SBA Releases New Guidance on PPP Loans Following PPP Flexibility Act

BY Alex Ayers
6/16/2020 - HVAC Government Affairs , COVID-19

Update 6/17/20 - Today the Small Business Administration passed another interim final rule relating to forgiveness of PPP loans after passage of the Paycheck Protection Program Flexibility Act. This new rule provides many needed updates on the treatment of certain payroll expenses and the minimum ratio of payroll to non-payroll expenses. This new interim final rule builds on the changes that were included in last week’s IFR.

Some of the important changes include limits on owner-employee forgiveness, increases in the cap for employees making over $100,00 per year and clarification on non-payroll expenses. Borrowers whose loans were created prior to June 5, 2020 can choose to use the new 24-week covered period or the original 8-week covered period. The updated IFR and application clarify borrowers are eligible for forgiveness on:

  1. Payroll costs including salary, wages, and tips, up to $100,000 of annualized per employee (for 24 weeks, a maximum of $46,154 per individual, or for 8-weeks, a maximum of $15,385 per individual) as well as covered benefits for employees (but not owners), including health care expenses, retirement contributions, and state taxes imposed on employee payroll paid by the employer (such as unemployment insurance premiums);
  2. Owner compensation replacement is calculated based on 2019 net profit with forgiveness limited to 8-weeks’ worth (8/52) of 2019 net profit (up to $15,385) for an 8-week covered period or 2.5 months’ worth (2.5/12) of 2019 net profit (up to $20,833) for a 24-week covered period. This limit excludes any sick leave or family leave taken under the Families First Coronavirus Response Act (FFCRA);
  3. Interest payments on mortgages in place before February 15, 2020, this is calculated in the same manner as the payments are deductible on Form 1040 Schedule C (business mortgage payments);
  4. Rent payments on lease agreements in place before February 15, 2020, this is calculated in the same manner as the payments are deductible on Form 1040 Schedule C (business rent payments); and
  5. utility payments under service agreements dated before February 15, 2020 to the extent they are deductible on Form 1040 Schedule C (business utility payments).

This clarification allows forgiveness on most transportation utility costs we were previously requesting guidance on. In addition to these changes the IFR also allowed any refinanced EIDL loan to be included in meeting the 60% payroll threshold, however these proceeds are not forgiven.

SBA also released an EZ version of the forgiveness applications for small businesses that were able to maintain salaries and employment over the covered period or are self-employed individuals with no employees. This EZ application is for:

  • Self-employed individuals and have no employees; or
  • 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; or
  • 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%.

Overall this latest IFR and new EZ application helps to further clarify what expenses are forgiven and ensures businesses electing to use the 24-week covered period are able to seek forgiveness for the full loan amount.

June 16, 2020

Late last week the Small Business Administration and Treasury Department released new guidance to update the Paycheck Protection Program rules following Congressional passage of the Paycheck Protection Program Flexibility Act. This bill made several changes to the program and can be seen in HARDI’s post here.

SBA’s new guidance is the first of what we expect to be several new rules to account for changes in the law. This rule primarily deals with new loans and the basic changes in the program:

  • New loans made after June 5 will have a maturity date of five years, already existing loans can be converted to the five-year loan maturity if both the bank and the lender agree to do so.
  • Loan deferment is changed from 6-months, businesses now have 10-months to apply for loan forgiveness before any payments are due. If a business applies for forgiveness earlier, deferment ends when SBA pays the forgiven portion of the loan to the bank or determines that no forgiveness is allowed. Interest will accumulate during this time.
  • Any business taking a loan prior to June 5 can retain the 8-week covered period instead of switching to the new 24-week covered period.
  • The Flexibility Act changes the 75% payroll cost requirement to 60%, in order to get full forgiveness a borrower must spend 60% of the loan amount on payroll costs. If a borrower spends less than 60% on payroll costs their forgiveness is decreased by a proportional amount so that payroll costs equal 60% of the total amount forgiven.

We expect further guidance to be released in the coming weeks on how the Flexibility Act will change the forgiveness application and other open questions such as the process for forgiveness if a borrower uses up the funds prior to the end of the 24-week period.

HARDI will continue to keep you updated on relevant issues surrounding the PPP loan program. If you have additional questions feel free to reach out to Alex Ayers, HARDI’s Director of Government Affairs or view our PPP FAQ page.