New SBA Interim Final Rule Offers Further Guidance on PPP Loan Forgiveness

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As noted in an prior post, the Small Business Administration, (SBA), in consultation with the Treasury, recently issued further guidance on the Paycheck Protection Program (PPP) created under the Coronavirus Aid, Relief and Economic Security (CARES) Act. The guidance was released in a new Interim Final Rule issued by the SBA and Treasury on June 22,2020. That release marks the 19th Interim Final Rule regarding the PPP.

The primary emphasis of the new guidance is on the forgiveness elements of the loan program and especially those changes that have been enacted as part of the Paycheck Protection Program Flexibility Act of 2020 (PPP Flexibility Act), which became law on June 5. This Act was passed with the intention of easing the burden on employer/borrowers under the original PPP in obtaining forgiveness.

The major changes incorporated in the PPP Flexibility Act are highlighted below. (See related post for more details)

  • Expands the covered period during which PPP loan recipients can spend the funds and still qualify for loan forgiveness to 24 weeks (from eight weeks.) The 24-week period is fixed for all loans made on or after June 5, 2020. Borrowers that received loans before that date may choose to elect an eight-week period.
  • Reduces the proportion of PPP funding that must be used on payroll costs to qualify for full forgiveness to 60% (from the 75% requirement set forth in earlier SBA guidance issued in April.)
  • Expands the term for new loans created as a result of not being granted total loan forgiveness to five years (from two years) for loans obtained after the date of enactment. Borrowers with loans received before June 5, 2020, can negotiate to extend their loan term to five years if their lender agrees.
  • Confirms that it is the employer’s/borrower’s responsibility to provide an accurate and complete calculation of the loan forgiveness requested in the application.
  • Confirms that any advance payments made under the SBA’s Economic Injury Disaster Loan (EIDL) program will be deducted in computing those amounts eligible for PPP loan forgiveness.

Prior to the release of this guidance, earlier guidance was issued by the SBA in response to passage of the PPP Flexibility Act, including an updated application for loan forgiveness. This guidance addressed many of the same items noted above. (see related post) However, many questions had arisen regarding “early” application for loan forgiveness given the expanded 24-week covered period. The new guidance addresses this important question.

Clarification regarding “early” application for loan forgiveness

The key question related to early application centered on whether an employer/borrower can apply for loan forgiveness prior to the expiration of the full 24-week covered period if all other requirements for loan forgiveness have been met. The new guidance includes a provision on this matter that allows an employer/borrower to apply for loan forgiveness before the end of the covered period, if the employer/borrower has used all of the loan proceeds for which forgiveness is being sought.

However, the rule adds an important caveat. It states that in applying for loan forgiveness early, if the employer/borrower has reduced any employees’ salaries or wages by more than the 25% allowed for full forgiveness, (and unchanged by the Flexibility Act or the new guidance) the employer/borrower must account for the excess salary reduction for the full eight-week or 24-week covered period, whichever one applies to its loan.

In effect, early application results in a forfeiture of the employer’s/borrower’s right to utilize the safe harbor salary and wage restoration date of December 31, 2020. By way of example, assume an employer/borrower has a covered period that is slated to end in October, but wishes to apply for loan forgiveness in late August. Any wage and salary reduction in excess of the 25% threshold enacted as part of the CARES Act would have to be calculated for the entire 24-week period, even if the employer/borrower had restored wages and salaries to prior levels by December 31, 2020.

The new Interim Final Rule provides an example of the mechanics of this calculation:

  • A borrower is using a 24-week covered period.
  • This borrower reduced the weekly salary of a full-time employee (FTE) from $1,000/week during the reference period to $700/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 seeking forgiveness would list $1,200 (the extra $50 weekly reduction multiplied by 24 weeks) as the salary/hourly wage reduction for that employee.
  • If the borrower applies for loan 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).

The new Interim Final Rule also clarifies and confirms earlier guidance in two circumstances:

  • Employer health insurance contributions for S corporation owners cannot be included when calculating payroll costs; however, employer retirement contributions for S corporation owners are eligible costs.
  • For owner-employees and self-employed individuals (including those who file Schedule C, Profit or Loss From Business, or Schedule F, Profit or Loss From Farming), forgiveness for owner compensation is calculated for the eight-week period as 8 ÷ 52 × 2019 compensation, up to a maximum of $15,385, in total for all businesses. For the 24-week period, the forgiveness calculation is limited to 2.5 months’ worth (2.5 ÷ 12) of 2019 compensation, up to $20,833, also in total for all businesses.

Other Developments

Just yesterday, June 29, 2020, AICPA Executive Director Barry Melancon reiterated during a national conference call that the SBA continues to be involved in the development of further PPP guidance and that the SBA continues to hold a substantial quantity (20-30) of frequently asked questions (FAQs), which have been in progress for some time but have yet to be released. No information on a release date is available.

Finally, in the course of his call, Mr. Melancon noted that the matter of federal deductibility of expenses paid with PPP loan proceeds continues to be discussed in Congress and that the incentive has broad bipartisan support in both Chambers of Congress. At this time, the Treasury is looking for Congress to legislate the one-time allowance of these expenses as to do so through a Treasury directive would possibly be interpreted as a rule-making precedent.

We will, of course, post additional information on the PPP loan forgiveness developments as they break. In the interim, should you have questions or comments, please contact Bob Grossman, Don Johnston or Mike Weber at 412-338-9300.

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