The “Paycheck Protection Program Flexibility Act of 2020” (the “PPPFA”) was signed into law by President Trump on June 5, 2020, and to date, the SBA and Treasury subsequently released the following guidance:
Interim final rules
- Integrating the PPPFA, modifying provisions relating to loan maturity, deferral of loan payments, and forgiveness provisions (June 11, 2020);
- Providing guidance on how to calculate owner compensation, employee compensation and non-payroll costs (June 17, 2020),
- General process to obtain loan forgiveness, deferral period and forgiveness, (June 22, 2020)
Two versions of the PPP loan forgiveness application (June 17, 2020)
- EZ Forgiveness Application; and
- Updated Full Forgiveness Application
This Briggs & Veselka update provides an introduction to the new EZ Forgiveness Application, bridges the gap of our understanding of the Full Forgiveness Application and provides a brief summary of the guidance included in the most recent new interim final rules, and supplements prior guidance we have communicated related to the PPP.
The information contained in this update is subject to change at any time, and we encourage all readers to consult the SBA website directly for the latest official PPP documentation and guidance.
The Application – “EZ Forgiveness”
The EZ Forgiveness Application is a three-page application for borrowers seeking PPP loan forgiveness through their lenders. Borrowers eligible to use the EZ Forgiveness Application must meet ONE of the following requirements:
- Self-employed (individuals, independent contractors or sole proprietors) borrowers that have no employees at the time of PPP loan application and did not include any employee salaries in their computation of average monthly payroll in its PPP application;
- Borrowers who did not reduce the salaries or wages of their employees by more than 25% during the covered period compared to the first quarter of 2020, and did not reduce the number or hours of their employees between January 1, 2020 and the end of the covered period (excluding reductions from inability to rehire employees who were employees on February 15, 2020, if the borrower was unable to hire similarly qualified employees for unfilled positions on or before December 31, 2020 and reductions in an employee’s hours that the borrower offered to restore and the employee refused); or
- Borrowers who experienced reductions in business activity since February 15, 2020, as a result of compliance with health directives related to COVID-19, and did not reduce the annual salaries or hourly wages of any of their employees by more than 25% during the covered period or the alternative payroll covered period compared to the first quarter of 2020.
If a borrower meets one of these defined requirements, then the forgiveness adjustment calculations for full time equivalents (FTEs) headcount reduction or for salary reductions are not required.
The EZ Forgiveness Application is intended to allow for a simpler, more efficient process when applying for forgiveness.
Updated Full Forgiveness Application
The updated Full Forgiveness Application reflects changes in PPP made by the PPPFA including the following highlights:
- Extension of the PPP safe harbor date to December 31, 2020 from June 30,2020;
- Extension of the covered period during which the borrower must spend PPP loan funds to qualify for forgiveness from 8 weeks to up to 24 weeks;
- Non-payroll costs allowed for forgiveness increased to 40% from 25% and requires borrowers to spend at least 60% (previously 75%) of the forgiveness amount on payroll costs;
- Allowance for a forgiveness exemption for borrowers who reduced full-time equivalent employees if the borrower was unable to rehire FTEs or return to the same level of business activity as before the COVID-19 crisis;
- Extends the payment deferral period from 6 months to the date the SBA remits the forgiveness amount to the lender;
- Allows PPP borrowers with forgiven loans to also defer payroll taxes; and
- Maturity date extension of new PPP loans that are not forgiven to 5 years from 2 years for loans funded after June 5th. Lenders and borrowers may mutually agree to modify PPP loans made before such date to reflect the longer maturity.
When can the loan forgiveness application be submitted?
The Flexibility Act provides that a borrower must apply for forgiveness within 10 months after the last day of the covered period or the PPP loan is no longer deferred and the borrower must start paying the principal and interest on the loan.
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 the borrower is requesting forgiveness.
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 percent, the borrower must account for the excess salary reduction for the full 8-week or 24-week period.
Based on this wording, it can be interpreted that the safe harbor date is the date by which the application is submitted for their FTE calculation.
Specifically, the FTE Safe Harbor calculation on the PPP Forgiveness Application allows borrowers to enter their total FTE as of the earlier of December 31, 2020 and the date the application is submitted.
Further Updates on Safe Harbor
The PPPFA allowed for additional considerations associated with loan forgiveness and FTE reductions. These considerations are summarized below:
FTE Reduction Safe Harbor 1
No reduction in loan forgiveness based on FTE employees if borrower can document an inability to operate between February 15, 2020, and end of the covered period at the same level of business activity as prior to February 15, 2020 due to compliance with governing bodies.
FTE Reduction Safe Harbor 2
No reduction in loan forgiveness based on FTE employees if the borrower reduced FTE between February 15, 2020, and April 26, 2020, and the borrower restored its FTE employee levels by no later than December 31, 2020, to its FTE employee levels.
CAPs on Owner/Employee Compensation during the covered period.
Forgiveness with owner compensation replacement is calculated for the eight-week period as 8/52 × 2019 net profit, up to a maximum of $15,385.
For the 24-week period, the forgiveness calculation is limited to 2.5 months’ worth (2.5/12) of 2019 net profit, up to $20,833 per owner in total across all businesses, but excluding any qualified sick leave equivalent amount or qualified family leave equivalent amount claimed under Families First Coronavirus Response Act.
See the summary of caps for loan forgiveness to owners within the table below:
Owner/Employee Compensation CAPS Summary Table
|8-week forgiveness period CAP||24-week forgiveness period CAP||Benefits to Include in Forgiveness|
|C-Corp||Lessor of 8/52 of 2019 cash compensation or $15,385||Lessor of 5/24 of 2019 compensation or $20,833||Employer paid health insurance and retirement contributions for owner/employees|
|S-Corp||Lessor of 8/52 of 2019 cash compensation or $15,385||Lessor of 5/24 of 2019 compensation or $20,833||Employer paid retirement contributions for owner/employees|
|Sch CSch F||Lessor of 8/52 of owner compensation based on 2019 net profit or $15,385||Lessor of 5/24 of owner compensation based on 2019 net profit or $20,833||None|
|Partnership GPs||Lessor of 8/52 of net earnings from self-employment X 0.9235 or $15,385||Lessor of 5/24 of net earnings from self-employment X 0.9235 or $20,833||None|
Borrowers who were not certain of when and how to apply for loan forgiveness now have a clearer path with the SBA’s new streamlined forgiveness application forms and can look to apply for forgiveness once their coverage period ends or after all funds have been used.
While there still remain gray areas of interpretation of the guidance, the PPPFA and subsequent rules provide borrower flexibility in using the funds and applying for and achieving full forgiveness.
The deadline for “new PPP loan applicants” is rapidly approaching, appearing to end on June 30, 2020, and there are still funds available for business owners who need funding.