The Small Business Administration (the “SBA”) continues to issue additional guidance for borrowers and lenders under the Payroll Protection Program (“PPP”) Flexibility Act of 2020 (the “PPP Flexibility Act”). This week, three additional Interim Final Rules and additional Frequently Asked Questions (“FAQs”) were published.
The first Interim Final Rule (the “Additional Forgiveness IFR”), published late on June 22nd, updates two previously issued IFRs on PPP loan forgiveness and the SBA’s loan review process. [1], [2]
The updated FAQs, published late on the evening of June 25th, add two questions and answers. The first provides guidance to lenders. The second conforms the maturity date of PPP loans to the provisions of the PPP Flexibility Act (i.e., five years for PPP loans issued on or after June 5th and two years for loans issued prior to June 5th, with the possibility of negotiation of a five-year term if the lender and borrower both agree).
The remainder of this Alert is a summary of the key aspects of the Additional Forgiveness IFR.
Confirmation of PPP Loan Application Cut-Off Date
Although the “covered period” for forgiveness was extended by the PPP Flexibility Act to 24 weeks or December 31, 2020 (subject to the right of a borrower whose PPP loan was funded prior to June 5th to elect to use the original eight-week forgiveness “covered period”), the Additional Forgiveness IFR notes that the CARES Act only granted authority to the SBA to guarantee PPP loans made through June 30, 2020. The PPP Flexibility Act did not extend this provision. Thus, the last day that a lender can obtain an SBA loan number for a PPP loan is June 30th, and no additional PPP loans will be issued after that date (unless Congress chooses to extend the loan guarantee program).
New Rule on When the PPP Loan Forgiveness Application Can Be Filed
In a welcome change, the SBA now tells borrowers the following:
“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. If the borrower applies for forgiveness before the end of the covered period and has reduced any employee’s salaries or wages in excess of 25 percent, the borrower must account for the excess salary reduction for the full 8-week or 24-week covered period, . . . . If the borrower does not apply for loan forgiveness within 10 months after the last day of the covered period, or if SBA determines that the loan is not eligible for forgiveness (in whole or in part), the PPP loan is no longer deferred and the borrower must begin paying principal and interest.”
In essence, this means that a borrower does not need to wait until the end of the 24-week (or eight-week) “covered period” to file the Loan Forgiveness Application (whether the short form EZ Application or the Regular Application, which were described in our previous Alert). Note that a borrower still needs to check with its lender prior to submitting a Loan Forgiveness Application to make sure that the lender’s portal is open and accepting applications. Once the lender’s portal is open, the Loan Forgiveness Application can be filed at any time after the borrower has fully expended the PPP loan amount for which forgiveness is sought.[3]
- Observation: The effect of the SBA’s statement above is that a borrower no longer must wait until the end of the applicable “covered period” to file the Loan Forgiveness Application. As noted in the quote, however, a borrower who chooses to start the forgiveness process prior to completion of the 24-week (or eight-week) “covered period” will forfeit the ability to restore any salary or wage reduction in excess of 25% that was made and not restored prior to filing the application. The “safe harbor” for a restoration of a salary/wage reduction thus would be lost, and the borrower would need to reduce the forgiveness amount accordingly. Given this, if a borrower determines that it can restore salary or wage rates within the eight-week “covered period,” then it would be prudent to wait until the end of the eight-week period and to elect the eight-week “covered period” (if the PPP loan was funded before June 5th) to avoid the forgiveness reduction. If a borrower is using the 24-week covered period, then the borrower might be forced to wait many more weeks before filing the Loan Forgiveness Application to avoid the reduction, and the continuing economic effects of the pandemic thus could be more important in determining whether it is prudent to file sooner rather than later.
- Observation: Interestingly, the SBA did not address what happens if a borrower exhausts its PPP loan proceeds and applies for forgiveness before the end of the 24-week or eight-week “covered period” and has not restored its reduced FTE count by the time of filing. We need further guidance on this point, because it may mean the FTE restoration “safe harbor” also is lost by the early filing, or it may mean that the borrower still can avoid reduction if it actually does restore its FTE count by the end of the 24-week or eight-week covered period.
- Observation: Although the safe harbor(s) may be lost by filing the Loan Forgiveness Application before the end of the applicable covered period, the opposite does not appear to be true. If a borrower exhausts its PPP loan proceeds and has restored (or not reduced) its salary/wage rates or FTE count before the early filing of the Loan Forgiveness Application, then there appears to be no reduction of the forgiveness if the borrower is forced to reduce its FTE count or cut salary/wage rates of an employee by more than 25% after the filing but before the end of the applicable covered period.
- Observation: Although the SBA states in the quote above that a borrower can file its Loan Forgiveness Application “any time on or before the maturity date of the loan,” this actually is not an accurate statement. In fact, the borrower cannot wait until just before the two-year or five-year maturity date of its PPP loan, because if the Loan Forgiveness Application is not filed “within 10 months after the last day of the covered period,” then the borrower forfeits the right to forgiveness.
Clarification that “Owner-Employee” Really Means All Owner-Employees
In our previous Alert, we noted that it appears that the SBA will apply the limits of $15,385 of 2019 compensation (if the eight-week “covered period” is elected) or $20,833 of 2019 compensation (if the 24-week “covered period” is used) to the “owner-employee” of any business, regardless of whether the business is a C corporation, S corporation, partnership, or sole proprietorship/independent contractor. The SBA confirmed this in the Additional Forgiveness IFR. Specifically, it set the rules as follows, with respect to the amount that a borrower can include in its forgiveness calculation:
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- An owner-employee of a C corporation is capped at either $15,385 or $20,833 (or, if less, 2.5/12th of his or her 2019 cash compensation), plus the employer-funded contributions to retirement plans and employer-paid premiums for health insurance.
- An owner-employee of an S corporation is capped at either $15,385 or $20,833 (or, if less, 2.5/12th of his or her 2019 cash compensation), plus the employer-funded contributions to retirement plans, but the employer-paid premiums for health insurance cannot be included.
- A partner in a partnership (or LLC taxed as a partnership) is capped at either $15,385 or $20,833 (or, if less, 2.5/12th of his or her 2019 net earnings from self-employment, as reported in Box 14(A) of his or her 2019 Schedule K-1, reduced by claimed IRC Section 179 expense deduction, unreimbursed partnership expenses, and depletion from oil and gas properties multiplied by 0.9235). No retirement plan contributions or health insurance premiums can be included.
- A sole proprietor (who files using either Schedule C or Schedule F of his or her Form 1040) is capped at either $15,385 or $20,833 (or, if less, 2.5/12th of the amount of his or her owner compensation replacement, calculated based on the net profit, as reported on Schedule C or Schedule F). No retirement plan contributions or health insurance premiums can be included.
- Each owner-employee and self-employed person is limited to only $15,385/$20,833 from all of his or her businesses, regardless of the number of businesses in which he or she is involved.
- Observation: Although the rules above provide needed clarity, we still do not have guidance on what the minimum stock ownership percentage must be to make one an “owner-employee.” For example, the SBA takes the position that a shareholder in an S corporation cannot include employer-paid health insurance premiums because these already are included in the S corporation shareholder’s cash compensation. However, this is only true for a shareholder who owns 2% or more of an S corporation, so is this rule limited to 2+% S corporation shareholders? Why should a person who owns 1% or less of a C corporation be subject to these limits? Given that the SBA seems to respond to industry questions as it issues new guidance, perhaps we will see more guidance on this question in the future.
Additional Clarity on the Documentation Needed to Prove Compliance with Safe Harbors
The PPP Flexibility Act provided two new “safe harbors” from the PPP loan forgiveness reductions for FTE counts during the covered period (or the Alternative Payroll Covered Period, if applicable). Under the Additional Forgiveness IFR, a borrower can exclude an employee from the FTE count if the borrower:
“(A) is able to document (i) an inability to rehire individuals who were employees of the eligible recipient on February 15, 2020; and (ii) an inability to hire similarly qualified employees for unfilled positions on or before December 31, 2020; or (B) is able to document an inability to return to the same level of business activity as such business was operating at before February 15, 2020, due to compliance with requirements established or guidance issued by the Secretary of Health and Human Services, the Director of the Centers for Disease Control and Prevention, or the Occupational Safety and Health Administration during the period beginning on March 1, 2020, and ending December 31, 2020, related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID–19.”
The SBA made a number of clarifications in this regard. First, it confirmed that the “safe harbor” contained in (A) above (for rejected offers of rehire) replaced the safe harbor that the SBA originally included in a prior IFR, which allowed a borrower to exclude from the calculation of FTEs a worker who was laid off, if the borrower subsequently offered a return to work at the same compensation and hourly schedule and the employee rejected the offer. This is an unfortunate clarification – the new safe harbor is more difficult to meet, because it requires the borrower to not only document that the offer was made and refused, but also that the borrower is unable to find a replacement who is similarly qualified.
Second, it confirmed that the “safe harbor” contained in (B) above (for inability to return to the same level of business) could be met if the actual incident(s) that gave rise to the borrower’s inability resulted indirectly from orders given by state or local government using the guidance issued by the DHHS, CDC or OSHA, or directly from orders of the DHHS, CDC or OSHA. This was a concern to many, because most small businesses were significantly affected by the rules and orders of state and local governments, not necessarily the federal government.
Finally, although the Additional Forgiveness IFR did not provide any new definitions to clarify the open issues in either of these “safe harbors,” guidance was provided in the form of descriptions of the types of documentation that a borrower would need to provide to support its use of one of these safe harbors. Specifically, with respect to the documents needed to show compliance with the “inability to rehire” safe harbor (paragraph (A) in the quote above), the Additional Forgiveness IFR states as follows:
“The documents that borrowers should maintain to show compliance with this exemption include, but are not limited to, the written offer to rehire an individual, a written record of the offer’s rejection, and a written record of efforts to hire a similarly qualified individual.”
- Observation: One other requirement that a borrower still must meet to comply with this “safe harbor” is that the borrower must notify the applicable state unemployment office of the employee’s rejection of the offer to rehire within 30 days of the borrower’s receipt of the employee’s written rejection. In prior guidance, the SBA stated that it would provide instructions on this notification on its website. To our knowledge, these instructions have not yet been posted.
- Observation: Although the language above is helpful, it still does not answer the question of what grounds a borrower can use to show an inability to hire a similarly qualified replacement. Can the borrower argue that the costs of the replacement (e.g., a recruiter, moving expenses, perhaps higher pay) are the basis for its inability, or is it only if no one accepts an offer?
With respect to compliance with the “inability to return to prior level of business activity” safe harbor (paragraph (B) in the quote above), the Additional Forgiveness IFR states as follows:
“Specifically, borrowers that can certify that they have documented in good faith that their reduction in business activity during the covered period stems directly or indirectly from compliance with such COVID Requirements or Guidance are exempt from any reduction in their forgiveness amount stemming from a reduction in FTE employees during the covered period. Such documentation must include copies of applicable COVID Requirements or Guidance for each business location and relevant borrower financial records.”
- Observation: There is very little detail in this language, but the SBA also included the following example, which at least helps a little more:
“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 satisfies the [PPP] 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.”
Although this example does not provide much in the way of specifics, it appears that, by documenting state and local rules or orders that apply from time to time to the borrower’s business and maintaining adequate financial records to show a decline in revenue while expenses have remained constant or nearly so, a borrower should be able to comply with this safe harbor to avoid a reduction in the forgiveness amount relating to a reduction in FTEs.
- Observation: The Additional Forgiveness IFR also reiterates that the borrower can exclude from the FTE count for purposes of this “safe harbor” any employee who is fired for cause, who leaves voluntarily or who is offered a restoration of hours that were cut during the covered period and rejects the offer. Of course, the borrower must adequately document each such situation.
Clarification of the Forgiveness Review Process
Borrower’s Responsibilities. The Additional Forgiveness IFR reiterates that it is the borrower’s responsibility to provide “an accurate calculation of the loan forgiveness amount,” and the borrower must attest to the accuracy of its reported information and calculations on its Loan Forgiveness Application. A borrower is not entitled to forgiveness without submitting to the lender all required documentation (outlined in the instructions to the applicable Loan Forgiveness Application). The lender then is expected to perform a “good-faith review” of the borrower’s calculations and supporting documentation. An example is given, which states:
“[M]inimal review of calculations based on a payroll report by a recognized third-party payroll processor would be reasonable. By contrast, if payroll costs are not documented with such recognized sources, more extensive review of calculations and data would be appropriate.”
Timeline for Lender’s Review; Lender’s Decision. The Additional Forgiveness IFR also lays out a timeline for the review process. As stated in the CARES Act, the lender has 60 days to review the borrower’s completed Loan Forgiveness Application (either the EZ Application or the Regular Application) and supporting documentation as described in the applicable Loan Forgiveness Application, to work with the borrower to cure any deficiencies, and to render a decision on whether or not the borrower is entitled to forgiveness. That decision may take one of three forms: (i) approval (in whole or in part), (ii) denial, or (iii) denial without prejudice (if directed by the SBA) because of a pending SBA review of the loan for which forgiveness is sought (e.g., the audit of loans over $2 million, or a review of whether the borrower’s initial application or use of the proceeds violated the law).
Borrower’s Rights Upon a Lender’s Denial. If the SBA directs a denial without prejudice, then the borrower may subsequently request that the lender reconsider its Loan Forgiveness Application, unless the SBA determined in its review that the borrower is ineligible for the PPP loan.
Lender’s Request for Payment; SBA’s Remitting of Amounts to Lender. If the lender (or the SBA) determines that the borrower is entitled to forgiveness of some or all of the amount applied for, then the lender will request payment from the SBA. The SBA will remit the appropriate forgiveness amount to the lender, plus any interest accrued through the date of payment, not later than 90 days after the lender issues its decision to SBA. If applicable, SBA will deduct EIDL Advance amounts from the forgiveness amount remitted to the Lender as required by the CARES Act.
Notifying the Borrower; Dealing with Any Balance Due. The lender is responsible for notifying the borrower of the forgiveness amount. If the SBA determines that the full amount of the loan is eligible for forgiveness and remits the full amount of the loan to the lender, then the lender must mark the PPP loan note as “paid in full.” If only a portion of the loan is forgiven, any remaining balance due on the PPP loan must be repaid by the borrower on or before the maturity date of the loan (i.e., five years from original funding for a PPP loan issued on or after June 5, 2020, or two years for loans issued prior to June 5th, unless the borrower and lender agree to a five-year maturity). The lender is responsible for notifying the borrower of when monthly payments will begin.
Notifications Upon Denials; Requesting SBA Review and Process. If the lender denies the forgiveness, it must notify the SBA and the borrower in writing of this decision within its allotted 60-day period. Once the borrower receives the written notice of denial, the borrower has 30 days to notify the lender that it is requesting the SBA to review the lender’s decision. The lender then must provide the borrower’s request for review (along with copies of the borrower’s Loan Forgiveness Application and all supporting documentation provided by the Borrower) to the SBA within five days after it receives the request from the borrower. The SBA has the discretion to review the lender’s decision.
If the borrower does not seek SBA review, or if the SBA notifies the lender that it declines the borrower’s request for review, then the lender must notify the borrower of the first date upon which payment of the PPP loan will begin.
If the SBA approves the borrower’s request for review, then the SBA will notify the borrower and the lender. No time limit is placed on the SBA to complete its review, but it would appears that this review must be completed within the 90-day period given the SBA under the CARES Act. Once the SBA makes its decision on the review, if the decision is to uphold the lender’s decision, then forgiveness is denied, and the lender must notify the borrower of the first date upon which payment of the PPP loan will be due.
In its review, the SBA is authorized to review both whether loan forgiveness of all or a part of the PPP loan is appropriate and whether the borrower was ineligible for the PPP loan in its entirety, based upon the provisions of the CARES Act, the SBA’s rules or guidance available at the time the borrower’s initial loan application was made, or the terms of the borrower’s PPP loan application (e.g., because the borrower lacked an adequate basis for the certifications that it made in its PPP loan application or incorrectly calculated the amount of loan to which it was eligible). Of course, if the borrower was not entitled to the PPP Loan, then the loan will not be eligible for forgiveness.
Tune in for subsequent episodes of “As the SBA Publishes.”
If you have any questions regarding how the Additional Forgiveness IFR impacts your particular PPP loan planning, please feel free to contact any member of Trenam Law’s COVID-19 Team.
[1] The second Interim Final Rule, published on June 24th, addresses the eligibility of a PPP loan applicant with a 20% or more owner who has a felony conviction. This IFR is beyond the scope of this Alert. If you have questions in this regard, however, please contact a member of the Trenam Law’s COVID-19 Relief Programs Team.
[2] The third Interim Final Rule, published late on the evening of June 25th, addresses a situation of limited impact, in which a person who is treated as an independent contractor for federal employment and income tax purposes (e.g., a crewmember on a commercial fishing boat), in reality, is more closely akin to a partner in a partnership. To avoid confusion, the SBA issued this IFR to apply the rules regarding a partner in a partnership (discussed in more detail below) to a person otherwise treated as an independent contractor. Because this situation applies to a limited number of people, this Alert will not address the issue any further. If a crewmember on a commercial fishing boat has questions in this regard, please contact a member of the Trenam Law COVID-19 Team.
[3] The Additional Forgiveness IFR includes an example illustrating how this might work: A borrower reduced a full-time employee’s weekly salary by $300, from $1,000 per week during the reference period to $700 per week during the covered period, although the employee continued to work full-time (so is an FTE of 1.0). If the borrower uses the 24-week “covered period,” then the first $250 (25% of $1,000) is exempted from the loan forgiveness reduction, and the borrower would reduce its forgiveness amount by the remaining $50 per week. If the borrower applies for forgiveness before the end of the 24-week “covered period,” then it must account for the salary reduction for the full 24-weeks, so the forgiveness reduction would be a total of $1,200 ($50/week x 24 weeks). In contrast, if the borrower were to elect the eight-week “covered period,” and then files the Loan Forgiveness Application before the end of the eight-week period, then, based on the same example facts, the total forgiveness reduction would be only $400 ($50 per week x eight weeks).
