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SBA's New EZ Loan Forgiveness Application Makes PPP Loan Forgiveness Easier for Some Borrowers; More Businesses Become Eligible for the PPP; and Owner-Borrowers get Clarification on a Path to Full Forgiveness

Client Updates

On June 5, 2020, President Trump signed into law House Resolution 7010, known as the “Paycheck Protection Program Flexibility Act of 2020” (the “PPPFA”). Our alert summarizing the PPPFA can be found here. The SBA and Treasury subsequently released the following:

  • Interim final rules:

    • implementing the PPPFA, modifying provisions relating to loan maturity, deferral of loan payments, and forgiveness provisions (June 11, 2020), which can be found here;

    • expanding eligibility for businesses with owners who have past felony convictions (June 12, 2020), which can be found here;

    • providing guidance on how to calculate owner compensation, employee compensation and non-payroll costs (June 17, 2020), which can be found here.

  • Revised PPP application forms to conform to the changes made in these interim final rules (June 11, 2020 and June 12, 2020), with the updated borrower application located here and the updated lender application located here.

  • Two versions of the PPP loan forgiveness application (June 17, 2020):

    • EZ Forgiveness Application (which can be found here with instructions located here); and

    • Updated Full Forgiveness Application (which can be found here with instructions located here)

Congress created the Paycheck Protection Program (the “PPP”) under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) through the Small Business Administration (the “SBA”) to provide forgivable loans to eligible small businesses facing economic hardship to retain U.S. employees on their payroll during the COVID¬19 pandemic.

This alert provides an introduction to the new EZ Forgiveness Application, highlights of the updates to the Full Forgiveness Application and a summary of the guidance in the new interim final rules, and supplements prior guidance regarding the PPP, which we discussed in prior alerts, and which can be found on our COVID-19 crisis response group website here.

EZ Forgiveness Application

The EZ Forgiveness Application is a short, three-page application for borrowers to submit to their lenders to apply for forgiveness of their PPP loans. The following borrowers are eligible to use the EZ Forgiveness Application:

  • Borrowers who are self-employed (individuals, independent contractors or sole proprietors) and have no employees at the time of the PPP loan and did not include any employee salaries in their computation of average monthly payroll in its PPP application;

  • Borrowers who did not reduce the salaries or wages of their employees by more than 25% during the covered period compared to the first quarter of 2020, and did not reduce the number or hours of their employees between January 1, 2020 and the end of the covered period (excluding reductions from inability to rehire employees who were employees on February 15, 2020, if the borrower was unable to hire similarly qualified employees for unfilled positions on or before December 31, 2020 and reductions in an employee’s hours that the borrower offered to restore and the employee refused); or

  • Borrowers who experienced reductions in business activity since February 15, 2020, as a result of compliance with health directives related to COVID-19,1 and did not reduce the annual salaries or hourly wages of any of their employees by more than 25% during the covered period or the alternative payroll covered period compared to the first quarter of 2020.

If a borrower meets one of these requirements, the reduction in forgiveness for full time equivalents or for salary reductions are not required, so the additional calculations in the full forgiveness applications are unnecessary and are excluded. With fewer calculations and documentation required, the EZ Forgiveness Application should provide a more streamlined process for applying for forgiveness for eligible borrowers.

Updated Full Forgiveness Application

The updated Full Forgiveness Application reflects changes t0 in PPP made by the PPPFA including the following:

  • Extends the PPP to December 31, 2020 from June 30,2020;

  • Extends the covered period during which the borrower must spend the PPP loan funds to qualify for forgiveness to 24 weeks from eight weeks;

  • Raises the cap on uses of forgivable PPP funds for non-payroll costs to 40% from 25% and adds a minimum threshold for payroll costs, requiring borrowers to spend at least 60% of the forgiveness amount on payroll costs;

  • Extends the deadline for borrowers to restore levels of employee headcount and compensation to December 31, 2020 from June 30, 2020;

  • Adds a forgiveness exemption for borrowers who reduced full-time equivalent employees if the borrower was unable to rehire or return to the same level of business activity as before the COVID-19 crisis;

  • Extends the payment deferral period from 6 months to the date the SBA remits the forgiveness amount to the lender;

  • Allows PPP borrowers with forgiven loans to also defer payroll taxes; and

  • Extends the maturity date of new PPP loans that are not forgiven to 5 years from 2 years.

Eligibility for PPP loans expanded to include owners with past felony convictions

The SBA’s interim final rule changed the eligibility threshold for those with felony criminal histories. The PPP previously provided that a PPP loan would not be approved if an applicant, or an owner of 20 percent or more of the equity of the applicant has been convicted of a felony within the last five years. The SBA’s new interim final rule reduces the timeframe to 1 year for felonies that do not involve fraud, bribery, embezzlement, or a false statement in a loan application or an application for federal financial assistance. The application also eliminates pretrial diversion status as a criterion affecting eligibility.

The PPP now provides that borrowers are ineligible for a PPP loan if, for example an owner of 20 percent or more of the equity of the applicant is incarcerated, on probation, on parole; presently subject to an indictment, criminal information, arraignment, or other means by which formal criminal charges are brought in any jurisdiction; or has been convicted of a felony involving fraud, bribery, embezzlement, or a false statement in a loan application or an application for federal financial assistance within the last five years or any other felony within the last year.

Owner compensation replacement calculations

Under the SBA’s new interim final rule, for businesses that file Schedule C, Profit or Loss From Business or Schedule F, Profit or Loss From Farming, on their federal income tax returns, forgiveness for 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 per owner in total across all businesses, but excluding any qualified sick leave equivalent amount or qualified family leave equivalent amount claimed under Families First Coronavirus Response Act.2

According to the new interim final rule, the owner compensation replacement calculations include this limit to prevent potential PPP windfalls to owners that Congress did not intend. Specifically, the SBA and Treasury want to encourage protecting paychecks of employees and prevent a result such as the following example, which could occur under the PPPFA safe harbor which exempts from loan forgiveness reductions 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 (i.e. 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 being forgiven.

The SBA, in the new interim final rule, states that 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 it would also undermine the purpose of the CARES Act of protecting the paycheck of the employee, by encouraging layoffs. 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.

New Guidance Answers Some Open Questions

Under the PPPFA, if a borrower did not use at least 60% of the forgiveness amount of the PPP loan to pay payroll, none of the loan will be forgiven, while under the previous regulations, a borrower who did not meet the 75% threshold would still have a portion of its loan forgiven - forgiveness would be proportionally reduced in accordance with the 75%/25% rule. The SBA’s interim final rule retains proportional reduction where borrowers do not meet the minimum 60% threshold for payroll costs. The SBA provides the following example:

“if a borrower receives a $100,000 PPP loan, and during the covered period the borrower spends $54,000 (or 54 percent) of its loan on payroll costs, then because the borrower used less than 60 percent of its loan on payroll costs, the maximum amount of loan forgiveness the borrower may receive is $90,000 (with $54,000 in payroll costs constituting 60 percent of the forgiveness amount and $36,000 in nonpayroll costs constituting 40 percent of the forgiveness amount).”

The PPPFA extends the time period during which the PPP borrowers can spend the funds and still qualify for forgiveness from 8 weeks to 24 weeks, but did not confirm when the borrowers is eligible to apply for forgiveness and whether the safe harbors for excluding salary and hourly wage reductions and reductions in the number of employees (full-time equivalents) from loan forgiveness reductions can be applied as soon as the borrower spends the funds or whether it needs to wait until the end of the entire extended period. The SBA’s forgiveness applications indicate that forgiveness may be applied for after the coverage period applicable to the borrower (i.e. either the 8-week or 24-week period after the loan disbursement date, as chosen by the borrower) that the safe harbors for excluding salary and hourly wage reductions and reductions in the number of employees (full-time equivalents) from loan forgiveness reductions can be applied as of the date the loan forgiveness application is submitted. Borrowers don’t have to wait until December 31 to apply for forgiveness or to use the safe harbors in its forgiveness application.

The PPP allows loan forgiveness for payroll costs — including salary, wages, and tips — for up to $100,000 annualized per employee. Previously, the limit of cash compensation per employee was $15,385 for the existing eight-week covered period to qualify for forgiveness. The PPPFA extended the coverage period to 24 weeks, but did not clarify whether the individual employee cash compensation cap would increase in proportion, to $46,154. The SBA’s new interim final rule establishes the 24-week maximum for full loan forgiveness at $46,154 per individual.

The PPPFA extended the PPP from June 30, 2020 to December 31, 2020, but did not expressly provide a different expiration of the time period in which applicants could apply for a PPP loan. The interim final rules indicate that the application deadline for PPP loans remains June 30, 2020.

What to do now

While questions remain, potential applicants who have deferred applying because they needed more time to spend the funds, sought greater flexibility in how to use the funds, or were uncertain of the extent to which they would be able to have their loans forgiven, now have more time and greater flexibility to use the funds and an easier path to having more of their loans forgiven with the SBA’s new guidance and updated loan application forms. Applicants have until June 30, 2020 to apply for PPP funding and funds remain available in the PPP for lending to eligible borrowers. Borrowers who were not certain of when and how to apply for loan forgiveness now have a clearer path with the SBA’s new streamlined forgiveness application forms and can look to apply for forgiveness once their coverage period ends.

1These consist of requirements established or guidance issued between March 1, 2020 and December 31, 2020 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, related to the maintenance of standards of sanitation, social distancing, or any other work or customer safety requirement related to COVID-19.
2This amount excludes any qualified sick leave equivalent amount for which a credit is claimed under section 7002 of the Families First Coronavirus Response Act (FFCRA) (Public Law 116-127) or qualified family leave equivalent amount for which a credit is claimed under section 7004 of FFCRA.

 

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