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SBA Simplifies the Loan Forgiveness Application, Introduces EZ Option

On the heels of congressional action that makes the Paycheck Protection Program (PPP) more flexible to use, the SBA and Treasury Department have unveiled a simplified full loan forgiveness application form along with an EZ version of the form.

Background

The PPP helps small business owners and other individuals adversely affected by the COVID-19 pandemic. In particular, the loans provided through the program are forgivable as long as borrowers retain their employees on payroll for a defined number of weeks.

Congress acted to expand the program after complaints by small business owners, who said they could not access the loans. Since then, eligibility and forgiveness criteria has undergone a number of changes, causing loan applications to slow down.

PPP Flexibility Act

The PPP Flexibility Act, which became law June 5, 2020, triples the number of weeks business owners have to use the loans, from eight weeks to 24 weeks, while retaining full loan forgiveness protection. The Act allows business owners the ability to spend more of the loans for overhead expenditures, while still requiring 60% to be used for payroll.

New SBA Loan Forgiveness Applications

The SBA’s new loan forgiveness application addresses the changes noted above. In addition to streamlining the full application, there is a new EZ version of the application that calls for less documentation and fewer calculations.

Full Application Form Revisions

Borrowers who received loans before June 5, 2020 can choose between using the original eight-week covered period or the new 24-week covered period.
S corporation owners can include retirement costs when calculating payroll cost, but they cannot include health insurance costs
Borrowers do not have to wait until Dec. 31, 2020 to apply to use safe harbors for excluding salary and hourly wage reduction, and reduction in the number of employees from loan forgiveness reductions. The safe harbors can be applied as of the date of the loan forgiveness application.

EZ Form Provisions

Borrowers can use the EZ form if:

They are self-employed or have no employees; or
Did not reduce salaries or wages of their employees by more than 25%, and did not reduce the number or hours of their employees; or
They experienced decreased business because of health directly related to COVID-19, and did not reduce the salaries or wages of their employees by more than 25%.

Each application provides borrowers the choice of using the original eight-week period, if their loan was made prior to June 5, 2020, or the new 24-week period under the PPP Forgiveness Act.

The revisions to the PPP loan forgiveness application had bipartisan support from members of Congress, who expressed concern that the complexity of the form was keeping eligible business owners from applying. There is still roughly $125 billion left in the PPP, and the program continues through June 30, 2020.

New SBA Interim Final Rule Summarized by the AICPA

Tuesday night, June 16th, the SBA issued an interim final rule, which contained rules for determining payroll costs and owner compensation in calculating PPP loan forgiveness under the new 24-week covered period.

The Paycheck Protection Flexibility Act tripled the duration during which PPP recipients could spend the funds and still qualify for loan forgiveness — a span of time called the covered period. The interim final rule adjusts and adds to previous guidance for calculating loan forgiveness under the original eight-week covered period.

The PPP allows loan forgiveness for payroll costs — including salary, wages, and tips — for up to $100,000 annualized per employee, or $15,385 per individual over the eight-week period. The new interim final rule establishes the 24-week maximum for full loan forgiveness at $46,154 per individual.

Owner Compensation Replacement Calculations Summarized by the AICPA

While the employee compensation limit for the 24-week period is three times the eight-week limit, the interim final rule does not do the same with the owner compensation replacement for businesses that file Schedule C, Profit or Loss From Business, or Schedule F, Profit or Loss From Farming, tax returns. For those businesses, forgiveness for the 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.

The owner compensation replacement calculations are structured to prevent owners from reaping PPP windfalls that Congress did not intend, according to the interim final rule. Specifically, the SBA and Treasury, which oversee the PPP, want to prevent the following scenario, which is made possible by a provision in the Paycheck Protection Flexibility Act that provides a safe harbor from loan forgiveness reductions to any borrower that is unable to return to the same level of business activity it was operating at before Feb. 15, 2020.

Because the maximum loan amount for a business is generally based on 2.5 months of the borrower’s average total monthly payroll costs during the one-year period preceding the loan, a borrower with one other employee would receive a maximum loan amount equal to five months of payroll (2.5 months of payroll for the owner plus 2.5 months of payroll for the employee). If the owner laid off the employee and availed itself of the aforementioned safe harbor, the owner could treat the entire amount of the PPP loan as payroll, with the entire loan forgiven.

“This would not only result in a windfall for the owner, by providing the owner with five months of payroll instead of 2.5 months, but also defeat the purpose of the CARES Act of protecting the paycheck of the employee,” the interim final rule says. “For borrowers with no employees, this limitation will have no effect, because the maximum loan amount for such borrowers already includes only 2.5 months of their payroll.”

Other IFR Provisions Summarized by the AICPA

The interim final rule also modifies earlier guidance to account for changes included in the Payroll Protection Flexibility Act.

The minimum term for PPP loans is raised to five years for all loans made on or after June 5. For loans made before June 5, the two-year minimum maturity remains in effect unless both the borrower and the lender agree to extend it to five years.
The proportion of PPP funding that must be used on payroll costs to qualify for full forgiveness drops to 60% from 75%.
The application deadline for PPP loans remains June 30.

Further Guidance

The SBA will be issuing additional revisions to its interim final rules on loan forgiveness and loan review procedures. If you need help or have questions, reach out to ALL’s PPP team leaders Vasant Nagda, CPA or Andrew Dieffenbach, CPA, CVA or contact us here.