In recent days, the Small Business Administration (SBA), in consultation with the Department of the Treasury, has published a number of updates to its Paycheck Protection Program (PPP) loan forgiveness rules and loan forgiveness application process in response to changes to the PPP program implemented under the Paycheck Protection Program Flexibility Act (PPPFA) enacted on June 5, 2020. Most notably, on June 16, 2020, the SBA published two new forms of PPP loan forgiveness applications and related instructions—a new revised standard form of loan forgiveness application (SBA Form 3508) (linked here) and related instructions (linked here) and a new shorter "EZ" form of loan forgiveness application (SBA Form 3508EZ) (linked here) and related instructions (linked here).

The revised SBA Form 3508 replaces the prior SBA Form 3508 application originally published by the SBA on May 15, 2020.¹ The shorter and simplified SBA Form 3508EZ is limited to use by applicants who are not subject to the fairly complicated loan forgiveness reduction formulas required under the PPP loan program, as amended by the PPPFA, because they either a) are self-employed and did not include employee salaries in the computation of average monthly payroll when they applied for their PPP Loan or b) have not reduced salaries or wages by more than permitted amounts under the loan forgiveness rules and have not reduced employee headcount or average paid hours between January 1, 2020 and the end of the applicable "covered period" of the PPP loan, or they otherwise satisfy one or more of the safe harbors that exempt borrowers from having to maintain headcount in order to be eligible for complete loan forgiveness. In addition to the new forms of loan forgiveness applications and related instructions, on June 22, 2020, the SBA published revisions to its previously published Loan Forgiveness Interim Final Rule and SBA Loan Review Procedures Interim Final Rule (linked here) (June 22 IFR Revisions) to implement changes to the PPP program and loan forgiveness application and review process required under the PPPFA.

This client alert summarizes the new loan forgiveness applications and revised rules most relevant to our client base. Both the revised SBA Form 3508 and the simplified SBA Form 3508EZ and their accompanying instructions and related rules are complex, and the below summary is not intended to be comprehensive. All PPP borrowers intending to apply for loan forgiveness are encouraged to review the applications, instructions, and rules carefully and consult with their legal and/or financial advisors if they have any questions prior to applying for forgiveness.

Wilson Sonsini's COVID-19 Client Advisory Resource team will continue to monitor changes and clarifications to the PPP loan program and loan forgiveness rules and will provide further updates if there are material developments.

The Revised Standard PPP Loan Forgiveness Application (SBA Form 3508)

The new revised standard PPP loan forgiveness application (SBA Form 3508) and accompanying instructions largely tracks the original application and instructions published in May 2020, but with a number of differences to implement changes to the PPP loan program and loan forgiveness rules under the PPPFA.

Key Differences:

• The portion of the loan forgiveness amount that must be comprised of payroll costs has been reduced from 75 percent to 60 percent to align with the PPPFA.
• Borrowers who received PPP loans prior to June 5, 2020 (the date the PPPFA was enacted) are allowed to choose between the original eight-week "covered period" (or "alternative payroll covered period," if applicable) or a new 24-week "covered period" (or "alternative payroll covered period," if applicable) implemented under the PPPFA, provided that in no event may the "covered period" (or "alternative payroll covered period," if applicable) extend past December 31, 2020. For borrowers who receive or who received PPP loans after June 5, 2020,² the 24-week "covered period" (or "alternative payroll covered period," if applicable) introduced by the PPPFA applies, subject to the December 31, 2020 cutoff date.
• Two new "check-the-box" FTE Reduction Safe Harbors have been added to PPP Schedule A—one safe harbor for applicants who can demonstrate in good faith that they were unable to operate their business at pre-pandemic levels between February 15, 2020 and the end of the applicable covered period due to compliance with HHS (United States Department of Health and Human Services), CDC (Centers for Disease Control and Prevention), or OSHA (Occupational Safety and Health Administration) guidance related to COVID-19 worker or customer safety measures and a second safe harbor for applicants who reduced FTE employee levels between February 15, 2020 and April 26, 2020, but later restored FTE headcount to levels that existed during the applicant's pay period that included February 15, 2020 by the earlier of December 31, 2020 and the date of application for PPP loan forgiveness.
• Certifications required to be made in connection with the application have been revised to account for the changes to the PPP loan program and loan forgiveness rules under the PPPFA, including new certifications for applicants that claim the FTE reduction safe harbor due to the fact that they have been unable to resume pre-pandemic business activity levels and new certifications for self-employed applicants and applicants with owner-employees that compensation for those owner-employees and self-employed individuals have been capped at certain levels depending on whether a 24-week or eight-week "covered period" is used by the applicant.

What Did Not Change:

• Borrowers can still calculate payroll costs using an "alternative payroll covered period" (which can be eight weeks or 24 weeks, as described above) that may better align with the borrowers' regular payroll cycles.
• The new application still includes flexibility to calculate eligible payroll and non-payroll expenses on both a paid and incurred basis.
• The new application still includes step-by-step instructions on how to perform the calculations required by the CARES Act, as amended by the PPPFA, to confirm eligibility for PPP loan forgiveness, including calculation of the maximum amount of loan forgiveness the applicant is eligible to receive and any reductions in the maximum loan forgiveness amount that may be required due to salary and wage reductions in excess of permitted levels and/or employee headcount reductions that are not cured or absolved under an applicable safe harbor.
• Unless borrowers are eligible to use SBA Form 3508EZ, borrowers are required to fully complete both 1) the PPP Loan Forgiveness Calculation Form and 2) PPP Schedule A.
• The new application still requires applicants to indicate if their PPP loan (together with any PPP loan received by one or more of its affiliates, if applicable) is in excess of $2 million. It is important to note that the SBA previously stated in its FAQ #46 that borrowers with a PPP loan with an original principal amount of less than $2 million will fall under a safe harbor that will deem them to have made the "necessity" certification in the PPP loan application in good faith and that only loans in excess of $2 million (and other PPP loans as appropriate) will be subject to audit by the SBA.
• The new application still requires applicants to make a number of certifications about the accuracy of the information submitted with the application and other matters, including that the funds were only used for authorized purposes and that the amounts applied for are eligible for forgiveness.
• Applicants using the new revised SBA Form 3508 (or lender equivalent) must still submit both the PPP Loan Forgiveness Calculation Form and PPP Schedule A to the same lender who originated the borrower's PPP loan, along with all documents listed on page 6 of the revised instructions under the heading "Documents that Each Borrower Must Submit with its PPP Loan Forgiveness Application." Borrowers are also required to maintain, but not submit with the application, the documents listed at the bottom of page 6 of the instructions under the heading "Documents that Each Borrower Must Maintain but is not Required to Submit."

The New Simplified PPP Loan Forgiveness Application (SBA Form 3508EZ)

In addition to the new revised standard PPP loan forgiveness application (SBA Form 3508) and accompanying instructions discussed above, the SBA also released a shortened and simplified "EZ" form of PPP loan forgiveness application (SBA Form 3508EZ) for applicants who can certify that they meet one of the following three criteria: 1) they are self-employed and did not include employee salaries in the computation of average monthly payroll when they applied for their PPP Loan, 2) they have not reduced salaries or wages by more than permitted amounts under the loan forgiveness rules and have not reduced employee headcount or average paid hours between January 1, 2020 and the end of the applicable "covered period" of the PPP loan (excluding employee reductions that arose from the inability to rehire individuals who were employees on February 15, 2020 and hire similarly qualified employees to fill those positions on or before December 31, 2020, and excluding reductions in employee hours that the applicant offered to restore, but the employee refused), or 3) they have not reduced salaries or wages by more than permitted amounts under the loan forgiveness rules and they can demonstrate in good faith that they were unable to operate their business at pre-pandemic levels between February 15, 2020 and the end of the applicable covered period due to compliance with HHS, CDC, or OSHA guidance related to COVID-19 worker or customer safety measures.

The simplified SBA Form 3508EZ includes many of the same rules and certifications required to be made under the longer standard PPP loan forgiveness application discussed above. For instance, SBA Form 3508EZ also requires the following:

• at least 60 percent of the forgiveness amount must have been spent on payroll costs during the applicable eight-week or 24-week "covered period" (or "alternative payroll covered period," if applicable);
• applicants must disclose if their PPP loan, together with affiliates (if any), exceeds $2 million; and
• applicants must submit supporting documentation and retain certain records for six years, as listed in the instructions to the SBA Form 3508EZ.

However, because the simplified Form 3508EZ is limited to applicants who are by definition not subject to fairly complex loan forgiveness reduction formulas (e.g., because they did not reduce wages or reduce employee headcount, or were otherwise subject to an applicable safe harbor), the loan forgiveness formula in Form 3508EZ is significantly simplified as compared to the longer SBA Form 3508.

The Forgiveness Application and Review Process

Following completion of SBA Form 3508 or SBA 3508EZ (or the applicable lender equivalent), a PPP borrower seeking loan forgiveness will submit the application and all required supporting documentation to its lender or lender servicing the loan. The June 22 IFR Revisions clarified that PPP borrowers may submit a loan forgiveness application before the end of the applicable covered period for the loan as long as the borrower has used all of the loan proceeds for which the borrower is requesting forgiveness. However, applicants must submit the completed application within 10 months after the covered period for the loan ends (e.g., 10 months after the end of the eight-week or 24-week covered period) in order to be eligible for loan forgiveness.³ The lender will have 60 days from receipt of a complete application to issue a decision on loan forgiveness to the SBA. If the lender determines that the applicant is entitled to forgiveness of some or all of the amount of the PPP loan, the lender will request payment from the SBA at the time the lender issues its decision to the SBA. The SBA will, subject to any SBA review of the loan or loan application (which is expected for any applicant who, together with their affiliates, has a loan in excess of $2 million), remit the appropriate forgiveness amount to the lender, plus interest accrued through the date of the payment and subtracting the amount of any Economic Injury Disaster Loan (EIDL) advance (if applicable), not later than 90 days after the lender issues its loan forgiveness decision to the SBA. The lender will then notify the applicant of the forgiveness amount. If the loan forgiveness request is denied or if only a portion of the loan is forgiven, principal and interest will no longer be deferred, and the remaining balance of the PPP loan must be repaid by the borrower on or before the maturity date of the loan.⁴

[1] The original SBA Form 3508 application and instructions were the subject of a previous Wilson Sonsini client alert published on May 18, 2020, which is now superseded by this client alert. 

[2] In a joint statement made by SBA Administrator Jovita Carranza and U.S. Treasury Secretary Steven Mnuchin on June 8, 2020 and the SBA’s revisions to its First Interim Final Rule published on June 11, 2020, the SBA clarified that the application deadline for PPP loans will be June 30, 2020.  

[3] If a PPP borrower fails to apply for loan forgiveness before the end of the 10-month application deadline, the deferral period for the loan will end and the borrower will be required to begin making principal and interest payments on the loan. 

[4] Under the PPPFA, PPP loans originated on or after June 5, 2020 (the date of enactment of the PPPFA) will have a minimum maturity period of five years. PPP loans originated before June 5, 2020 generally mature in two years (which was set by the SBA’s April 2, 2020 Interim Final Rule), but the PPPFA allows lenders and borrowers to extend the maturity date by mutual agreement to a minimum of five years consistent with the PPPFA.