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May 27, 2020

The Small Business Administration (SBA) released two new interim final rules on Friday May 22nd. The first comes on the heels of the PPP Loan Forgiveness Application released one week prior and provides some additional guidance regarding PPP loan forgiveness (click here to read). The second outlines the procedures the SBA will use to review PPP loans, as well as lender responsibilities for evaluating borrower PPP Loan Forgiveness Applications (click here to read).

PPP Loan Forgiveness

While much of the 26-page interim final rule seemingly reiterates guidance already provided as a part of the PPP Loan Forgiveness Application (click here for our summary), there are a number of new revelations contained within the answers to the 15 questions posed within the document. We have summarized some of the new and/or expanded information below:

  • For borrowers that also applied for an EIDL and received a loan advance, the SBA will deduct the EIDL from the forgiveness amount remitted to the lender as required by the CARES Act. The PPP Loan Forgiveness Application requests the amount of any EIDL loan advance received by the borrower but does not factor the amount into the forgiveness calculation. Borrowers who received an EIDL loan advance should not manually adjust their forgiveness amount on the application, but rather should expect the forgiveness amount remitted to the lender by the SBA to be net of any EIDL loan advance received.
  • In the event that the forgiveness amount remitted by the SBA to the lender exceeds the remaining principal balance of the PPP loan (because the borrower made scheduled payments on the loan after the initial deferment period), the lender is required to remit the excess amount, including accrued interest, to the borrower.
  • The following amounts paid to employees are qualified payroll costs eligible for forgiveness, provided that the total cash compensation paid to each employee during the applicable covered period does not exceed an annual salary of $100,000 as pro-rated for the covered period (currently $15,385):
    • Amounts paid to furloughed employees for their salary, wages, or commissions (i.e. amounts paid to non-working employees)
    • Amounts paid to employees for hazard pay and bonuses
  • Payroll costs for owner-employees, self-employed individuals, and partners in partnerships cannot exceed the lesser of 8/52nds of the individuals’ 2019 compensation or $15,385 per individual in total across all businesses. This appears to limit the forgiveness for owner-employees, self-employed individuals, and partners in partnerships who receive compensation under multiple PPP loans from exceeding the above limitations in total.
    • Schedule C filers are limited based on their 2019 net profit.
    • Partners in partnerships are limited based on their 2019 net self-employment income (reduced by any §179 expense deduction, unreimbursed partnership expenses, and depletion from oil and gas properties) multiplied by 0.9235.
    • Neither Schedule C filers nor partners in partnerships may claim forgiveness with respect to retirement and/or health insurance contributions, as these expenses are expected to be paid out of their net self-employment income.
    • Owner-employees are limited based on the amount of their 2019 employee cash compensation, plus any employer retirement and health care contributions made on their behalf. Presumably, this is intended to put employee-owners on equal footing with Schedule C filers and partners in partnerships.
  • When calculating the loan forgiveness amount, a borrower may exclude any reduction in full-time equivalent (FTE) employee headcount that is attributable to an individual employee if:
    • the borrower made a good faith, written offer to rehire such employee (or, if applicable, restore the reduced hours of such employee) during the covered period or the alternative payroll covered period;
    • the offer was for the same salary/wages and same number of hours as earned by such employee in the last pay period prior to the separation or reduction in hours;
    • the offer was rejected by such employee;
    • the borrower has maintained records documenting the offer and its rejection; and
    • the borrower informed the applicable state unemployment insurance office of such employee’s rejected offer of reemployment within 30 days of the employee’s rejection of the offer.
  • When calculating a reduction in loan forgiveness based on a reduction in the number of employees and a reduction relating to salary/wages, to ensure that borrowers are not doubly penalized, the salary/wage reduction applies only to the portion of the decline in employee salary and wages that is not attributable to the FTE reduction.
  • When an employee of the borrower is fired for cause, voluntarily resigns, or voluntarily requests a reduced schedule during the covered period or the alternative payroll covered period (FTE reduction event), the borrower may count such employee at the same full-time equivalency level before the FTE reduction event when calculating the FTE employee reduction penalty. Borrowers that avail themselves of this de minimis exemption shall maintain records demonstrating that each such employee was fired for cause, voluntarily resigned, or voluntarily requested a schedule reduction and shall be required to provide such documentation upon request.

SBA Loan Review Procedures

This 19-page interim final rule provides details regarding the process the SBA will use to review PPP loans, as well as outlining lender responsibilities with regard to determining borrower forgiveness and cooperating with SBA reviews of PPP loans.  Below is a summary of some of the more salient points:

  • The SBA may review any PPP loan (regardless of size), as the Administrator deems appropriate. The Administrator is specifically authorized to review the following:
    • Borrower Eligibility: The Administrator may review whether a borrower is eligible for the PPP loan based on the provisions of the CARES Act, the rules and guidance available at the time of the borrower’s PPP loan application, and the terms of the borrower’s loan application. If the SBA determines that the borrower was not eligible to receive a PPP loan, the borrower will not be eligible for any loan forgiveness. Additionally, the SBA may seek repayment of the outstanding PPP loan balance or pursue other available remedies.
    • Loan Amounts and Use of Proceeds: The Administrator may review whether a borrower calculated the loan amount correctly and used loan proceeds for the allowable uses specified in the CARES Act.
    • Loan Forgiveness Amounts: The Administrator may review whether a borrower is entitled to loan forgiveness in the amount claimed on the borrower’s Loan Forgiveness Application.
  • The SBA, at its sole discretion, may undertake a review at any time it deems appropriate. As noted on the Loan Forgiveness Application Form, borrowers must retain PPP documentation in their files for six years after the date the loan is forgiven or repaid in full, and permit authorized representatives of SBA, including representatives of its Office of Inspector General, to access such files upon request.
  • If the SBA undertakes such a review, the SBA will notify the lender in writing and the lender must notify the borrower in writing within five business days of receipt.
  • If the loan documentation submitted to the SBA by the lender or any other information indicates that the borrower may be ineligible for a PPP loan or may be ineligible to receive the loan amount or loan forgiveness amount claimed by the borrower, the SBA will require the lender to contact the borrower in writing to request additional information. The SBA may also request information directly from the borrower. The lender will provide any additional information provided to it by the borrower to the SBA. The SBA will consider all information provided by the borrower in response to such an inquiry.
  • Failure to respond to SBA’s inquiry may result in a determination that the borrower was ineligible for a PPP loan or ineligible to receive the loan amount or loan forgiveness amount claimed by the borrower.
  • Borrowers may appeal adverse decisions made by the SBA with respect to loan eligibility, the eligible loan amount, and/or the eligible forgiveness amount. The SBA intends to issue a separate interim final rule addressing the appeal process.
  • The timeline for reviewing/processing of forgiveness applications is as follows:
    • The lender is required to issue a decision to the SBA on a loan forgiveness application within 60 days of receiving a completed loan forgiveness application from a borrower.
    • The SBA will, subject to any SBA review of the loan, remit the appropriate forgiveness amount to the lender, plus any interest accrued through the date of payment, not later than 90 days after the lender issues its decision to the SBA. If applicable, the SBA will deduct EIDL loan advance from the forgiveness amount remitted to the Lender, as required by the CARES Act.

In Closing

While the two interim final rules addressed some of the gaping holes in the mountain of guidance released to date, many questions remain unanswered. Likewise, some of the greatest criticisms to the PPP loan forgiveness, namely the length of the covered period and the 75% limitation, remain unchanged. The House and Senate are both considering changes to the PPP to provide additional flexibility to borrowers; hopefully, we will have good news to share with you soon. In any event, we expect further guidance from the SBA in the near future. We will continue to update you as new information becomes available.  If you have questions or wish to discuss these matters, please contact us.

Sincerely,

Abeles and Hoffman, P.C.