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New Guidance on SBA PPP Loan Forgiveness

The SBA has issued additional guidance and new forms for the forgiveness of PPP loans. A portion of this guidance is to adjust the program for the Paycheck Protection Flexibility Act of 2020. However, the guidance also makes other changes to the program. In addition, the SBA released two different forms that can be used to apply for loan forgiveness.

New Guidance

There are two changes that modify the economics of the program for many businesses. The first is that a business can effectively use a covered period that is between the eight-week period in the initial law and the 24-week period in the new law. The form and instructions provide that the business can apply for forgiveness before the end of the 24-week covered period. If the business does so, the forgiveness application includes the activity through the date of the application and only takes into account changes in FTEs or wages through that date. Also, the exception to the FTE rule for the business being limited by the COVID-19 restrictions applies if the restrictions have gone through the date of the forgiveness application.

For example, assume that it takes a business twelve-weeks to spend enough funds on qualified purposes for full PPP loan forgiveness. If that business is still limited due to the COVID-19 restrictions at the end of that twelve-week period, it can apply for the loan forgiveness at the end of the period. Since it is still subject to the operating limitations at the end of the period, it qualifies for the exception to the FTE reduction calculation. That means that the business will receive the full forgiveness if they file the application then. If the business is later able to fully open before the end of 2020 but does not restore its FTE count, those facts don’t appear to affect the loan forgiveness. However, if the business waits to file the loan forgiveness application until after it is allowed to fully reopen, the FTE exception would no longer apply. The date that the business files for the loan forgiveness can change the amount of loan forgiveness.

The second significant change is a modification to the calculation of wages or income of a business owner. The maximum period that an owner’s wages or income can be calculated toward loan forgiveness is now 2½ months. Thus, the maximum compensation of an owner that can be counted toward debt forgiveness is $20,833. In addition, the guidance indicates that non-cash benefits paid to owners are not included in the forgivable expenses. This would preclude loan forgiveness for owner health care premiums, retirement contributions, or state taxes that are paid for an owner. The previous guidance allowed these costs for owners but included them in the amount subject to the limit based on annualized $100,000 pay. It isn’t clear that the SBA intended to change that treatment. If they did not intend to totally exclude those benefit costs for owners, we expect them to issue further guidance to clarify the issue.

New SBA Forms

The SBA released two versions of the form to apply for debt forgiveness on a PPP loan. The main form can be used by any borrower and is very extensive. The second form is Form 3508EZ and is a much shorter form. Companies can use the shorter form if they meet the following criteria:

  • The business did not reduce salaries by more than 25% during the covered period for any employee who received an annualized wage of less than $100,000 during every pay period in 2019.
  • The business met one of the two following criteria:
    • The business did not reduce its FTEs during the covered period from the base period, or
    • The business qualified for the exception based on the inability to operate at the same level of business activity due to COVID-19 restrictions between February 15 and the end of the covered period.

Business owners should expect the SBA to continue making changes to the rules for the program. Often these changes are beneficial to the business. However, some changes have limited business’s ability to qualify for loan forgiveness. Watch for new updates to see how they will affect your business.

If you have any questions about PPP loans and this development, reach out to us at 303-989-7600.