As anticipated, this week the Small Business Administration (SBA) and the US Treasury jointly announced the latest changes and revisions to the Paycheck Protection Program’s (PPP) forgiveness application, along with the introduction of the SBA’s new EZ PPP forgiveness application.

Brief Background on Paycheck Protection Program

In early June, 2020, the United States Congress enacted the Paycheck Protection Flexibility Act to make it easier for small businesses and other Paycheck Protection Program borrowers to qualify for full loan forgiveness. The forgivable loans were designed to help support those companies or nonprofits facing economic hardships created by the coronavirus pandemic. Congress passed the $2 trillion Coronavirus Aid, Relief, and Economic Security (CARES) Act as a way to assist those business owners and nonprofit leaders to continue to pay employee salaries. One of the most attractive features was that the PPP loan recipients could have their loans forgiven in full if the funds were used for eligible expenses and other criteria were met.

Ever since the CARES Act was voted into law, business owners and their advisors have seen changes evolving on a regular basis as FAQs have been published by the SBA in an attempt to improve the Act and ensure its impact would be as originally intended.

Executive Summary of the Recent Changes

The revised PPP Loan Forgiveness Application can be viewed here https://content.sba.gov/sites/default/files/2020-06/PPP%20Loan%20Forgiveness%20Application%20%28Revised%206.16.2020%29.pdf

These are the significant changes as announced Wednesday:

  • Health insurance costs for “S corporation” owners cannot be included when calculating payroll costs
  • Retirement costs for “S corporation” owners are eligible for calculating payroll costs
  • Borrowers don’t have to wait until December 31, 2020 to apply for forgiveness to use the safe harbors and instead can apply for forgiveness based on the date the application is submitted
  • Borrowers who received loans before June 5, 2020 can decide whether or not they prefer to use the original eight-week covered period or the new 24-week covered period

Summary of the new EZ forgiveness application

The goal behind this new application is to make it EZ (‘easier’) to complete by asking for less complicated calculations and requiring less back-up documentation. Those business owners who qualify to use the scaled-down version (EZ application) will have to meet specific criteria. They must:

  • Be self-employed and have no employees
  • Not have reduced the salaries or wages of their employees by more than 25% and did not reduce the number or hours of their employees - or
  • They must have experienced reductions in business activity as a result of health directives related to COVID-19 and did not reduce the salaries or wages of their employees by more than 25%

New interim final rule published

On Tuesday, June 16, 2020, the SBA issued a ruling to further clarify how business owners will be expected to determine payroll costs and owner compensation when calculating PPP loan forgiveness under the new 24-week covered period.

This announcement offers two new provisions described here and expands the previous guidance issued for calculating loan forgiveness under the original eight-week covered period. In short, the PPP allows loan forgiveness for payroll costs — including salary, wages, and tips — for up to $100,000 annualized per employee, or $15,385 per individual over the eight-week period. The new interim final rule establishes the 24-week maximum for full loan forgiveness at $46,154 per individual.

Owner compensation replacement calculations: new calculations

It should be noted that even though the employee compensation limit for the 24-week period is three times the eight-week limit, the interim final rule does not do the same with the owner compensation replacement for businesses that file Schedule C, Profit or Loss From Business, or Schedule F, Profit or Loss From Farming, tax returns. Instead, forgiveness for the owner compensation replacement will be determined using a different formula. In these instances, the eight-week period will be determined as 8 ÷ 52 × 2019 net profit, up to a maximum of $15,385. For those who decide to use the 24-week period, the forgiveness calculation is limited to 2.5 months’ worth (2.5 ÷ 12) of 2019 net profit, up to $20,833.

Other provisions put forth in the interim final rule

The interim final rule also addresses and refines some of the earlier guidance that was previously issued as part of the Payroll Protection Flexibility Act. The two key changes state that:

  • The minimum term for PPP loans is raised to five years for all loans made on or after June 5, 2020 while the two-year minimum maturity remains in effect for loans made prior June 5, 2020. (An exception will be made if both the borrower and the lender agree to extend it to five years.)
  • The proportion of PPP funding that must be used on payroll costs to qualify for full forgiveness drops to 60% from 75%

This pronouncement will simplify the process for many. Please feel free to contact us if you have any questions regarding your own specific situation as it relates to the forgiveness portion of your PPP loan or any other questions you may have.