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The Small Business Administration (SBA) and Treasury announced on October 8 that a simplified application (Form 3508S) for Paycheck Protection Program (PPP) loan forgiveness is now available for borrowers whose loans fall in the $50,000 or less threshold. As more and more businesses begin filing for PPP loan forgiveness, this change outlined in a new interim final rule greatly simplifies the process for borrowers with smaller loans. However, it is important to note that this simplified form is not equal to automatic forgiveness.   

Among the simplified provisions for borrowers with $50,000 or less in PPP loans is the exemption from a reduction in forgiveness based on reductions in full-time-equivalent (FTE) employees as well as reductions in employee salaries or wages. While certifications and documentation of payroll and non-payroll costs will still be required, this move streamlines the process significantly for borrowers with smaller loans who will not be responsible for potentially complicated calculations for FTE and salary reductions.  

Borrowers with loans of $50,000 or less who are also included in affiliate loans totaling $2 million or more are not eligible for the new application. The SBA estimates that approximately 3.57 million loans were issued for $50,000 or less or $63 billion of the PPP funds, and that about 1.71 million of the loans were for businesses with one or zero employees.   

Below are additional considerations to keep in mind: 

Updates for lenders 

Lenders should note the further guidance on their responsibilities released with the notice which includes review of borrower documentation for eligible costs for forgiveness for all forgiveness applications. Lenders are required to confirm receipt of the borrower certifications the borrower’s documentation of payroll and nonpayroll costs. Borrowers are responsible for their calculations and accuracy of the information provided, and lenders are permitted to rely on what the borrower has submitted.  

It’s important to note that the amount of forgiveness cannot exceed the principal amount of the loan even if a borrower submits documentation for eligible costs exceeding the amount of their PPP loan. 

Regardless of what form is submitted for forgiveness, lenders must: 

Many questions remain about the tax treatment of some expenses that fall under the PPP. Contact your CPA for assistance with your forgiveness application and to have a thorough discussion about the impact your PPP loan has on your tax strategy and when is the best time to apply for forgiveness. 

With the M&A market in flux after all the unexpected challenges of 2020, buyers and sellers are likely wondering how their Paycheck Protection Program (PPP) loan comes into play in an M&A transaction. On Oct. 2, we got some answers when the Small Business Administration (SBA) released guidance on what to do if you are buying or selling a business with a PPP loan. The Procedural Notice was addressed to SBA employees and PPP lenders and clarifies how a change of ownership is defined, the steps that need to be taken with a PPP loan, and the obligations of borrowers regardless of change of ownership. Here’s what you need to know:

What defines a change of ownership?

The guidance states that a change of ownership requires at least one of the following conditions to be true for a PPP borrower:

Aggregation of sales and transfers since the date of the approval of the PPP loan is required. Sales or other transfers for publicly traded borrowers must be aggregated when they result in one person or entity holding or owning at least 20% of the common stock or other ownership interest.

What must I do before the ownership change?

1. Notify your lender if you are contemplating a transaction that will change ownership – this must be done in writing and include relevant documentation.

2. If your lender is accepting PPP loan forgiveness applications, submit your application with all required documentation (we can help with this).

3. Set up an interest-bearing escrow account with your PPP lender which will be required in most cases by the SBA.

4. Determine if SBA approval of the change of ownership is required for your transaction.

How do I determine if SBA approval is required for my transaction?

SBA approval is not required for:

SBA approval is required for sales that cannot meet the above criteria. The SBA will have 60 calendar days to review and approve or not approve. The PPP lender is responsible for notifying the SBA within five business days from the completion of the transaction and must submit to the SBA:

What if I don’t set up an escrow account?

Borrowers attempting to make an asset sale with 50% of assets and no escrow account will require a condition of the purchasing entity to assume all of the PPP borrower’s obligations under the PPP loan. The purchaser will then be responsible for compliance with PPP loan terms, and the assumption must be part of the purchase and sale agreement.

What do I do if I end up with two PPP loans?

Transactions resulting in an owner holding two PPP loans will require the owner to segregate and delineate the PPP funds and expenses with documentation demonstrating PPP requirement compliance for both loans. Being thorough and accurate with your documentation is key.

Anything else I should know?

Loans that are repaid in full or are fully forgiven by the SBA have no restrictions for change in ownership. Note that all PPP borrowers are responsible for the performance of PPP loan obligations, certifications related to the PPP loan application including economic necessity, compliance with all PPP requirements, and supporting PPP documentation and forms. Borrowers will be responsible for providing any and all of this documentation to a PPP lender/servicer or the SBA upon request.

For questions and assistance with an M&A transaction and your PPP loan, reach out to us.

On Aug. 24, the Small Business Administration (SBA) and Treasury issued the latest interim final rule update to the Paycheck Protection Program (PPP) that seeks to clarify guidance related to owner-employee compensation and non-payroll costs. This guidance has been long-awaited and clears up several questions borrowers have had about forgiveness. Here are the main points: 

1. Owner-employees of C or S corporations are exempt from the PPP owner-employee compensation rule for loan forgiveness if they have a less than 5% stake in the business. The intent is to provide forgiveness for compensation of owner-employees who do not have a considerable or meaningful ability to influence decisions over loan allocations. This clarifies earlier guidance that capped the owner-employee compensation regardless of what stake they have in the business.  

2. Loan forgiveness for non-payroll costs may not include amounts attributable to the business operation of a tenant or subtenant of the PPP borrower. The SBA provides a few examples of what this means: 

3. To achieve loan forgiveness on rent or lease payments to a related thirdparty, borrowers must ensure that (1) the amount of loan forgiveness requested does not exceed the amount of mortgage interest owed on the property attributable to the business’s rented space during the covered period, and (2) the lease and mortgage meet the Feb. 15, 2020, requirement for establishment. Earlier guidance had not addressed related third-party leases. 

It’s important to note that mortgage interest payments to a related party are not eligible for forgiveness as PPP loans are not intended to cover payments to a business’s owner because of how the business is structured – they are intended to help businesses cover non-payroll costs owed to third parties. 

For questions on any of these rules or assistance with your PPP loan forgiveness application, contact us today. 

The Small Business Administration (SBA) and Treasury released an updated Paycheck Protection Program (PPP) FAQ on Aug. 4 in an effort to address PPP loan forgiveness issues that have arisen as borrowers begin to complete their applications. The 23 FAQs address various aspects of PPP forgiveness including general loan forgiveness, payroll costs, non-payroll costs, and loan forgiveness reductions. Here is a brief overview of some of the most notable clarified guidance. 

General loan forgiveness 

Payroll costs forgiveness 

Non-payroll costs forgiveness 

Forgiveness reductions 

The FAQ document also includes several examples for making calculations related to the above questions. Contact us for questions and assistance with your PPP loan forgiveness application.  

The U.S. Senate and House of Representatives have both unanimously agreed to extend the Paycheck Protection Program (PPP) by five weeks in an effort to continue providing relief for small businesses hit hard by the pandemic. Applications officially closed for the program on June 30 when the Senate voted for a last-minute extension. President Trump is expected to sign the bill.

This extension would give small businesses until Aug. 8 to apply for a share of the approximately $129 billion in remaining PPP funding through the Small Business Administration (SBA). Thanks to the PPP Flexibility Act passed on June 5, recipients have 24 weeks to use loan funds for payroll and other essential expenses like rent/mortgage and utilities. The Flexibility Act also lowered the threshold for payroll expenses to 60% to achieve full forgiveness with a few safe harbor considerations. Over 4.9 million loans have been approved by the SBA so far, worth more than $520 billion.

Contact us for assistance in compiling information for your PPP forgiveness application to present to your lender.

On June 22, 2020, the U.S. Small Business Administration (SBA) released the: Paycheck Protection Program (PPP) Revisions to Loan Forgiveness Interim Final Rule

This guidance details two noteworthy changes impacting PPP loan borrowers, including:

The updated regulations also make minor updates to existing guidance addressing the extension of the covered period derived from the June 5, 2020 enactment of the Paycheck Protection Program Flexibility Act (H. R. 7010).

Read our blog summary of changes from H.R. 7010 here.

When Can a Borrower Apply for Loan Forgiveness?
A borrower can apply for forgiveness at any time on or before the loan maturity date. However, if the borrower applies for forgiveness before the end of the covered period and has reduced any employee’s salaries or wages by more than 25 percent, the borrower must account for the excess salary reduction for the full 8-week or 24-week covered period.

Expanded Limitations on Owner Compensation
The release of Revisions to the Third and Sixth Interim Final Rules on June 17, 2020, increased the maximum compensation for all employees and owners, which was summarized in our blog here. The new interim rules added that the employer portion of retirement plan funding for owner-employees of S-Corporations and C-Corporations is now capped at 2.5 months’ worth of the 2019 contribution amount. Furthermore, healthcare costs paid on behalf of owner-employees of S-Corporations are not eligible for forgiveness.

HT2 has established a dedicated PPP loan forgiveness team that is constantly monitoring new guidance from the SBA, as well as the Treasury, Congress, and the IRS, to ensure we have the latest information when advising our clients.

On June 16, 2020, the U.S. Small Business Administration (SBA) released the updated Paycheck Protection Program (PPP) Loan Forgiveness Application (see link below) which supersedes the application previously released on May 15, 2020. The new application incorporates changes to the PPP per the Paycheck Protection Program Flexibility Act (H. R. 7010), which was signed into law on June 5, 2020. The latest PPP loan forgiveness application, in conjunction with the June 17, 2020 release of the Revisions to the Third and Sixth Interim Final Rules, addresses some of the previously unanswered questions, including:

  1. Covered Period: All PPP loan borrowers will now have a 24-week Covered Period, unless borrowers of loans originated prior to June 5, 2020 elect to use the 8-week Covered Period as originally designed. The application instructs the borrower to state their covered period on the application, either the 8- or 24-week period. These new instructions do not suggest that there is an additional form required for the 8-week election.
  2. Maximum Cash Compensation Per Employee: PPP loan borrowers can obtain forgiveness for cash compensation in the maximum amount of $46,154 per employee, calculated as $100,000 as prorated over the 24-week Covered Period, or $15,385 over the 8-week Covered Period.
  3. Owner Compensation: Prior to this latest guidance, owner compensation was limited to eight weeks’ worth (8/52) of 2019 net profit up to $15,385. PPP loan borrowers using the 24-week Covered Period can now include 2.5 months’ worth (2.5/12) of 2019 net profit up to $20,833.

The SBA also released the PPP Loan Forgiveness Application Form 3508EZ (Form EZ) on June 16, 2020. The Form EZ is a simplified version of the loan forgiveness application and is applicable to PPP loan borrowers who are willing to certify they have met one of the following conditions:

  1. Borrower Has No Employees: The borrower is a self-employed individual, independent contractor, or sole proprietor who had no employees at the time of the PPP loan application and did not include any employee salaries in the computation of average monthly payroll in the PPP loan application form.
  2. No Salary or Hourly Wages Reductions or FTE Reductions: The borrower did not reduce annual salary or hourly wages of any employee by more than 25 percent during the Covered Period or compared to the period between January 1, 2020 and March 31, 2020, AND 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.
  3. No Salary or Hourly Wages Reductions or Unable to Maintain Level of Business Activities: The borrower did not reduce annual salary or hourly wages of any employee by more than 25 percent during the Covered Period or compared to the period between January 1, 2020 and March 31, 2020, AND was unable to operate during 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, the Occupational Safety and Health Administration, or standards of sanitation, social distancing, and any other work or customer safety requirement related to COVID-19.

Further guidance and instructions are anticipated, especially as they relate to the PPP Loan Forgiveness Application. The HT2 COVID-19 Task Force is hard at work deciphering new regulations as they are published! Stay tuned for updates and contact us for assistance with your loan forgiveness application.

On June 10, 2020, the Small Business Administration (SBA) issued an updated interim final rule for the Paycheck Protection Program (PPP) in response to the PPP Flexibility Act passed on June 5, 2020. The updated guidance accounts for revisions made to the covered period, usage of funds changes, extended safe harbors, and more.

Here is a quick rundown of the changes made by the PPP Flexibility Act.

Also of note:

Further guidance and instructions are anticipated, especially as they relate to the PPP Loan Forgiveness Application. The HT2 COVID-19 Task Force is hard at work deciphering new regulations as they are published! Stay tuned for updates and contact us for assistance with your loan forgiveness application.

Helpful Links:

On May 28, 2020, in a nearly unanimous vote, the U.S. House of Representatives voted to extend certain provisions of the Paycheck Protection Program (PPP) to provide small businesses with relief in the timeframe and use of their PPP loan funds. While President Trump has encouraged changes to PPP, and the Senate had been developing a plan of its own, the Paycheck Protection Program Flexibility Act is the first to pass its branch.

House representatives took into consideration the most debated aspects of the PPP when they wrote the Flexibility Act including the timeframe and parameters for usage of loan funds. The most notable changes of the Paycheck Protection Program Flexibility Act were:

The bill must next pass the Senate, which has not yet signaled support but is expected to take up the bill when it’s in session next week. We will continue to update this story as developments occur.

On May 23, the Small Business Administration (SBA) issued an interim final rule for the Paycheck Protection Program (PPP) that included the loan forgiveness application guidance released May 15, as well as other updated guidance.

The rule, Paycheck Protection Program – Requirements – Loan Forgiveness, is the formal guidance that accompanies the forgiveness application and should be used by borrowers and their advisors, as well as lenders, to ensure accurate completion and review of the forgiveness application. Since the passage of the CARES Act on March 25 and the opening of PPP loan applications on April 3, questions, concerns, and clarifications have abounded regarding loan forgiveness on all sides. The release of the interim final rule clarifies many questions, but guidance is still expected for borrowers and lenders.

Clarifications on borrower responsibility

Alternative payroll period – Until the application was released on May 15, the 8-week rule was strict for payroll. The interim rule now allows borrowers to establish the forgiveness period with the start of the first payroll period following loan disbursement, rather than the date of loan disbursement. This allows for greater flexibility for employers with less frequent pay periods and should make meeting forgiveness requirements for some businesses a little easier.

Eligible payroll costs – Payroll costs must make up a hefty 75% of the loan to qualify for forgiveness, but borrowers have questioned what qualifies because employee compensation can be paid in a multitude of ways. The rule clarified that eligible payroll costs include salary, wages, commission, bonuses, hazard pay, cash tips or equivalent, PTO/sick/family/medical leave, separation or dismissals, employee benefits related to group health care coverage and retirement, state and local taxes assessed on payroll, and independent contractor/sole proprietor wages/commissions/income paid by employers to contractors up to the pro-rated amount of a $100,000 annual salary.

Caps on eligible costs for self-employed/owner-employees – For these individuals, guidance on forgiveness was somewhat incomplete and unclear. The rule clarifies that forgiveness is capped at 8/52 of 2019 compensation up to $15,385 across all businesses and that retirement and health insurance contributions are not eligible for forgiveness for self-employed individuals (benefit contributions do qualify for owner-employees) which had been in question prior to guidance issuance.

Costs paid vs costs incurred – The 8-week-from-disbursement rule in the original PPP documentation created some unforeseen restrictions on claiming eligible non-payroll costs for businesses operating on a schedule that did not align with the 8 weeks. The May 15 guidance and the most recent interim rule clarified that non-payroll costs may be paid during the 8-week period or simply incurred as long as they are paid on or before the next billing date. These costs include interest payments on business mortgage on real or personal property, business rent on real or personal property under a lease, and business utility payments, including electricity, gas, water, transportation, telephone, or internet, all incurred, in force, or in service before Feb 15., 2020. The rule also clarified that advance payments on interest are not eligible for forgiveness.

Clarification on calculating FTE employees

The interim rule included much-needed clarification on calculating FTE employees considering the many possible changes and circumstances as a result of the crisis, which was a looming question for borrowers, including when and how safe harbors apply.

First, it is important to note that the FTE calculation for PPP forgiveness differs from previous legislation in that 40 hours is considered FTE status rather than 32 hours, like for the Affordable Care Act. FTEs are calculated by the average number of hours paid per week per employee / 40, rounded to nearest tenth. FTEs can be calculated using the formula available on the forgiveness application or contact us for assistance.

Wage reductions must be analyzed on a per employee annualized basis – Employers may reduce wages and still qualify for forgiveness as long as they follow certain restrictions. Salary or hourly calculations should be done on an average annualized basis compared to period of Jan. 1, 2020, to March 31, 2020. If the average for the 8-week period is 25% less than first quarter of 2020, loan forgiveness will be reduced, unless the reduction is restored at equal to or greater levels by June 30, 2020, then forgiveness will not be reduced. 

Rehiring employees – Similar to the above, borrowers who rehire employees and/or reverse reductions to salary and wages by June 30 are still eligible for forgiveness. The guidance also clarified that, for hours and wage reductions on the same employee, loan forgiveness will not be reduced.

Employees who reject return – What happens if employees refuse to return to work for reasons such as personal or familial high-risk health concerns or other reasons? The guidance states that employers will not be beholden to employees who reject returning to work in their total FTE count. Key here is that borrowers will be required to demonstrate they made a good faith effort to rehire the employee with a written offer and must receive a written rejection. Employers must also notify the state unemployment office within 30 days following an employee’s rejection to return to work.

Cause or voluntary employee changes – Concessions have also been granted for employers whose reduction in FTE account was out of their control. The rule clarifies that borrowers who fired employees for cause, employees who voluntarily resigned, or voluntarily requested and received reduction in hours will not be counted against forgiveness. All these procedures should be documented in writing.

Clarification on loan forgiveness procedures

When working with lenders and the SBA, borrowers should be aware of additional guidance and clarification on the procedures for loan forgiveness. Most notably, all forgiveness applications must be submitted to the lender, not the SBA or other entity, and your lender will notify you of your forgiveness amount. Other points to note include:

Understanding non-forgiveness – Borrowers concerned about unforgiveable expenses received clarification that they will have 2 years at 1% interest to repay portions of the loans not forgiven by the maturity date. These terms are more generous that most SBA loans.

Factoring in EIDL – Some borrowers also qualified for, applied, and received Economic Injury Disaster Loan (EIDL) grants from the SBA. How this impacts PPP forgiveness has been a hot topic among borrowers and their advisors, but the guidance has clarified that EIDL grants will be factored into forgiveness calculations. If you want to avoid EIDL grants impacting your PPP forgiveness, they may be paid back prior to forgiveness, if applicable to your circumstances.

SBA may review any loan – While earlier guidance indicated that loans under $2 million will not be audited for economic need, the rule clarified that the SBA still has the right to review any loan, regardless of size, to ensure it meets eligibility requirements and is calculated correctly and funds are used properly. A separate ruling is expected on these procedures. Proper documentation will be essential here. Contact us for assistance.

Borrowers may appeal – Even if you feel you have all your ducks in a row, the SBA may still think differently. Fortunately, the interim rule allows borrowers 30 days to appeal SBA determinations. More guidance is expected on this.

Lenders have a deadline – The interim rule also issued clear guidance and deadlines for lenders and the SBA to handle the forgiveness applications. Lenders have 60 days to decide on loan forgiveness from receipt of application (and to notify the borrower of forgiveness amount), followed by 90 days for the SBA to review the application. Borrowers may be asked questions by the lenders and the SBA during these reviews, so they should be prepared with accurate documentation.

The first PPP loans were disbursed on April 3, so early borrowers are closing in the final weeks of the 8-week period. More guidance is expected in the coming days and weeks, but borrowers should begin preparing their documentation now. Contact us for assistance with your loan forgiveness application.