This week, the Small Business Administration (SBA) published two new PPP Loan Forgiveness Applications and an Interim Final Rule that gives further clarity to the changes found within the Paycheck Protection Flexibility Act of 2020 that passed on June 5, 2020. A link to these rulings and other related items may be found here: https://home.treasury.gov/policy-issues/cares/assistance-for-small-businesses.
Key Provisions or Clarifications in the Interim Final Rule dated June 17, 2020
Below we will focus only on those items we consider new, clarified, and of interest to KHA clients. The points listed below are not an exhaustive list. For more detailed information, please visit each resource below.
The proportion of PPP funding that must be used on payroll costs to qualify for full forgiveness drops to 60% from 75%. If the borrower does not spend at least 60% of the loan on payroll costs, the loan will not be fully forgiven.
The minimum maturity date for PPP loans is expanded to five years for all loans made on or after June 5. For loans made before June 5, the two-year maturity remains in effect unless the borrower and the lender agree to extend it to five years.
The Paycheck Protection Flexibility Act (PPFA) tripled the duration during which PPP recipients could include accepted costs for the loan forgiveness calculation. When considering that change, borrowers were left with unclear guidance in how the $100,000 annualized payroll limitation would be addressed. This IFR provided clarity in the form of two different limitations on accepted payroll costs that depend on whether or not the employee has ownership in the business. If the employee has no ownership, the 24-week maximum for full loan forgiveness is $46,154 per individual. If the individual is an owner-employee, general partner, or sole proprietor, the compensation calculation is limited to 2.5 months or $20,833.
The SBA, in consultation with the U.S. Treasury released a new EZ application to allow for a more simplified application. Instructions can be found here.
The EZ application requires fewer calculations and less documentation than the full application, but there are requirements that the borrower must meet in order to use this new application. To qualify for this EZ application, the borrower must meet 1 of the following 3 conditions:
- The borrower is self-employed, has no employees, and did not include any other employees at the time of the application for the PPP loan.
- The borrower did not reduce the salaries or wages of their employees by more than 25% and did not reduce the number or hours of their employees.
- The borrower experienced reductions in business activity as a result of government mandated health directives related to COVID-19 and did not reduce the salaries or wages of their employees by more than 25%.
The SBA in consultation with the U.S. Treasury also revised the original loan forgiveness application to reflect the changes provided in the PPFA and Interim Final Rule dated June 17, 2020.
The revised PPP loan forgiveness application and instructions include numerous revised and clarified points.
Safe harbors for excluding salary and hourly wage reductions and reductions in the number of employees (full-time equivalents) from loan forgiveness reductions can be applied as of the date the loan forgiveness application is submitted or December 31, 2020, whichever is earlier. Many borrowers were unclear as to whether they were required to wait until December 31, 2020 to submit their forgiveness application. This clarification allows borrowers to submit applications earlier.
Borrowers that received loans before June 5, 2020 can choose between using the original eight-week covered period or the new 24-week covered period. Based on this application, borrowers with loan dates June 5, 2020 or later will only have the 24-week covered period available.
This application also simplified the use of the FTE reduction. If borrowers meet certain criteria in regards to number of employees, average paid hours, and/or compliance with government mandates, then the FTE reduction calculation will not be applied to the amount eligible for forgiveness.The loan application instructions can provide greater detail and can be found here.
Congress created the PPP as part of the CARES Act. The intent of the PPP was to support organizations facing economic hardships as a result of the coronavirus pandemic and to assist them in paying employee salaries. Congress passed the Paycheck Protection Flexibility Act to make it easier for small businesses and other PPP borrowers to qualify for full loan forgiveness. When considering how to address areas in the application that remain unclear or gray, borrowers should consider the intent of Congress.
There are still unanswered questions and we expect several answers in the form of frequently asked questions and will continue to monitor this subject.
Let KHA Assist
If you are interested in understanding how the forgiveness portion of the PPP Loan is calculated, the KHA Management Consultants team has dedicated resources to understanding this and are willing and available to assist KHA clients. Please reach out to understand how KHA might help you.
As your trusted advisors, we are committed to keeping you well-informed with any new legislation passed by Congress or other authorities as well as any new pronouncements by the Department of Treasury that may affect you. Please do not hesitate to reach out to KHA with any additional questions you may have.
These sources are simply included for informational purposes. KHA Accountants, PLLC, its partners and others do not provide any assurance as to the accuracy of these items or the information included therein. As such, KHA Accountants, PLLC cannot be held liable for any information derived from referenced sources. This by no means is a recommendation to obtain a loan or attempt to apply for a loan. There are many unknowns at this time regarding what other stimulus (grants or other loan options) may become available with pending and future bills, executive orders, or emergency declarations to follow, that may become laws. Consult your legal and business advisors prior to making financing decisions. This is intended for illustrative and discussion purposes only.