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June 17, 2020

SBA Issues Clarifications to Forgiveness Rules: Good News for Self-Employed Borrowers, Confirmation of 24-Week Covered Period, and New Forgiveness Applications

Updated 7/2/2020 at 9:05am ET

UPDATE 7/2: Congress has voted to extend the deadline to apply for forgivable Paycheck Protection Program loans. Businesses now have until Aug. 8 to apply for the aid. President Trump is expected to sign the bill.

SC&H’s Key Takeaways

  • This is good news for self-employed borrowers, who should now expect the ability to achieve full-loan forgiveness and for those without employees, a new easier forgiveness application is available.
  • It provides confirmation that the 24-week covered period means maximum cash compensation per employee of $46,154.
  • They have adjusted their forgiveness application and introduced a new “EZ Version” along with two sets of application instructions.
  • The June 30, 2020 due date to restore wage levels and FTE is now the earlier of the date the forgiveness application is filed or December 31, 2020 – whether or not you use the 8-week or 24-week covered period.

On Friday, June 5, President Trump signed into law the Paycheck Protection Program Flexibility Act of 2020 (PPPFA), a reform bill that gives business owners more flexibility and time to use loan proceeds and still maximize PPP loan forgiveness.

Despite the passing of the PPPFA and many prospective changes from the bill, the SBA hadn’t provided any official guidance on the mechanics of the key changes: the 24-week covered period, payroll/nonpayroll split, extension of the loan maturity date, and the mandate for restoring or replacing all full-time employees.

But we now have some good news from the SBA, as they published their 19th Interim Final Rule (IFR) on Wednesday, June 17 that supports PPPFA changes to the use of PPP loan proceeds, loan forgiveness, and the covered period.

Let’s take a look at the details from this guidance:

Good News for Self-Employed Borrowers

The update ensures full forgiveness for self-employed, freelancers, and independent contractors who took the maximum loan amount based on 2.5 times their 2019 monthly income. Previously, the rules made it very hard to get above the 75% payroll cost threshold.

The latest IFR provides two options for calculating owner compensation under the new rules:

  • Eight weeks’ worth (8/52) of 2019 net profit (up to $15,385) for an eight-week covered period or
  • 5 months’ worth (2.5/12) of 2019 net profit (up to $20,833) for a 24-week covered period.

This means that borrowers choosing the 24-week covered period option will get full-loan forgiveness since the loan for these self-employed borrowers who have no employees was capped at $20,833.

Nonpayoll Costs – Forgiveness Amounts Extended to 24 Weeks

This makes it much easier to meet loan forgiveness thresholds.

The “incurred or paid” rule still applies. So, you can count expenses that were incurred or paid within that 24-week period, which means you’ll likely get some expenses that fall outside of the 24-week covered period as well.

S corporation Shareholders – Health insurance payments on behalf of partners, self-employed individuals and now, S Corporation shareholders is not a forgivable expense. Retirement plan costs for S corporation shareholders, but not partners or self-employed individuals, continue to be allowed as a payroll cost.

Two New Loan Forgiveness Applications

In addition to the IFR updates detailed above, the SBA also released two new applications for borrowers:

  1. Revised Full-Loan Application
  2. New EZ Version (Form 3508EZ)

Who can use the EZ version?

  • Borrowers that are self-employed and have no employees; OR
  • Borrowers who did not reduce the salaries or wages of their employees by more than 25%, and did not reduce the number or hours of their employees (and ignore FTE reductions caused by employees refusing to come back or the borrower’s inability to hire qualified replacements; OR
  • Borrowers who did not reduce the salaries or wages of their employees by more than 25%, and who experienced reductions in business activity and a related decrease in headcount as a result of federally mandated health directives or guidance related to COVID-19.
  • The EZ application requires fewer calculations and less documentation for eligible borrowers. Details regarding the applicability of these provisions are available in the instructions to the new EZ application form.
  • Of note, the EZ application does not have a loan size component to its usage. The form is just meant for those borrowers who are able to avoid the rather complex calculations and worksheet related to FTE and wage reductions.

Open Items We’re Monitoring

  • When will Treasury drop the 25-30 FAQs we have been hearing about for weeks? We still need definitional guidance on many issues, though the 24-week period now allows most borrowers to relax a bit.
  • Tax treatment of forgiven expenses – Congress is mulling over a bill that would make loan forgiveness tax free and the expenses deductible.
  • There was talk that loans of a certain size, perhaps $150,000 or less, would not even have to apply for forgiveness. About 3 million of the 4.5 million loans were for less than $50,000. Banks would certainly be in favor of decreasing the time they spend on smaller loans and an argument could be made that the time the government would spend reviewing those 3 million forgiveness applications (all filed within a few months of each other) wouldn’t produce much benefit to the Treasury.

Many businesses that qualify for the program have opted not to take the money, either because they don’t know that they qualify, they don’t know if their loan will be forgiven, or they just don’t want to go into debt. For this group – this guidance is very favorable, there’s still time to apply (the program ends June 30), and there’s more than $129B left in the second round of the PPP.

If you have any questions or would like to speak with one of our team members, please don’t hesitate to reach out. SC&H is here to help.

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