Covid PPP Loan Forgiveness

New Interim Final Rules are being issued by Treasury pretty much daily...but latest on 6/22/2020

This one provides new information on forgiveness calculations, including the timing of applying for forgiveness and borrower options. 

New PPP Forgiveness Application forms were released on 6/17/2020.  

There are two forms, an "EZ" version of the application (Form 3508EZ)  and a Long Form for those who don't qualify based on the information below. The instructions to these forms also provide information on required documentation. 

1. EZ (Form 3508EZ) see qualification requirements below. 

2. Long Form (Form 3508) 

To qualify for the EZ form the borrower must meet one of the three options below: 

1.  Be a self-employed individual, independent contractor, or sole proprietor who had no employees at the time of the PPP loan application and did not include any employee salaries in the computation of average monthly payroll in the Borrower Application Form (SBA Form 2483).

OR

2. Did not reduce annual salary or hourly wages of any employee (earning annual wages below 100,000) by more than 25 percent during the Covered Period or the Alternative Payroll Covered Period compared to the period between January 1, 2020 and March 31, 2020 

AND

Did not reduce the number of employees or the average paid hours of employees between January 1, 2020 and the end of the Covered Period.

(Ignore reductions that arose from an inability to rehire individuals who were employees on February 15, 2020 if the Borrower was unable to hire similarly qualified employees for unfilled positions on or before December 31, 2020. Also ignore reductions in an employee’s hours that the Borrower offered to restore and the employee refused. See 85 FR 33004, 33007 (June 1, 2020) for more details.

OR

3.  Did not reduce annual salary or hourly wages of any employee by more than 25 percent during the Covered Period or the Alternative Payroll Covered Period (as defined below) compared to the period between January 1, 2020 and March 31, 2020 (for purposes of this statement, “employees” means only those employees that did not receive, during any
single period during 2019, wages or salary at an annualized rate of pay in an amount more than $100,000);

AND

The Borrower was unable to operate during the Covered Period at the same level of business activity as before February 15, 2020, due to compliance with requirements established or guidance issued between March 1, 2020 and December 31, 2020 by the Secretary of Health and Human Services, the Director of the Centers for Disease Control and Prevention, or the Occupational Safety and Health Administration, related to the maintenance of standards of sanitation, social distancing, or any other work or customer safety requirement related to COVID-19.

According to the instructions, "If you can check at least one of the three boxes above, complete  SBA Form 3508EZ in accordance with the instructions ,and submit it to your Lender (or the Lender that is servicing your loan).

Borrowers may also complete this application electronically through their Lender. If you are unable to check one of the boxes above, you cannot use SBA Form 3508EZ and instead you must apply for forgiveness of your PPP loan using SBA Form 3508."

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Documentation Requirements for the 3508EZ form are covered in the instructions. They include submitted and retained documents. 

1. Documents that Each Borrower Must Submit with its PPP Loan Forgiveness Application Form 3508EZ

Payroll:

Documentation verifying the eligible cash compensation and non-cash benefit payments from the Covered Period or the Alternative Payroll Covered Period consisting of each of the following:
a. Bank account statements or third-party payroll service provider reports documenting the amount of cash compensation paid to employees.
b. Tax forms (or equivalent third-party payroll service provider reports) for the periods that overlap with the Covered Period or the Alternative Payroll Covered Period:
i. Payroll tax filings reported, or that will be reported, to the IRS (typically, Form 941); and
ii. State quarterly business and individual employee wage reporting and unemployment insurance tax filings reported, or that will be reported, to the relevant state.
c. Payment receipts, cancelled checks, or account statements documenting the amount of any employer contributions to employee health insurance and retirement plans that the Borrower included in the forgiveness amount.
d. If you checked only the second box on the checklist on page 1 of these instructions, the average number of full-time equivalent employees on payroll employed by the Borrower on January 1, 2020 and at the end of the Covered Period.

Nonpayroll:

Documentation verifying existence of the obligations/services prior to February 15, 2020 and eligible payments from the Covered Period.
a. Business mortgage interest payments:

Copy of lender amortization schedule and receipts or cancelled checks verifying eligible payments from the Covered Period; or lender account statements from February 2020 and the months of the Covered Period through one month after the end of the Covered Period verifying interest amounts and eligible payments.

b. Business rent or lease payments:

Copy of current lease agreement and receipts or cancelled checks verifying eligible payments from the Covered Period; or lessor account statements from February 2020 and from the Covered Period through one month after the end of the Covered Period verifying eligible payments.

c. Business utility payments:

Copy of invoices from February 2020 and those paid during the Covered Period and receipts, cancelled checks, or account statements verifying those eligible payments

2. Documents that Each Borrower Must Maintain but is Not Required to Submit

  • Documentation supporting the certification that annual salaries or hourly wages were not reduced by more than 25 percent during the Covered Period or the Alternative Payroll Covered Period relative to the period between January 1, 2020 and March 31, 2020. This documentation must include payroll records that separately list each employee and show the amounts paid to each employee during the period between January 1, 2020 and March 31, 2020, and the amounts paid to each employee during the Covered Period or Alternative Payroll Covered Period.
  • Documentation regarding any employee job offers and refusals, refusals to accept restoration of reductions in hours, firings for cause, voluntary resignations, written requests by any employee for reductions in work schedule, and any inability to hire similarly qualified employees for unfilled positions on or before December 31, 2020.
  • Documentation supporting the certification, if applicable, that the Borrower did not reduce the number of employees or the average paid hours of employees between January 1, 2020 and the end of the Covered Period (other than any reductions that arose from an inability to rehire individuals who were employees on February 15, 2020, if the Borrower was unable to hire similarly qualified employees for unfilled positions on or before December 31, 2020). This documentation must include payroll records that separately list each employee and show the amounts paid to each employee between January 1, 2020 and the end of the Covered Period.
  • Documentation supporting the certification, if applicable, that the Borrower was unable to operate between February 15, 2020 and the end of the Covered Period at the same level of business activity as before February 15, 2020 due to compliance with requirements established or guidance issued between March 1, 2020 and December 31, 2020 by the Secretary of Health and Human Services, the Director of the Centers for Disease Control and Prevention, or the Occupational Safety and Health Administration,
    related to the maintenance of standards of sanitation, social distancing, or any other work or customer safety requirement related to COVID-19. This documentation must include copies of the applicable requirements for each borrower location and relevant borrower financial records.
  • All records relating to the Borrower’s PPP loan, including documentation submitted with its PPP loan application, documentation supporting the Borrower’s certifications as to the necessity of the loan request and its eligibility for a PPP loan, documentation necessary to support the Borrower’s loan forgiveness application, and documentation demonstrating the Borrower’s material compliance with PPP requirements. The Borrower must retain all such documentation in its files for six years after the date the loan
    is forgiven or repaid in full, and permit authorized representatives of SBA, including representatives of its Office of Inspector General, to access such files upon request.

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See details of sweeping changes to these rules that were signed into law on 6/5/2020 and updated by the release of forms on 6/17/2020. 

The following information on PPP Loan Forgiveness was pulled from the latest guidance available on 5/26/2020. This has now been changed by legislation enacted on 6/5/2020. 

Note: If you have both and EIDL advance and a PPP loan, the EIDL advance will be subtracted from the amount eligible for forgiveness. 1

There are two main sources of information, the forgiveness application itself and an "interim final rule" from the US Treasury  released on Friday, 5/24/2020. We have described the steps based on the information provided here. 

Start with Your Lender 

To qualify for loan forgiveness, you must complete and submit the Loan Forgiveness Application to your lender. The lender has 60 days from receipt of your application to determine if your loan will be forgiven. 

Gather your payroll data

The application worksheet contains two tables listing employee information that must be completed. Table 1 is for employees making less than $100,000 per year and Table 2 is for those making $100,000 or more. Owner-employee, self-employed and general partner payroll compensation is considered separately. 

The following payroll costs are able to be considered: 

"In general, payroll costs paid or incurred during the eight consecutive week (56 days) covered period are eligible for forgiveness. Borrowers may seek forgiveness for payroll costs for the eight weeks beginning on either:

i. the date of disbursement of the borrower’s PPP loan proceeds from the Lender
(i.e., the start of the covered period);

or
ii. the first day of the first payroll cycle in the covered period (the “alternative
payroll covered period”).

Payroll costs are considered paid on the day that paychecks are distributed or the borrower originates an ACH credit transaction. Payroll costs incurred during the borrower’s last pay period of the covered period or the alternative payroll covered period are eligible for forgiveness if paid on or before the next regular payroll date; otherwise, payroll costs must be paid during the covered period (or alternative payroll covered period) to be eligible for forgiveness."1

Include bonuses, hazard pay, and furlough pay

"The CARES Act defines the term “payroll costs” broadly to include compensation in the form of salary, wages, commissions, or similar compensation. If a borrower pays furloughed employees their salary, wages, or commissions during the covered period, those payments are eligible for forgiveness as long as they do not exceed an annual salary of $100,000, as prorated for the covered period."

"The Administrator, in consultation with the Secretary, has also determined that, if an employee’s total compensation does not exceed $100,000 on an
annualized basis, the employee’s hazard pay and bonuses are eligible for loan forgiveness because they constitute a supplement to salary or wages, and are thus a similar form of compensation."  

Owner-employee, self-employed, general partner compensation

"The amount of loan forgiveness requested for owner-employees and self-employed individuals’ payroll compensation can be no more than the lesser of 8/52 of 2019  compensation (i.e., approximately 15.38 percent of 2019 compensation) or $15,385 per individual in total across all businesses." 

"Owner-employees are capped by the amount of their 2019 employee cash compensation and employer retirement and health care contributions made on their behalf."

"Schedule C filers are capped by the amount of their owner compensation replacement, calculated based on 2019 net profit."

"General partners are capped by the amount of their 2019 net earnings from self-employment (reduced by claimed section 179 expense deduction, unreimbursed partnership expenses, and depletion from oil and gas properties) multiplied by 0.9235."   (This is net of the 7.65% FICA/Medicare deduction.)

"No additional forgiveness is provided for retirement or health insurance contributions for self-employed individuals, including Schedule C filers and general partners, as such expenses are paid out of their net self-employment income. "

Add to employee payroll any amounts paid for :

Employer contributions for health insurance and employee retirement plans

Employer state and local taxes

Choose the pay period dates you will use

Covered period = 8 weeks following distribution of the loan

Alternate covered period - available for bi-weekly or more frequent payrolls only (excludes semi-monthly)  = 8 weeks starting on the date of first pay period after distribution of the loan

Calculate the payroll reduction 

Compare average wages for "covered or alternate covered period" to amounts paid during January 1, 2020 to March 31, 2020. Full details are on the form. 2

If you fail the 75% test, there is an FTE Reduction exception : 

"Indicate the FTE of (1) any positions for which the Borrower made a good-faith, written offer to rehire an employee during the Covered Period or the Alternative Payroll Covered Period which was rejected by the employee; and (2) any employees who during the Covered Period or the Alternative Payroll Covered Period (a) were fired for cause, (b) voluntarily resigned, or (c) voluntarily requested and received a reduction of their hours. In all of these cases, include these FTEs on this line only if the position was not filled by a new employee. Any FTE reductions in these cases do not reduce the Borrower’s loan forgiveness."2

 

 

1    Source = US Treasury Interim Final Rule   https://home.treasury.gov/system/files/136/PPP-IFR-Loan-Forgiveness.pdf 

2   Source = PPP loan forgiveness application https://www.sba.gov/document/sba-form--paycheck-protection-program-loan-forgiveness-application