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June 22, 2020

Last week, the Small Business Administration (SBA) revised the existing forms and instructions to be used by borrowers to request forgiveness under the Paycheck Protection Program (PPP). Additionally, the SBA released a new “EZ” application available to certain borrowers. The updated PPP loan forgiveness application reflects changes to the PPP made by the recently enacted Paycheck Protection Program Flexibility Act (PPPFA). The PPPFA made a number of amendments to the CARES Act intended to provide additional flexibility to PPP loan borrowers.

The applications and related instructions can be accessed via the below links:

The Revised PPP Loan Forgiveness Application and Instructions

The majority of the changes to the PPP loan forgiveness application and related instructions are intended to conform the documents to changes made by PPPFA. That said, there are some new revelations to discuss.

  • While the PPPFA extended the safe harbor date for borrowers to avoid reductions in their PPP forgiveness by restoring reductions in headcount and compensation to December 31st, the revised application determines whether the reductions were restored as of the earlier of December 31st or the date the loan forgiveness application was submitted (i.e. borrowers do not have to wait until December 31st to submit their loan forgiveness application).
  • The instructions for claiming employer contributions to employee health insurance were updated to specifically exclude contributions made on behalf of self-employed individuals, partners in partnerships, and owner-employees of an S Corporation, indicating that such employer contributions are already included in the compensation of the individual. While it is true that shareholders owning more than 2% of an S Corporation are required to include employer contributions to their health insurance in compensation, those shareholders owning 2% or less of an S Corporation are not required to do so. As we have previously indicated, the SBA has yet to provide a definition of “owner-employee” (i.e. whether the term applies to all owners or if there is a minimum ownership threshold). The above change to the instructions may suggest that a minimum ownership threshold does indeed exist for S Corporation owners to be considered “owner-employees” (or it may simply reflect a poor choice of words).
  • The instructions for claiming employer contributions to employee retirement plans were updated to specifically exclude contributions made on behalf of self-employed individuals and partners in partnerships. As owner-employees were not specifically excluded, it appears that S Corporations may claim forgiveness for employer retirement plan contributions made on behalf of all owners, though it should be noted that the equivalent “EZ” instructions go a step further by indicating that employer retirement plan contributions on behalf of owner-employees are capped at 2 ½ months’ worth of the 2019 contribution amount. Presumably, the same limitation applies to both applications.

The New “EZ” PPP Loan Forgiveness Application and Instructions

The SBA unveiled a new “EZ” loan forgiveness application available to certain borrowers who can certify that they are not subject to loan forgiveness reductions due to reductions in employee headcount and/or compensation. Page one of the “EZ” instructions provide the criteria for using the “EZ” application.  Simply stated, in order to use the “EZ” application, borrowers must satisfy one of the following circumstances:

  • The borrower is self-employed, had no employees at the time of the PPP loan application, and did not include any employee compensation, etc. in the Payroll Costs used to determine their PPP loan amount;
  • The borrower did not reduce the annual salaries or hourly wages of their employees by more than 25% and did not reduce the number of or average paid hours of their employees; or
  • The borrower experienced reductions in business activity as a result of health directives related to COVID-19 and did not reduce the annual salaries or hourly wages of their employees by more than 25%.

The “EZ” application is essentially a stripped-down version of the regular application, eliminating much of the detailed reporting and information used for the PPP loan reduction calculations. As only “qualified” borrowers may only use the “EZ” application, the application contains a few additional borrower certifications, as well as requirements for the borrower to submit and/or retain information supporting the “qualifying” certifications.

Forgiveness Before and After the PPPFA

After getting reacquainted with mechanics of the (revised) PPP loan forgiveness application, it becomes apparent that changes made by the PPPFA, particularly the extension of the Covered Period to 24 weeks and the relaxation of the SBA’s “75% rule” to a new “60% rule”, will not only make it easier for borrowers to spend their PPP loan funds on forgivable expenses during the Covered Period, but will allow many borrowers to effectively avoid reductions in their forgiveness due to reductions in headcount and/or compensation.

Before the PPPFA, unless a borrower had significantly increased the number of employees and/or forgivable compensation between 2019 and 2020, they would likely be hard-pressed to maximize their loan forgiveness during the 8-week Covered Period. The SBA’s “75% rule” was calculated as the fraction of the number of days in the 8-week Covered Period (56) over the number of days in the 2 ½ month period during 2019 used to determine the PPP loan amount (76): 73.68% (rounded up to 75%). This was based on the premise that the principal Congressional intent behind the PPP loan was to encourage employers to retain employee headcount and compensation at pre-coronavirus levels. In order to achieve maximum forgiveness, borrowers would actually have had to increase their average weekly forgivable Payroll Costs (as compared to 2019), incur/pay enough Non-Payroll Costs to cover the difference between the PPP loan amount and the forgivable  Payroll Costs, and not be required to reduce forgiveness due to any reductions in headcount and/or compensation (which also would have impacted forgivable Payroll Costs).

After the PPPFA, borrowers not electing to use an 8-week Covered Period now have roughly 5 ½ months to incur/pay Payroll Costs and Non-Payroll Costs. Accordingly, it seems likely that the total Payroll and Non-Payroll Costs paid/incurred during the Covered Period will likely far outstrip the PPP loan amount for many borrowers. Note that the reductions to forgiveness due to reductions in headcount and/or compensation are “subtracted” from the total Payroll and Non-Payroll costs incurred/paid during the Covered Period before limiting overall forgiveness to the lesser of (1) the reduced total Payroll and Non-Payroll Costs, (2) the PPP loan amount, or (3) approximately 167% of gross (non-reduced) Payroll Costs. As such, many borrowers, even those who experienced a reduction in (or temporary cessation of) business operations during the Covered Period, are likely to avoid any actual reduction to their loan forgiveness.

Overall, changes made by the PPPFA should result in substantially greater PPP loan forgiveness, and by extension, a substantially larger net injection of capital into the economy.

In Closing

We expect that the SBA will continue to release revisions to previous guidance in the coming weeks and 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.