SBA Updates on PPP Loan Forgiveness

The U.S. Small Business Administration (SBA) released a new Interim Final Rule (IFR) which revises two previously-released IFRs.  These IFRs deal with Paycheck Protection Program loan forgiveness and SBA loan procedures.  The changes are due to the recent amendments to the PPP Flexibility Act (PPPFA).

The new IFR is inline with previous rules reflecting PPPFA provisions, including the covered period (CP) for forgiveness, non-payroll costs eligible for forgiveness, reductions in the forgiven amount, and the timing of when borrowers must apply for forgiveness to avoid making payments.

Forgiveness Applications

The new IFR confirms that borrowers may submit their forgiveness applications any time on or before the loan matures. This includes before the end of the covered period, provided they have used all of the loan funds for which they are applying for forgiveness.

PPPFA Exemptions

This new IFR incorporates PPPFA exemptions that preserve loan forgiveness for borrowers that made good-faith efforts to rehire employees or fill vacant positions.  Further, the IFR retains a previous exemption for borrowers that have reduced employee hours and offered, in good faith, to restore them.  In addition, the IFR also incorporates an exemption for those whose business could not return to previous levels of business activity due to public health directives.  The SBA indicated the latter exemption includes both direct and indirect compliance with state and local directives that are patterned after directives from the Centers for Disease Control (CDC), the U.S. Department of Health and Human Services (HHS), or the Occupational Safety and Health Administration (OSHA).

Borrower Disclosure

The SBA will disclose the names, address, NAICS codes, zip codes, business type, demographic data, nonprofit information, jobs supported and loan ranges as follows:

• $150,000 to 350,000
• $350,000 to 1 million
• $1 million to 2 million
• $2 million to 5 million
• $5 million to 10 million

These categories account for nearly 75% of the loan dollars approved.  For loans below $150,000, information will not be released by individual borrower.  Rather, totals will be released and grouped by

• Zip code
• Industry
• Business type
• Various demographic categories

Owner Eligibility Update

There has been confusion on the eligibility of owner compensation.  Here is a summary of compensation limits for various categories of owner-employees:

• C Corp Owner-Employee – $20,833 cash compensation, employer contribution to retirement plan and health insurance premiums paid on their behalf or if less, the lesser of the prorated 2020 amounts or 2.5/12ths of the 2019 amounts for these items
• S Corp Owner-Employee – $20,833 cash compensation and employer contribution to retirement plan on their behalf (cannot include health insurance premiums) or if less, the lesser of the prorated 2020 amounts or 2.5/12ths of the 2019 amounts for these items
• Schedule C and Schedule F Filers – These self-employed individuals are capped at their owner compensation replacement based on the net profit on the 2019 Schedule C or F. This amount is 2.5/12ths of the net profit on the 2019 Schedule C or F, limited to $20,833 (100,000 / 12 * 2.5). This cannot include any health insurance or retirement contributions
• General Partners – Very similar to Schedule C and F filers, general partners are capped at the amount of their self-employment income from the partnership or LLC as reported in Box 14(A) of their 2019 K-1 form, reduced by Section 179 depreciation, unreimbursed partnership expenses, and certain oil and gas depletion, the net of which is multiplied by 92.35 percent. This annual amount cannot exceed $100,000 and for the 24-week CP is limited to 2.5 months or $20,833 and cannot include any retirement or health insurance premiums

Each owner-employee and self-employed individual gets only one $20,833 limit regardless of the number of businesses they have interests in that have obtained PPP loans.

FTE Reduction Safe Harbors

Two safe harbors were added in the PPPFA, which aided in loan forgiveness due to a reduction in Full-time Equivalents (FTEs) during the CP or the alternative payroll covered period (APCP) when compared to the reference period selected by the borrower.

• if a borrower can document an inability to rehire employees that were employed on February 15, 2020, or an inability to hire similarly qualified employees for unfilled positions on or before December 31, 2020.
• if a borrower is able to document the inability to return to the same level of business activity as it was operating at on February 15, 2020, due to compliance with requirements of CDC, HHS, or OSHA generally regarding COVID-mandated practices. This includes sanitation, social distancing, or any other employee or customer safety requirements.

The IFR provides more detail for the borrower’s documentation requirements for safe harbors.

• For the first situation, the IFR is rather general.
  • The borrower must maintain
    • the written offer to rehire,
    • the written record of the rejection and
    • a record of the efforts the borrower took to hire a similarly qualified worker.
  • The borrower must also notify the state unemployment office of the rejected rehire within 30 days of the rejection.
• The documentation required for the second safe harbor situation were even more general.
  • To show a decline in activity, the documentation must include
    • copies of applicable COVID requirements or guidance for each business location
    • relevant borrower financial records
  • The SBA will accept a business’s direct or or indirect compliance with CDC, HHS or OSHA requirements.  Most businesses that closed or forced to scale back did so under the requirements of state or local governments.  The IFR acknowledges the underlying mandates were from the three federal agencies, regardless of a state or local enforcement agency issuing the directive.

We will continue to closely monitor this situation.  COVID-19 related changes are being made rapidly.  The information above is current as of the date of this article.

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Please contact your HW&Co. advisor with any questions.