What Businesses Need to Know About the New PPP Loan Forgiveness Application

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Webinar Helps Businesses Make Sense of Changing Rules

If one thing has become certain these last few months, it’s that change is the only constant. New rules for PPP loan forgiveness extend the eligibility time frame and reduce the amount that borrowers must spend on qualified payroll. And a new, shorter loan forgiveness application is now available to certain borrowers. On June 25, Senior Managers Austin Coyan, CPA, CFE, and James Bailey, CPA talked about these changes and what they mean for PPP borrowers.

What’s New in the PPP Loan Forgiveness Application?

James BaileyJames explained that there are now two versions of the PPP loan forgiveness application: Form 3508 EZ and the regular application, which was revised on June 16, 2020. Qualifications to use the EZ include meeting one of the following three criteria:

  1. You had no employees during the loan application and the covered period will be filed in the loan forgiveness application.
  2. You didn’t reduce wage rates or employee salaries by more than 25% and no employees were laid off.
  3. You didn’t reduce wage rates or employee salaries by more than 25% and were unable to operate during the Covered Period at the same level of business activity as before February 15, 2020, due to compliance with requirements established or guidance issued between March 1, 2020, and December 31, 2020.

James said most borrowers who qualify for the EZ application will fall into the third category.

The primary benefit of using the EZ loan forgiveness application is that the borrower won’t have to submit nearly as much information to the lender. What’s important to realize, though, is that the lender will still have the opportunity to request additional documents and detailed calculations, and borrowers will still have to know the number of full-time equivalent (FTE) employees. Much of the basic work in preparing the loan forgiveness application is still being done in the background, even if it is not submitted.    

Increased Transparency for PPP Loans

On June 19, 2020, the SBA and U.S. Department of Treasury announced plans to publicly share PPP recipient business names, addresses, NAICS codes, zip codes, business type, demographic data, non-profit information, jobs supported, and PPP loan amounts in the following ranges:

  • $150,000 – $350,000
  • $350,000 – $1 million
  • $1 – $2 million
  • $2 – $5 million
  • $5 – $10 million
    • For loans below $150,000, totals will be released, aggregated by zip code, industry, business type, and various demographic categories.

The calculation for how the borrower got the loan is a factor for some financial information about the company. Two liability concerns are for the public to then use this data to arrive at general conclusions about the number of employees and/or employee salaries, or for criminals to potentially look at businesses with high salaries. To counter these concerns, businesses need to assess whether their internal controls are strong enough to withstand public scrutiny and protect the business’s sensitive data. One example that James mentioned was positive pay.

As businesses reopen, James recommended businesses look into specific insurance policies that would cover liabilities related to coronavirus, such as if an outbreak occurs or employees get sick.

Understanding the PPP Loan Forgiveness Rule Changes

Austin CoyanAustin then talked about the changes to PPP loan forgiveness, starting with the PPP Flexibility Act signed into law on June 5, 2020. The biggest change, he said, was that the covered period went from eight weeks to 24 weeks, or 168 days, based upon the date a borrower received its PPP loan funds. The default option is now 24 weeks.

If borrowers received loan proceeds before June 5, 2020, they could still elect the original eight week covered period; however, any PPP loan disbursed after June 5 must take the new 24-week covered period. Using the alternate payroll period is still an option either way, which means a borrower can shift the covered period for payroll expenses only to align the first payroll after PPP funds were or are received. To claim this option, payroll must be done at least bi-weekly.

Austin also reminded webinar participants that in calculating PPP forgivable expenses, it’s important to remember that expenses can be paid or incurred.

The next big change is that the amount that has to be spent on covered payroll expenses decreased from the original 75% to 60%. This new rule applies whether PPP loan funds were disbursed before or after June 5, 2020. There is also no “cliff” in the new guidance. Austin explained that this means if a borrower didn’t meet the minimum covered payroll expense threshold, there would be no PPP loan forgiveness. Under the rule changes, if a business doesn’t spend at least 60% of its PPP funds on qualified payroll, the forgivable amount will decrease, but not to zero.

Changes to Qualified Payroll Expenses

Other changes that businesses should be aware of are new caps for employees. Originally, the cap for gross compensation was $100,000; spread out over the eight-week period, that amounted to $15,385 per employee. If a borrower selects the new 24-week covered period, the cap increases to $46,154 per employee for regular employees. The $100,000 gross compensation limit still applies.

Wage limitations for self-employed or owner-employee limitations remain at $15,385 for the original eight-week period or $20,833 for the new 24-week period (2.5 months of a $100,000 salary). The cap of not exceeding 2019 wages is still applicable to both 24- and eight-week periods. Look at Box 3 of the W-2, divide by 52 (weeks in a year), and then multiply by 8 or 24 (for the covered period); the result is the cap of allowable wages for 2020. This is to make sure that self-employed borrowers don’t use all their PPP loan funds on themselves, if they have other employees in the business.

This cap is used on any owner-employee whose W-2 has any ownership interest, Schedule C, Schedule F farmers, or general partners for self-employed income. Also, remember that employer-paid health insurance and employer-paid retirement are not part of those caps for either employees or owner-employees. What this means for self-employed borrowers is that they can use the new EZ loan forgiveness application, having met the criteria for no other employees.

Austin said one thing that the SBA did not provide guidance on for non-payroll costs is what transportation expenses qualify. At the moment, don’t count on expenses like fuel to be included, but with a new 24-week covered period, it will be much easier to meet the criteria for covered expenses.

New PPP Rule Changes: Limitations

The PPP Flexibility Act did not change anything regarding the reduction of salaries and wages or full-time equivalency calculations. Wages cannot be reduced by more than 25%. To figure this out, look at wages from January 1 through March 31, 2020. Were wages reduced by more than 25% for those employees? If yes, then know there is going to be a limitation on how much of the loan is forgiven, or if the safe harbor can be met.

The safe harbor, Austin explained, is looking at the average salary or wage on February 15 and then the average salary or wage From February 15 through April 26, 2020. Compare the two results. If the second calculation is equal or greater, then enter the average salary or hourly wage as of the earlier of either December 31, 2020, or the date of the loan forgiveness application. If the second calculation is equal to or greater than the first calculation, then the safe harbor is met. Keep in mind that these calculations are only necessary if wages dropped by more than 25%. Industries like oil and gas and restaurants or companies that started limiting overtime wages are going to be more likely to need these calculations.

There is still some clarification that the SBA needs to release regarding FTE employees.

FTE Calculation

The calculation for determining FTE employees is mostly the same, but with an extra caveat. Austin said that nothing has changed regarding whether a borrower looks back to February 15 to June 30, 2019, or January 1 through February 29, 2020, or for seasonal employers, May 1 through September 15, 2019. The goal is to look at full-time employees during that covered period that you’re using for PPP funds.

There is also still the simplified FTE calculation based on a 40-hour workweek; if an employee works 40 or more hours per week, they count as one employee. If an employee works less than 40 hours per week, they count as 0.5. This applies whether the eight-week or 24-week period is used.

There are exemptions to the FTE reduction, such as:

  • Offer to rehire, but unsuccessful by December 31, 2020
  • Offer to restore hours or wages, but employee rejected
  • Qualified reductions (only reported if position was not filed)
    • Fired for cause
    • Voluntarily resigned
    • Voluntarily requested and received a reduction in hours

In any case, keep meticulous documentation for the lender and/or SBA. Borrowers also must be able to document they were unable to operate at levels from February 15 through the covered period at the same level of business as of February 15, 2020, due to requirements established by HHS, CDC, or OSHA. The borrower also must show the financial loss, or the exemption does not qualify.

The other safe harbor option is that if FTEs were reduced from February 15 through April 26, 2020, but restored FTEs to February 15 level no later than December 31, 2020. This is the exemption that Austin mentioned that SBA needs to provide more guidance. The SBA has promised a list of FAQs but as of this writing, that has not been released.

Clarification on Timing for Loan Forgiveness Process

A business can submit its loan forgiveness application before the end of the covered period if it has used all of the loan funds for which the business is seeking loan forgiveness. The lender then has 60 days after receiving a PPP loan forgiveness application to issue a decision on forgiveness to the SBA. At that point, the SBA will remit the appropriate forgiveness amount to the lender, plus any interest accrued through the date of payment, no less than 90 days after the lender issues its decision on PPP loan forgiveness to the SBA. The lender is required to inform the borrower of the loan forgiveness amount and the date on which the borrower’s first payment is due, if applicable.

Remember that loan documentation must be maintained for six years following the later of loan forgiveness or loan payoff date.

Among all these changes, if your business has been impacted by the coronavirus and you’re navigating PPP loan documentation, forgiveness, EIDL funding, or any other scenario you’re unsure about, you can reach out to your ABBB representative anytime for questions. We are working with many businesses on issues similar to yours and can help you manage the shifting guidelines and requirements. Visit the Coronavirus Resource Center for updated guidance, loan forgiveness forms, links to relevant sites, and recordings from past webinars.