New Regulations Provide Key Forgiveness Flexibility for PPP Loan Borrowers, But Borrower Information Will Now Be Made Publicly Available

Chambliss, Bahner & Stophel, P.C.
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The Small Business Administration (SBA) and the Treasury Department have issued additional regulations implementing the Paycheck Protection Program Flexibility Act. Most of the adjustments are merely “clean up” changes to reflect the new 24-week covered period and “EZ” loan forgiveness application. But the regulations include some new critical guidance, including an explanation that borrowers may apply for forgiveness before the end of their covered period.

Here are the salient points that PPP loan borrowers need to know:

  • The regulations clarify, for the first time, that PPP loan borrowers may apply for forgiveness before the end of the covered period. This guidance provides important flexibility for borrowers who received their loan before June 5, but were unable to spend the loan proceeds within the original eight-week period. These borrowers now may apply for forgiveness as soon as they use all of the loan proceeds for which they are requesting forgiveness rather than waiting until the end of the extended 24-week period.

    While this generally is viewed as a positive development, it raises additional questions, including:

    • For borrowers who apply for forgiveness early, will the full cap on payroll amounts ($100,000 prorated for the covered period) be applicable? Or will that amount be further prorated to account for the fact that borrowers are not using the full covered period? 

      For example, for borrowers using a 24-week covered period, the cap on employee compensation is 24/52 of $100,000, which is $46,153.85. If the borrower applies for forgiveness after 12 weeks, does the full cap still apply? Or will the cap instead be 12/52 of $100,000 ($23,076.92)?

    • While the regulations address the effect of salary reductions, they do not address potential FTE employee reductions. Will that calculation and comparison to the selected reference period be made as of the date of the loan forgiveness application? If so, borrowers conceivably could apply for forgiveness early and receive full forgiveness while still reducing their FTE employees during the 24-week covered period.
       
  • Borrowers who apply for forgiveness before the end of their covered period and who reduced any employee’s salary or wages in excess of 25% nevertheless must account for the excess salary reduction for the full covered period when determining the reduction to the loan forgiveness amount.
  • For purposes of loan forgiveness, C-corporation owner-employees are capped at their 2019 employee cash compensation and employer retirement and health insurance contributions made on their behalf. The cash compensation amount will be dependent on whether the borrower has elected the eight-week covered period (max. $15,384.62) or the 24-week covered period (max. $20,833), as we explained here. But the regulations provide clarity that retirement and health care contributions for C-corporation owner-employees are not included within this cap. 

    The regulations do not clarify how the cap on owner-employee retirement and health care contributions is to be determined. They seem to suggest that borrowers must review 2019 contributions, segregate the amount allocable to each owner-employee, and then ensure that 2020 contributions during the applicable covered period do not exceed that amount. But this is an issue in need of additional explanation from the agencies.
     

  • 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.
  • The SBA and the Treasury clarified that borrowers’ potential loan forgiveness amount would  not be adversely affected by a reduction in FTE employees during the covered period if the reduction was because of reduced business activity during the covered period due to compliance with such governmental guidance concerning COVID—19 health and safety requirements. The following example is illustrative:

    Example: 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-19 requirements or guidance, the borrower satisfies the Flexibility Act’s exemption and will not have its forgiveness amount reduced because of a reduction in FTEs during the covered period.

In addition, the SBA and the Treasury Department also have reversed course and promised to publicly disclose information concerning PPP loan borrowers except for those with loans below $150,000. The information that will be made publicly available will include:

  • Business name
  • Address
  • NAICS code
  • Business type
  • Demographic data
  • Nonprofit information (if applicable)
  • Jobs supported, and
  • Loan amount ranges as follows:
    • $150,000-350,000
    • $350,000-1 million
    • $1-2 million
    • $2-5 million
    • $5-10 million

These new regulations most certainly won’t be the last pronouncement on PPP loan forgiveness.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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