The Treasury Department and the SBA have released new interim final rules, a new how-to FAQ and other revised FAQs to further explain how the PPP loan rules work. The clarifications relating to loan maturity, calculation of loan forgiveness amounts by business type and FTE reduction exemptions explained below may be especially helpful to businesses considering the extended application deadline for PPP, which is expected to be extended to August 8, 2020, to give businesses time to claim the remaining $130 billion in funding. Both houses passed the bill, S. 4116, by unanimous consent, and the President is expected to sign it.
Loan Maturity and Deferral Period
Implementing the changes that came into play with the Payroll Protection Program Flexibility Act, the interim rules and FAQs explain that all PPP loans that received an SBA loan number on or after June 5, 2020, will automatically have a five-year maturity. For PPP loans that received an SBA loan number before the June 5 program changes, the loan will have a two-year maturity unless the borrower and lender mutually agree to extend the term of the loan to five years. The promissory note for the loan will state the term of the loan.
A borrower may submit a loan forgiveness application if the borrower has used all of the loan proceeds to be forgiven. If the borrower applies for forgiveness before the end of the covered period and has reduced any employee’s salaries or wages in excess of 25%, the borrower must include the excess salary reduction for the full 8-week or 24-week covered period.
Example: A borrower is using a 24-week covered period. This 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% of $1,000) is exempted from the loan forgiveness reduction. The borrower would list $1,200 as the wage reduction for that employee (the extra $50 weekly beyond the 25% threshold reduction multiplied by 24 weeks). If the borrower applies for forgiveness before the end of the covered period, it must account for the salary reduction for the full 24-week covered period (totaling $1,200).
10 Months to Apply. If the borrower does not apply for loan forgiveness within 10 months after the last day of the covered period, or if SBA determines that the loan is not eligible for forgiveness (in whole or in part), the PPP loan is no longer deferred and the borrower must begin paying principal and interest.
Example: If a borrower’s PPP loan is disbursed on June 25, 2020, the 24-week period ends on December 10, 2020. If the borrower does not submit a loan forgiveness application by October 10, 2021, the borrower must begin making payments on or after October 10, 2021.
The CAREs Act requires reductions in a borrower’s loan forgiveness amount based on reductions in full-time equivalent employees, or in employee salary and wages. The Flexibility Act includes an important exemption for borrowers that have returned to pre-COVID salary and wages by December 31, 2020, and offers other exemptions based on employee availability and business activity. In addition, SBA and Treasury have adopted a regulatory exemption to the reduction rules for borrowers that have offered to restore employee hours at the same salary or wages, even if the employees have not accepted. Here are the details for these exemptions.
Inability to Rehire
Loan forgiveness will not be reduced if an eligible recipient is able to document good faith efforts to rehire. Exceptions include (i) an inability to rehire individuals who were employees on February 15, 2020; and (ii) an inability to hire similarly qualified employees for unfilled positions on or before December 31, 2020.
Borrowers are required to inform the applicable state unemployment insurance office of any employee’s rejected rehire offer within 30 days of the employee’s rejection of the offer. Borrowers should maintain documents to show compliance with this exemption, including the written offer to rehire an individual, a written record of the offer’s rejection, and a written record of efforts to hire a similarly qualified individual.
Reduction in Hours
Similar to rehire efforts, reductions in FTEs will not apply if:
- the borrower made a good faith, written offer to restore the reduced hours of the employee;
- the offer was for the same salary or wages and the same number of hours as earned by the employee in the last pay period prior to the reduction in hours;
iii. the offer was rejected by the employee; and
- the borrower has maintained records documenting the offer and its rejection.
Reduced Business Activity
Loan forgiveness also will not be reduced if a borrower is able to document an inability to return to the same level of business activity as occurred before February 15, 2020, due to compliance with federal agency requirements or guidance. Compliance requirements beginning March 1, 2020, and ending December 31, 2020, related to sanitation, social distancing, or worker or customer safety requirements for COVID–19 fall under this exemption. State requirements will be considered if they are based on federal guidance.
Example: A PPP borrower sells beauty products both online and at its physical store. During the covered period, the local government where the borrower’s store is located orders all non-essential businesses, including the borrower’s business, to shut down based in part on COVID–19 guidance issued by the CDC in March 2020. Because the borrower’s business activity was reduced due to compliance with federal COVID guidance, the borrower will not have its forgiveness amount reduced. The borrower must maintain records on the reduction in business activity and the local government’s shutdown orders that reference a COVID requirement.
Owner-Employees and Self-Employed Payroll Costs
The new rules include a favorable clarification regarding payroll costs eligible for forgiveness. For borrowers who select a 24-week covered period, the $100,000 maximum payroll costs are annualized over the 24-week period for a maximum of $46,154 per individual. If a borrower chooses an 8-week covered period, the payroll maximum remains at $15,385 per individual.
Forgivable amounts include covered benefits for employees, but not for some owners. These include health care expenses, retirement contributions and state taxes imposed on employee payroll paid by the employer, such as unemployment insurance premiums.
While the interim rules on PPP forgiveness limitations have been favorable for some borrowers, some recent clarifications for the self-employed and owner-employees are not as beneficial.
For self-employed individuals and owner-employees, the loan forgiveness cap is the lower of $15,385 or 8/52 of 2019 compensation for an 8-week covered period. For a 24-week covered period, the calculation is 2.5/12 x 2019 compensation up to a max of $20,833. These limits are applied across all businesses. Additional rules on compensation add-ons apply for different business entities as follows.
C Corporation Owner-Employees: For C Corporation owner-employees, payroll amounts are capped by the amount of their 2019 employee cash compensation and employer retirement and health insurance contributions made on their behalf.
S Corporation Owner-Employees: S Corporation owners’ payroll amounts are capped by the amount of their 2019 employee cash compensation and employer retirement contributions made on their behalf, but employer health insurance contributions cannot be separately added because those payments are already included in their employee cash compensation.
Schedule C or F filers: The eligible payroll amounts for these owners 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 (reduced by claimed Section 179 expense deductions, unreimbursed partnership expenses, and depletion from oil and gas properties) multiplied by 0.9235. For self-employed individuals, including Schedule C or F filers and general partners, retirement and health insurance contributions are included in their net self-employment income and therefore cannot be separately added to their payroll calculation.
Maximum Loan Amounts
Treasury and SBA also revised the information on how to calculate maximum loan amounts for different business types, including the self-employed, partnerships, S and C Corporations, and nonprofits. The new information in FAQ 10 applies to self-employed individuals:
1) with a business that was in operation on February 15, 2020, but was not in operation between February 15, 2019, and June 30, 2019, and
2) who file a Schedule C or Schedule F for 2020.
The maximum PPP loan allowed is equal to 2.5 times the average monthly payroll costs incurred in January and February 2020, plus the outstanding amount of any EIDL loan received between January 31, 2020, and April 3, 2020, that will be refinanced by the PPP loan.
The new guidance clears up a number of issues regarding loan forgiveness and loan maturity. It is important to note that an accurate calculation of the loan forgiveness amount is the responsibility of the borrower. Borrowers should already be working on these calculations.
The explanation of maximum loan amounts for different entities is especially helpful now that the loan application deadline will be extended until August 8th. That means new loan availability for borrowers who missed out the first time.
The SBA has issued a report on the number of loans given by amounts, industry, and geographic location. The report shows that California and Texas lead the pack in total loan dollar amounts by state. Health care and social assistance businesses had the highest percentage of loans by the NAICS sector. For more information on the loans already given, see the SBA’s Paycheck Protection Program report.
The recent clarifications for PPP offer small businesses greatly improved conditions for taking advantage of this COVID relief program. While the rules are complex the changes are generally favorable to borrowers who now have more time to return to pre-COVID payroll levels and have clear rules for exemptions to FTE requirements. If you have questions about navigating the the path to loan forgiveness, reach out to Frazier & Deeter’s team of PPP loan experts today to discuss your unique situation.