Simplified Paycheck Protection Loan Forgiveness

Paycheck Protection Program Loan Forgiveness Simplified

Many small and midsize businesses with Paycheck Protection Program (PPP) loans under the CARES Act have been struggling with spending those funds productively within the eight-week loan forgiveness period (Covered Period). Many projected that a portion of their PPP loan would not be forgiven unless they re-hired or paid workers who were not needed (due to their current level of operations) to satisfy the loan forgiveness safe harbors. Restaurant, hospitality and retail businesses were hit especially hard due to closures, occupancy limitations, and curtailed travel during their Covered Period. In addition, many self-employed individuals realized they would have to repay some of their PPP loans since the loans were based on 2.5 months (75 days) of 2019 Schedule C income, while forgiveness was based on only eight weeks (56 days) of that same number (assuming the individual did not have any other expenses that qualify for loan forgiveness).

The Paycheck Protection Plan Flexibility Act (PPP Flex Act) (H.R. 7010), enacted on June 5, further enhanced the opportunity for loan forgiveness by expanding requirements on how the loans are spent and extending the time to use the funds to 24 weeks (but not beyond December 31, 2020). The PPP Flex Act allows borrowers who received PPP funds before June 5, 2020, to elect to use their original eight-week Covered Period. To reflect the PPP Flex Act changes, the Small Business Administration (SBA) issued amendments to existing rules on June 16, 2020, and June 22, 2020. The amendments provided more clarity, along with a simplified application (discussed below) for borrowers who maintained employee counts and wages during their Covered Period or who were not able to return to their February 15, 2020, level of operations due to COVID-19 requirements or guidance.

Maximum Compensation Amounts for the 24-Week Covered Period

The extended Covered Period will allow borrowers to request forgiveness on gross cash compensation paid to or incurred for non-owner employees during 24 weeks, not to exceed $46,154 ($100,000/52 x 24). Employer contributions paid or incurred during the 24 weeks to qualified retirement and health care plans for those employees can also be submitted for PPP loan forgiveness.

The 24-week payroll costs for any one “owner employee” (which is different than a “self-employed” individual or partner) is capped at $20,833 ($100,000/12 x 2.5) because that is the total amount that would have been loaned for any one employee to cover cash compensation. Employer contributions to qualified retirement and health care plans paid or incurred during the 24 weeks for owner employees can also be submitted for PPP loan forgiveness.

Note that while self-employed individuals and general partners are also subject to the $20,833 cap per individual, their contributions to retirement plans and payment of health plan expenses are not added to the eligible for forgiveness amount, based on the reasoning that replacement income amount already includes those contributions. Note also that S corporation shareholders’ employer health insurance contributions made on their behalf cannot be separately added because those payments are already included in their employee cash compensation.

No Need for Documentation if Compensation Achieves Total Forgiveness

For many borrowers, 24 weeks of cash compensation may completely use up all of their PPP loan funds, making it unnecessary to substantiate any other eligible costs. This simplification is not likely for the eight-week period because the loan proceeds provided for 2.5 months (75 days) of payroll costs that had to be spent in eight weeks (56 days). This potential shortfall in PPP loan forgiveness prompted many employers to rush to pay bonuses or fund retirement plans — actions that may no longer be necessary under the 24-week Covered Period.

Less of the Forgiven Amounts Must be Spent on Payroll Costs

The PPP Flex Act lowered the SBA’s original requirement that 75% of the forgiven amount must be spent on payroll costs (the 75% rule prompted many employers to rush to pay bonuses or make retirement plan contributions to use up their PPP funds). Instead, the PPP Flex Act provides that only up to 60% of the PPP funds must be spent on payroll costs for maximum PPP loan forgiveness with partial forgiveness for lower spending on payroll costs. This change applies to all PPP loans, regardless of whether the eight-week Covered Period is elected. This change alone will allow many borrowers to achieve 100% forgiveness even when electing the eight-week period.

More Eligible Costs Can Support More Reductions in Headcounts and Salary/Wages

The reductions based on decreases in full-time equivalent (FTE) employees and salary/wages are applied to the total amount spent on eligible expenses. The 24-week Covered Period may result in eligible expenses far exceeding the total loan amount and that can absorb reductions before falling below the total loan amount. The greater the eligible expenses, the greater the FTE or salary/wage reduction that can be supported. For example, if a borrower has a $1 million PPP loan and has total eligible costs of $2 million during the Covered Period, then the FTE quotient can be up to 50% before the total amount spent on eligible expenses is the limiting factor on account of falling below the total loan principal.

Streamlined Application for Eligible Borrowers Avoids Data-Intensive Calculations

Perhaps the most significant simplification for PPP loan forgiveness is a new, streamlined PPP loan forgiveness application. SBA Form 3508-EZ and related SBA Form 3508-EZ instructions eliminate the need to compile the numerous counts of FTE employees if one of the following statements apply:

  • 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 by the later of the application date or December 31, 2020, and reductions in an employee’s hours that a borrower offered to restore and were refused).
  • 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.

Borrowers using Form 3508-EZ are still required to submit the number of employees on the loan application date and the forgiveness application date, but that is a much easier tally than undertaking the FTE counts.

Application Can be Filed Before the End of 24-Week Period

A PPP borrower may submit a loan forgiveness application based on the use of the funds during the eight weeks after receipt of the funds or as soon as all the loan proceeds have been used after the eight weeks and before 24 weeks have passed. However, if the borrower is not using the eight-week Covered Period, any reduction on account of a greater than 25% decrease of employee salaries or wages must be calculated for the entire 24-week Covered Period. The June 22, 2020, interim final rules provide the following example: A borrower using the 24-week Covered Period reduced a full-time employee’s weekly salary from $1,000 per week to $700 per week during the Covered Period. The employee continued to work on a full-time basis during the Covered Period (with an FTE of 1.0). In this case, the first $250 (25% of $1,000) is exempted from the PPP loan forgiveness reduction. The borrower seeking forgiveness would list $1,200 as the salary/hourly wage reduction for that employee (the extra $50 weekly reduction multiplied by 24 weeks). If the borrower applies for PPP loan forgiveness before the end of the Covered Period, the borrower must account for the salary reduction for the full 24-week covered period (totaling $1,200).

Long-Form Filers Can Begin Data Collection Now

Borrowers that do not qualify to use SBA Form 3508-EZ would request PPP loan forgiveness on regular (long-form) SBA Form 3508. Based on the corresponding SBA Form 3508 instructions, borrowers can move forward now with calculating and documenting their FTEs because the dates of the comparison periods are fixed (i.e., they do not depend on the Covered Period). On long-form SBA Form 3508, historical FTE counts are compared to a borrower’s average FTE count for the  Covered Period.

But borrowers will need to wait until their Covered Period ends to finalize their FTE determination for that time. Projecting the average number of FTEs for the Covered Period is useful for analysis but may be difficult for any business that is uncertain about when they can put employees back to work. Thus the elimination of FTE counts under the new safe harbors discussed above for Form 3508-EZ. Still, for long-form filers, the 24-week period allows employers more time to reduce or eliminate their calculated FTE reduction by re-hiring laid-off employees by the earlier of the loan forgiveness application date or December 31, 2020, instead of June 30, 2020.

If borrowers reduced employees’ hourly rates or annual salaries during the Covered Period, they must document that the reduction did not exceed 25% of the wages/salary for the calendar quarter preceding the PPP loan date. If borrowers did not reduce the rate of pay, they do not need to perform this calculation, even if actual payments to employees decreased due to reduced hours. Reductions in wage payments due to reduced hours are not a part of this calculation because the reduced hours generate a reduction in the number of FTEs.

Any reduction in rates of pay or salaries that exceeds 25% will decrease the amount spent on expenses that are eligible for forgiveness. However, the 24-week Covered Period allows more time to recover from temporary wage or salary reductions. For example, if a full-time employee’s hourly rate was reduced from $20/hour in Q1 to $10/hour for an eight-week Covered Period, the reduction at the end of the eight weeks in excess of 25% would be $5/hour, which for a typical 40-hour work week would equate to $1,600. But, if the business restores the wage rate to $20/hour for weeks 9-24, the new average rate for the Covered Period is $15/hour, meaning the pay reduction does not exceed 25%, preventing any reduction of forgivable amount due to a pay reduction during the Covered Period.

MFA Observations
Businesses will likely want to apply for forgiveness very soon after their Covered Period ends so they can make business decisions, such as any necessary payroll or staffing cuts, without impacting loan forgiveness.

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