SBA and Treasury Release Interim Final Rule on Loan Forgiveness after the Flexibility Act
The recent IFR clarifies and modifies several basic rules, the timing of applications, forgiveness limitations for business owners, and broadens the statutory exemptions from FTE reductions.
Basic Changes to Loan Forgiveness Rules
New 60/40 Loan Forgiveness Rule
The recent IFR addresses the previous “75/25 rule” and converts it to a “60/40 rule” as outlined in the Flexibility Act. The Flexibly Act amended the requirements regarding forgiveness of PPP loans by reducing from 75 percent to 60 percent, the portion of PPP loan proceeds that must be used for payroll costs for the full amount of the PPP loan to be eligible for forgiveness.
The Flexibility Act (and the latest IFR) provides a minimum maturity of five years for all PPP loans made on or after June 5. Loans secured before June 5 are subject to a default two-year maturity, but lenders and borrowers may extend their maturity date by mutual agreement.
The five page standard application form is the Form 3508 which can be found here.
The SBA has also issued an alternative three page application (the 3508EZ) which can be found here.
The EZ form is a streamlined application available to borrowers who are not subject to the wage and salary reductions or the FTE reductions with respect to loan forgiveness.
Loan Forgiveness Process
To receive loan forgiveness, a borrower must complete and submit the Loan Forgiveness Application (SBA Form 3508, 3508EZ, or lender equivalent). The lender has 60 days to review and submit to the SBA. In turn, the SBA has 90 days to review and remit the appropriate forgiveness amount to the lender (upon approval). If applicable, the SBA will deduct EIDL Advance amounts from the forgiveness amount remitted to the lender.
Application Process and Timing
Early Application and Salary/Wage Reduction Rules
The recent guidance clarifies that 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.
However, the IFR clarifies that if a small business applies for early PPP loan forgiveness, they are still subject to the wage and salary reductions in forgiveness based on a full 24 weeks (assuming a 24 week covered period).
Example: Assume a borrower is using a 24-week covered period. Further assume this borrower reduced a full-time employee’s weekly salary from $1,000 per week during the reference period to $700 per 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 as the salary/hourly wage reduction for that employee (the extra $50 weekly reduction multiplied by 24 weeks) even if it submits its application before the end of the 24-week covered period.
If the borrower does not apply for loan forgiveness within 10 months after the last day of the covered period the loan is no longer deferred and the borrower must begin paying principal and . If this occurs, the lender must notify the borrower of the date the first payment is due.
Forgiveness Limitations for Owner-Employees and Self-Employed Individuals
Eight-Week vs. Twenty-Four Week Limitations
Borrowers who received loans before June 5 may elect to use an eight-week covered period or the new default twenty-four week covered period as modified under the Flexibility Act.
For borrowers electing the eight-week covered period loan, owner-employees and self-employed individuals’ payroll compensation is capped at eight-weeks’ worth (8/52) of 2019 compensation or $15,385 per individual, whichever is less, in total across all businesses.
Owner-employees and self-employed individuals for borrowers not electing an eight-week covered period are limited to 2.5 months’ worth (2.5/12) of 2019 compensation or $20,833 per individual, whichever is less across all businesses.
Limitations by Entity Type
C-corporation owner-employees are capped by the amount of their 2019 employee cash compensation and employer retirement and health insurance contributions made on their behalf.
S-corporation owner-employees are capped by the amount of their 2019 employee cash compensation and employer retirement contributions made on their behalf, but employer health insurance contributions made on their behalf cannot be separately added because those payments are already included in their employee cash compensation (i.e., included in their W-2 as wages).
Schedule C or F filers are capped by the amount of their owner compensation replacement, calculated based on 2019 Schedule C or Schedule F net profit.
General partners are capped by the amount of their 2019 net earnings from self-employment (reduced by claimed section 179 expense, unreimbursed partnership expenses, and depletion (oil and gas properties) multiplied by 0.9235.
Schedule C, Schedule F, and general partners may not include retirement and health insurance contributions as forgivable payroll costs as these amounts are already included in their income from self-employment.
New Exemptions Based on Employee Availability and Business Activity
The Flexibility Act established two new exemptions based on employee availability and business activity, respectively, that would eliminate a reduction in the loan forgiveness amount that would otherwise be required due to a reduction in full-time equivalent (FTE) employees.
Inability to Rehire
In calculating the loan forgiveness amount, the IFR clarifies that a borrower may exclude any reduction in full-time equivalent employee headcount that is attributable to an individual employee if:
- The borrower made a good faith written offer to restore the reduced hours of such employee
- The offer was for the same salary or wages and same number of hours as earned by such employee in the last pay period prior to the reduction in hours
- The offer was rejected by such employee, and
- The borrower has maintained records documenting the offer and its rejection
The IFR further exempts borrowers from the loan forgiveness reduction based on FTEs if the borrower is able to document in good faith the following:
- An inability to rehire individuals who where employees of the borrower on February 15, 2020, and
- And inability to hire similarly qualified individuals for unfilled positions on or before
December 31, 2020
Borrowers are required to inform the applicable state unemployment insurance office within 30 days of any employee’s rejection of the offer.
Inability to Return to the Same Level of Business Activity
Borrowers are also exempted from a reduction in the number of FTE employees during the covered period if the borrower is able to document in good faith an inability to return to the same level of business activity as a borrower was operating at before February 15, 2020 due to compliance with requirements established or guidance issued (COVID Requirements or Guidance) between March 1, 2020 and December 31, 2020 by the director of specified federal agencies. Federal agencies include Health and Human Services (HHS), the Centers for Disease Control (CDC), or the Occupation Safety and Health Administration (OSHA).
The June 22 IFR broadens the above statutory exemption to include both direct and indirect compliance with COVID Requirements or Guidance, because a significant amount of the reduction in business activity stemming from COVID Requirement or Guidance is the result of state and local government shutdown order that are based in part on guidance from the three federal agencies.
For Example: Assume a PPP borrower is in the business of selling beauty products both online and at its physical store. During the covered period, the local government where the borrower’s store is located orders all non-essential businesses including the borrower’s business, to shut down their stores, based in part on COVID-19 guidance issued by the CDC in March 2020. Because the borrower’s business activity during the covered period was reduced compared to its activity before February 15, 2020, due to compliance with COVID Requirements or Guidance, the borrower satisfied the Flexibility Act’s exemption and will not have its forgiveness amount reduced because of a reduction in FTEs during the covered period, if the borrower in good faith maintains records regarding the reduction in business activity and the local government’s shutdown orders that reference a COVID Requirement or Guidance as described above.
The rules surrounding loan forgiveness continue to change daily. The SBA and Treasury should issue additional supporting regulations and administrative rules in the days and weeks to come. If you have questions about loan forgiveness or any the recent rule changes as a result of the Flexibility Act, please contact John Mlynczyk, Terry Niegel, or Don Lance from our office by calling 541-687-1170.