June 16, 2020
This week, the Small Business Administration (SBA) and the U.S. Department of the Treasury released new information for recipients of loans through the Paycheck Protection Program (PPP). A recent article from the Journal of Accountancy offers helpful details on the revised loan forgiveness application, the new EZ application, and the new interim final rule on calculating compensation for loan forgiveness.
The Revised PPP Loan Forgiveness Application
The author notes three key items included in the updated application for PPP loan forgiveness:
- Clarification that S corporation owners may not include health insurance costs in their payroll cost calculation, but they may include retirement costs.
- Guidance regarding the use of safe harbors in conjunction with loan forgiveness.
- The option to use either the 8-week or the 24-week coverage period for borrowers that received PPP loans prior to June 5.
The New EZ PPP Loan Forgiveness Application
The EZ application was created for use by PPP borrowers with relatively straightforward cases (e.g., fewer calculations and less documentation). In order to be eligible to use the EZ application, borrowers must fit one or more of the following criteria:
- Be self-employed and have no employees
- Not have reduced salaries or wages by more than 25% and not have reduced hours or employees
- Both experienced a reduction in business due to COVID-19 health directives and did not reduce salaries or wages by more than 25%
New Interim Final Rule
Just prior to releasing the revised and new applications for loan forgiveness, the SBA issued a new interim final rule. The rule addresses the fact that the Paycheck Protection Program Flexibility Act (PPPFA) increased the covered period for PPP funds from eight weeks to 24 weeks. The rule increases the cap on salaries and compensation to account for the increase in the covered period. For borrowers using the 8-week period, PPP loan forgiveness is allowed for up to $15,385 for each individual employee ($100,000 annualized to an eight-week period). For borrowers using the 24-week period, PPP loan forgiveness is allowed for up to $46,154 for each individual employee ($100,000 annualized to a 24-week period).
Additionally, the rule addresses owner compensation in light of the increase in the covered period for PPP funds from eight weeks to 24 weeks. The calculation for owner compensation is more complex than that for individual employee compensation in order “to prevent owners from reaping PPP windfalls that Congress did not intend.” For borrowers using the eight-week period, PPP loan forgiveness is allowed for up to $15,385 of owner compensation. For borrowers using the 24-week period, PPP loan forgiveness is allowed for up to $20,833 of owner compensation.
Lastly, the interim final rule also adjusted previous guidance in order to account for changes made by the PPPFA. For loans made on or after June 5, 2020, the minimum term is five years. For loans made prior to June 5, 2020, the two-year minimum term is two years, unless the borrower and lender agree upon an extension. The portion of PPP funds that are required to be used on payroll costs in order for a borrower to qualify for forgiveness is reduced from 75% to 60%.