PPP Loan Forgiveness – A Challenging Puzzle to Solve

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The Paycheck Protection Program (PPP) has helped thousands of California and Texas businesses survive through the COVID-19 emergency. As many were left practically helpless by stay-at-home orders and forced business closures, it has been an essential lifeline for many. One of the most popular features has been loan forgiveness, allowing borrowers to receive forgiveness for a portion or all of the funds borrowed. However, there has been a bevy of questions about the process since very few have been eligible as covered periods are just now ending. The recently passed PPP Flexibility Act of 2020 (the Act) made several significant changes the Small Business Administration and Treasury are now formalizing. In fact, over the last week, the Interim Final Rule was updated, and a new loan forgiveness application, including a new EZ application, was released. To help clients, prospects, and others, JLK Rosenberger has provided a summary of key points below.

Interim Final Rule Update (IFR)

The updated rule was issued late on June 22, 2020, and formalizes many of the changes outlined in the Act including the expansion of the covered period from 8 to 24 weeks, a change to the expense minimum to 60% on payroll expenses, and the new 5-year term for loans made after June 5. In addition, there were several other issues addressed and reinforced in the guidance.

  • Early Forgiveness– The IFR permits a borrower to apply for loan forgiveness prior to the end of the covered period. However, this decision may come with a trade-off because any reductions in salaries or employees above the 25% allowed still need to be accounted for across the covered period. This means borrowers will not be able to take advantage of a new safe harbor which permits the restoration of salary and wages by December 31, 2020, and thereby avoid a reduction in the forgiveness amount. The early application does not mean calculations will be changed to a shorter period.
  • Forgiveness Calculations – The IRF also makes clear that correct loan forgiveness calculations are the responsibility of the borrower, and no one else. While lenders are expected to perform a good-faith review, they are not required to independently verify information provided assuming supporting documentation and certifications are provided.
  • Reminders – It was also pointed out that employer expenses for S-corporation owners should not be included in payroll costs. However, these payments can be considered eligible costs.
Updated Loan Forgiveness Application

On June 17, the SBA issued two new forgiveness applications including an EZ version which has been simplified for qualifying borrowers. In fact, each application is accompanied by a separate instruction guide. There are three criteria that must be met in order to use the EZ application.

  1. A borrower must be a self-employed individual, independent contractor, or sole proprietor without employees at the time of loan application submission.
  2. A borrower did not reduce annual salaries or wages of any employee by more than 25% during the covered period as compared to the period between January 1, 2020, and March 31, 2020.
  3. A borrower did not reduce annual salary or hourly wages of any employee by more than 25% during the covered period as compared to January 1, 2020 – March 31, 2020, and have been operating at reduced levels due to COVID-19.
Other Application Highlights

In both application versions, there were a number of important changes which include:

  • Covered Period Election – Borrowers that received a loan prior to June 5 can elect if they want to retain the original 8-week covered period or transition to the new 24-week covered period.
  • Expense Ratio – Updated information on the allowable expense ratio between payroll costs and non-payroll costs has been adjusted to reflect the lowered 60% requirement. This allows borrowers greater freedom to address expenses essential to business operations.
  • FTE Reduction Exceptions – FTE reductions will not impact forgiveness under the following circumstances.
    • In situations where a good faith, a written offer was made to rehire an employee and where the borrower was unable to hire similarly qualified employees for unfilled positions before December 31, 2020.
    • When the borrower made a good faith written offer to restore reduction in hours, at the same salary or wages and the employee rejected the offer.
    • When an employee was fired for cause, voluntarily resigned, or requested a reduction in hours during the covered period.
  • Required Documentation – Forgiveness application should include the following documentation.
    • Payroll Documentation – Documentation provided should include that which verifies cash compensation and non-cash benefits paid during the covered period. This can include bank statements, third party payroll reports, relevant tax forms such as IRS Form 941.
    • Nonpayroll Documentation – Documentation should include any information which verifies the existence of obligations prior to February 15, 2020, and eligible payments made during the covered period.

Contact Us

It appears that the PPP continues to be a challenging puzzle to solve. Just when it appears no more changes will be forthcoming, that’s when changes occur. If you have questions about the information outlined above or need assistance with a COVID-19 tax planning or business issue, JLK Rosenberger can help. For additional information call us at 818-334-8625 or click here to contact us. Let’s navigate this process together.