Below are 10 important things to know about the Paycheck Protection Program (“PPP”) Loan Forgiveness Applications and the detailed instructions for the further revised and updated applications posted on July 30, 2021, as well as other forgiveness procedures as updated by the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (the “Economic Aid Act” or “PPP2 Act”). This is the continuation of the guidance that we expected after the enactment of the Consolidated Appropriations Act, 2021 (“2021 Appropriations Act”) on December 27, 2020.
The PPP2 Act and 2021 Appropriations Act included several changes to the forgiveness documents and process, which affected existing forms and the processes. The most important of these changes were the tax deductibility of expenses, the forgiveness of loans of $150,000 or less, the expansion of eligible costs, and the borrower’s ability to select its covered period within a timing window between 8 and 24 weeks. In addition, the Economic Aid Act sets aside over $284 billion for PPP loans, both for new First Draw PPP Loans and Second Draw PPP Loans. See our articles “What to Know about the Paycheck Protection Program, Round Two – First Draw PPP Loans” and “10 Things to Know about Second Draw PPP Loans as Updated for the Economic Aid Act and the ARP Act.” Lending on PPP loans ended on May 31, 2021.
Around July 28, 2021, an Interim Final Rule on COVID Reduction Score, Direct Borrower Forgiveness Process and Appeals Deferment was posted (the “July 2021 IFR”). The July 2021 IFR discussed a streamlined process for borrowers with PPP loans of $150,000 or less, and on July 28, 2021, the SBA also announced that it will launch a new streamlined application portal on August 4 allowing borrowers to apply for forgiveness directly with the agency instead of going through their lenders. However, lenders are required to opt in to this program, and those with pending forgiveness applications cannot use the portal. In addition to the technology platform, the SBA announced that it is creating a PPP customer service team to answer questions and directly assist borrowers with their forgiveness applications. Borrowers that need assistance or have questions should call 877-552-2692, Monday–Friday, 8 a.m.–8 p.m. EST.
As of July 30, 2021, there were three applications and instructions: (a) PPP Loan Forgiveness Application Form 3508S Revised July 30, 2021 (“Form 3508S”); (b) PPP Loan Forgiveness Application Form 3508EZ Revised July 30, 2021 (“Form 3508EZ”); and (c) PPP Loan Forgiveness Application Form 3508 Revised July 30, 2021 (“Form 3508”). Also the form—Paycheck Protection Program Borrower’s Disclosure of Certain Controlling Interest (“Form 3508D”), discussed below in Item 10, was revised as of July 30, 2021. The July 30, 2021 changes to the forms included: (i) extending the expiration date to January 31, 2022; and (ii) for Form 3508S, adding wording for use of the new SBA portal, if so directed by the lender.
Also on January 19, 2021, the Small Business Administration (the “SBA”) in consultation with the Department of Treasury (“Treasury”) posted the Interim Final Rule on Loan Forgiveness Requirements and Loan Review Procedures as Amended by Economic Aid Act (“2021 Forgiveness IFR”). The 2021 Forgiveness IFR incorporates and restates the prior interim final rules relating to loan forgiveness and makes revisions to conform the prior interim final rules to the amendments made by the Economic Aid Act. In addition and on an ongoing basis, the SBA posts Frequently Asked Questions (most recently updated July 29, 2021) (“FAQs”) and Frequently Asked Questions on Loan Forgiveness (most recently updated 10/13/2020) (“Forgiveness FAQs”). The SBA has stated that the 2021 Forgiveness IFR should be interpreted consistently with the FAQs and the Forgiveness FAQs; however, the Economic Aid Act overrides any conflicting guidance in the FAQs and Forgiveness FAQs, and the SBA will be revising the FAQs and Forgiveness FAQs to conform to the Economic Aid Act “as quickly as feasible.” Please note that section 1106 of the CARES Act is now codified as section 7A of the Small Business Act. On March 3, 2021, the SBA issued additional guidance on forgiveness in the Interim Final Rule on Loan Amount Calculating and Eligibility (“March 2021 IFR”). On March 12, 2021, the SBA updated the FAQs. On March 18, 2021, the SBA posted Interim Final Rule on Paycheck Protection Program as Amended by American Rescue Plan Act (“Eligibility IFR”), which also addressed some forgiveness items. And as mentioned above, the July 2021 IFR also deals with forgiveness items.
The forms, 2021 Forgiveness IFR, and other guidance are generally effective when posted, and the rules in the 2021 Forgiveness IFR apply to loans that were made in 2020 but for which the SBA has not yet remitted forgiveness to the lender. Please note that we expect further changes to the forgiveness loan applications
For borrowers with First Draw PPP Loans in excess of $2 million: around October 26, 2020, the SBA asked PPP lenders to request certain information from First Draw PPP Loan borrowers with loans at or over $2 million. The SBA has posted these questionnaires on the Treasury website, and it has posted additional guidance. Please note that Second Draw PPP Loans borrowers will be deemed to have made the required certification concerning necessity and the loan amounts for First Draw PPP Loans and Second Draw PPP Loans will not be aggregated. The SBA discontinued use of these forms in early July 2021. Please see our articles: (a) “First Draw Loans at or Over $2 million – SBA Discontinues Use of Necessity Questionnaires and What Is Next”; and (b) “First Draw PPP Loans $2 Million and Up and the PPP Necessity Questionnaires.”
This article summarizes 10 things to know about the revised and updated PPP loan forgiveness applications:
1. COVERED PERIOD:
The covered period is the period beginning on the date the lender disburses the PPP loan and ending on the date selected by the borrower that is at least 8 weeks following the date of loan disbursement and not more than 24 weeks after the date of loan disbursement (the “Covered Period”). Please note that the option to elect an alternative covered period was removed because the Economic Aid Act provided borrowers flexibility to choose the end of their Covered Period. The Covered Periods for a First Draw PPP Loan and a Second Draw PPP Loan cannot overlap; the borrower must use all proceeds for the First Draw PPP Loan for eligible expenses before disbursement of the Second Draw PPP Loan.
2. TIMELINE FOR SUBMITTING APPLICATION AND DEFERRAL:
A borrower may submit a loan forgiveness application any time on or before the maturity of the loan if the borrower has used all of the loan proceeds for which the borrower is requesting forgiveness, except that a borrower applying for forgiveness of a Second Draw PPP Loan that is more than $150,000 must submit the loan forgiveness application for its First Draw PPP Loan before or simultaneously with the loan forgiveness application for its Second Draw PPP Loan.
If the borrower does not apply for loan forgiveness within 10 months after the last day of the maximum Covered Period of 24 weeks, or if the SBA determines that the loan is not eligible for forgiveness (in whole or in part), the PPP loan is no longer deferred and the borrower must begin paying principal and interest. If this occurs, the lender must notify the borrower of the date the first payment is due.
The July 2021 IFR also states that a timely appeal by a borrower of a final SBA loan review decision extends the deferment period of the PPP loan until OHA’s decision becomes final under 13 CFR 134.1211. See “What to Know About PPP Appeals and Next Steps."
3. ELIGIBLE PAYROLL COSTS:
4. NONPAYROLL COSTS:
5. FORM ELIGIBILITY:
6. FORGIVENESS CALCULATION:
Employee Retention Credit Update: The 2021 Appropriations Act also amended the provisions of the ERC. Prior to that act, PPP recipients were not eligible for the ERC. The 2021 Appropriations Act permits an employer that received a PPP loan to be eligible to claim an ERC, effective retroactive to the original effective date of the CARES Act. On March 1, 2021, the IRS issued guidance addressing the ERC as it applies to qualified wages paid after March 12, 2020, and before January 1, 2021, and addressing the interaction with PPP loans. This guidance is only for 2020. An eligible employer is permitted to elect not to take into account certain qualified wages for purposes of the ERC. However, a PPP borrower is deemed to have made an election for those qualified wages included in the amount reported as payroll costs on the loan forgiveness application. As such, PPP borrowers should carefully evaluate and calculate which qualified wages should be included as payroll costs on the loan forgiveness application in order to maximize the ERC, if the borrower meets the other ERC requirements. In other words, an employer that receives a PPP loan may claim the ERC available to it for the calendar quarter, subject to the restriction that the qualified wages may not be counted both for the ERC and as payroll costs that are paid during the Covered Period to the extent the payroll costs qualify the eligible employer for forgiveness under the PPP. In addition, on August 10, 2021, the IRS issued a safe harbor that allows an employer to exclude certain amounts received from other coronavirus economic relief programs in determining whether it qualifies for the ERC based on a decline in gross receipts, and the forgiveness of a PPP loan is one of those amounts. Rev. Proc. 2021-33.
If the borrower is applying for forgiveness through the SBA Platform, the borrower will be automatically prompted for documentation when the Score associated with the PPP loan requires it. If the borrower is applying for forgiveness through the lender, the borrower will be advised by the lender when the Score requires the borrower to provide documentation supporting the revenue reduction certification, if not previously submitted.
If the lender has directed the borrower to complete the forgiveness application electronically through the SBA Platform, the borrower must first successfully register for an account with the SBA Platform. If the SBA Platform cannot validate the borrower’s identity (if, for example, there has been an unreported change of ownership), the borrower will not be able to use the SBA Platform and instead must submit the forgiveness application directly to the lender. If the borrower is submitting the forgiveness application through the SBA Platform, the borrower must complete all required fields, initial all representations and certifications, sign the form, and, if required, upload revenue reduction documentation to complete submission of the application in the SBA Platform. The forgiveness application must be completed, signed, submitted, and accepted by the SBA Platform in order to continue the deferment of the loan. The borrower is to receive a confirmation when the SBA Platform has accepted the forgiveness application. If the borrower does not receive a confirmation, the loan will no longer be deferred beginning 10 months after the end of the Covered Period, unless the borrower submits a forgiveness application to the lender before the end of the deferment period.
After the forgiveness application is accepted by the SBA Platform, the lender will be notified by the SBA Platform. The lender has 60 days from the date of notice to review the forgiveness application and supporting documentation (if applicable) and issue a forgiveness decision to SBA through the SBA Platform. Upon issuance of the lender’s forgiveness decision, SBA has 90 days, subject to any review of the loan or loan application, to make a forgiveness remittance to the lender, if appropriate. By submitting the forgiveness application through the SBA Platform (if applicable), the borrower is authorizing SBA to share all information and documentation the borrower has submitted with the lender. If the borrower has already submitted a forgiveness application to the lender, the borrower should not submit a duplicate forgiveness application though the SBA Platform.
If the borrower is completing the forgiveness application through the SBA Platform, SBA will prepopulate certain data fields on the electronic Form 3508S with the information in SBA’s Electronic Transmission (E-TRAN) system of record. If the borrower is unable to confirm to SBA that the borrower’s records agree with all of the pre-populated data fields, the borrower must apply for forgiveness of the PPP loan through its lender.
If the borrower is submitting a forgiveness application through the lender, the borrower must complete all of the data fields on the form. Additionally, if the borrower is completing the forgiveness application through the SBA Platform, the borrower must complete all data fields that are not pre-populated.
7. FORGIVENESS REDUCTIONS BASED ON HEAD COUNT, SAFE HARBORS, AND REHIRING FORGIVENESS GUIDANCE:
Section 7A of the Small Business Act specifically requires certain reductions in a borrower’s loan forgiveness amount based on reductions in full-time equivalent employees. It includes an important statutory exemption for borrowers that have eliminated the reductions on or before December 31, 2020 (or for a PPP loan made on or after December 27, 2020, not later than the last day of the loan’s Covered Period). The Small Business Act also allows exemptions from reductions in loan forgiveness amounts based on employee availability and business activity. In addition, the SBA and Treasury have adopted regulatory exemptions to the reduction rules for borrowers that (1) have offered to restore employee hours at the same salary or wages, even if the employees have not accepted, (2) fired an employee for cause or have an employee who voluntarily resigns or voluntarily requests a schedule reduction; (3) eliminate reductions by December 31, 2020 or, for a PPP loan made after December 27, 2020, the last day of the loan’s Covered Period, or (4) have a PPP loan of $50,000 or less.
There is some guidance in the 2021 Forgiveness IFR, the loan forgiveness applications, and the Forgiveness FAQs on implementation of statutory exemptions from loan forgiveness reduction based on reductions in full-time equivalent employees, including the calculation of the average full-time equivalency (FTE) (40 hour week), the FTE Reduction Safe Harbors, and the FTE Reduction Exceptions.
8. FORGIVENESS REDUCTIONS BASED ON SALARY OR WAGES:
Under Section 7A(d)(3) of the Small Business Act, a reduction in an employee’s salary or wages in excess of 25% will generally result in a reduction in loan forgiveness amount, unless an exception applies. Specifically, for each new employee in 2020 and 2021, as well as each existing employee who was not paid more than the annualized equivalent of $100,000 in any pay period in 2019, the borrower must reduce the total forgiveness amount by the total dollar amount of the salary or wage reductions that are in excess of 25% of base salary or wages of the employee during the most recent full quarter during which the employee was employed before the Covered Period (the reference period), subject to exceptions for borrowers who restore reduced wages or salaries. This reduction calculation is performed on a per employee basis, not in the aggregate. Additionally, this reduction is performed based on the Covered Period and reference period applicable to the First Draw Loan or Second Draw Loan.
The forgiveness applications issued by the SBA require that they be accompanied with detailed documentation and that additional documents be retained by the borrower. If the lender identifies errors in the borrower’s calculations or material lack of substantiation in the borrower’s supporting documents in the loan forgiveness applications, the lender is to work with the borrower to remedy the issue. Borrowers should take the time to make sure they have both the accompanying documentation and the documents to be maintained available at the time of the submission. A borrower should not put off getting the “retained” documents together. The SBA has a right to request that information as part of its review. If the borrower does not promptly provide documents, this might cause delays and possibly denial of forgiveness. In addition, certain documents are required for appeals of certain SBA decisions. See our articles “Updated Key Considerations for PPP Documentation under the Economic Aid Act (January 27, 2021),” “A Guide to the SBA PPP Loan Forgiveness Review Process,” and “First Draw PPP Loans $2 Million and Up and the PPP Necessity Questionnaires.”
10. Form 3508D—BORROWER’S DISCLOSURE OF CERTAIN CONTROLLING INTERESTS:
All borrowers that received First Draw PPP Loans before December 27, 2020 are required to submit the form. The purpose of the form is to require borrowers that received First Draw PPP Loans before December 27, 2020 to disclose whether a “Covered Individual” directly or indirectly held a “Controlling Interest” in the borrower at the time the borrower’s loan application was submitted to the PPP lenders. If the borrower submitted a loan forgiveness application to its PPP lender before December 27, 2020, then the form must be completed and submitted to the PPP lender not later than January 26, 2021. If the PPP lender has already submitted a forgiveness decision to the SBA, the PPP lender must promptly transmit the completed Form to the SBA. Otherwise, PPP lenders must transmit the completed Form 3508D to the SBA when the PPP lenders issues its forgiveness decisions to the SBA. If the borrower submits a loan forgiveness application to its PPP lender on or after December 27, 2020, the form must be completed and submitted to the PPP lender within 30 days after submitting the forgiveness application. In that case, the PPP lender must transmit the completed Form 3508D to the SBA when the PPP lender issues its forgiveness decision to SBA.
The form requires disclosure, “at the time the borrower’s application for the First Draw PPP Loan was submitted to the PPP lender” of the names of “Covered Individual(s) directly or indirectly” holding “Controlling Interest(s) in the Borrower.” Those facts and a certification is required by the Principal Executive Officer of the borrower, “or an individual performing a similar function.” An entity is prohibited from receiving a PPP loan after December 27, 2020 if a controlling interest is held directly or indirectly by the President of the United States, Vice President of the United States, the head of an Executive department, or a Member of Congress, or the spouse of any of the preceding.
For purposes of the form, the following definitions apply:
 The prior interim final rules relating to loan forgiveness and loan reviews that are incorporated in the 2021 Forgiveness IFR are: the first interim final rule on loan forgiveness (85 FR 33004) (June 1, 2020); the first interim final rule on SBA loan review procedures and related borrower and lender responsibilities (85 FR 33010) (June 1, 2020); the interim final rule incorporating Flexibility Act Amendments (85 FR 38304) (June 26, 2020); the interim final rule on Treatment of Owners and Forgiveness of Certain Nonpayroll Costs (85 FR 52881) (August 27, 2020); and the interim final rule on Additional Revisions to Loan Forgiveness and Loan Review Procedures Interim Final Rules (85 FR 66214) (October 19, 2020). The rule also incorporates the forgiveness portions of the interim final rules regarding individuals with self-employment income (85 FR 21747 (April 20, 2020) and 85 FR 36997 (June 19, 2020)) and fishing boat owners (85 FR 39066) (June 30, 2020).
 For First Draw PPP Loans made in 2020, borrowers use 2019. For First Draw PPP Loans made in 2021 and Second Draw PPP Loans, borrowers use the year (2019 or 2020) that was used to calculate the borrower’s loan amount.