SBA Offers Further Guidance on PPP Loan Forgiveness

Schwabe, Williamson & Wyatt PC

On June 17, 2020, the SBA issued yet another Interim Final Rule (the “IFR”) (SBA-2020-0037) conforming two previously-issued rules to the recently-enacted Paycheck Protection Program Flexibility Act (the “PPPFA”). Those aspects of the IFR relating to PPP loan forgiveness are effective as of March 27, 2020 (the date of the enactment of the CARES Act).

Changes to the Paycheck Protection Program Effected by the PPPFA

The PPPFA extended the forgiveness covered period (that period during which certain allowable expenditures are incurred and paid in order to be applied toward loan forgiveness) from 8 weeks to 24 weeks after the loan is funded (but in no event later than December 31, 2020). Borrowers with PPP loans made prior to June 5, 2020, may elect either an 8-week or a 24-week forgiveness covered period. The PPPFA also lowered the percentage of the PPP loan proceeds that must be applied toward payroll costs from 75% to 60%, and clarified that a PPP borrower is still eligible for partial forgiveness if less than 60% of the loan proceeds are applied to payroll costs.

Maximum Cash Compensation Applicable to Forgiveness

The CARES Act excluded from the definition of “payroll costs” that portion of an employee’s cash compensation amount in excess of $100,000 annually from the calculation of the loan forgiveness amount. As a consequence, for those PPP borrowers electing a 24-week forgiveness covered period, with respect to employees earning cash compensation in excess of $100,000, that portion of their compensation that can be applied toward loan forgiveness increases from a maximum of $15,385 (representing 8 weeks of compensation at $100,000 per year) to $46,154 (representing 24 weeks of compensation at $100,000 per year).

Maximum Owner Compensation Applicable to Forgiveness for Individuals with Self-Employment Income Who File a Form 1040 Schedule C.

Similarly with respect to self-employed business owners who file a Form 1040 Schedule C, the maximum amount that can be applied to loan forgiveness increases from $15,385 (eight weeks of 2019 net profits) to $20,833 (representing 2½ months of 2019 net profits—which is the same measure used in calculating the maximum loan amount). This should make forgiveness of these amounts more achievable for self-employed business owners.

Revised Loan Forgiveness Applications

On June 16, 2020, the SBA also released two new applications: a revised full-loan application and a new EZ version. The new EZ version applies to borrowers that either (1) are self-employed and have no employees; or (2) 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; or (3) experienced reductions in business activity as a result of health directives related to COVID-19, and did not reduce the salaries or wages of their employees by more than 25%. The revised PPP Loan Forgiveness Application can be found here, and the PPP Loan Forgiveness Application Form EZ can be found here.

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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