, please contact your Nyemaster Goode attorney.