SBA Revises Third and Sixth Interim Final Rules
On June 16, 2020, the Small Business Administration (SBA) released revisions to its third and sixth interim final rules on the Paycheck Protection Program (PPP) (click here to read). This most recent interim final rule is the second of several anticipated rulings in response to the Paycheck Protection Program Flexibility Act (PPPFA) signed into law on June 5th. The PPPFA made a number of amendments to the CARES Act intended to provide additional flexibility to PPP loan borrowers (click here for more details). This latest guidance includes revisions to reflect changes made to loan maturity, loan forgiveness, and covered period.
Loan Maturity & Loan Forgiveness
As covered in our last release (click here to read), the PPPFA amended the CARES Act to provide a minimum maturity of 5 years for PPP loans made on or after the effective date of the PPPFA, June 5, 2020, as well as legislating a requirement for all PPP loans that 60% of any loan forgiveness be for Payroll Costs (in lieu of the SBA mandated “75% rule”). Minor changes were made to the third interim final rule to conform the loan maturity and loan forgiveness provisions to the PPPFA.
The extension of the covered period from 8 weeks to 24 weeks is one of (if not the) most popular provisions in the PPPFA. Effectively tripling the period for borrowers to spend their loan proceeds on forgivable Payroll and Non-Payroll Costs, the extension will provide many borrowers, particularly those who have yet to resume full operations, much-needed flexibility to spend the loan proceeds in a manner that best supports their business, while maximizing loan forgiveness. Those borrowers whose loans were made prior to June 5, 2020 who do not require or desire the additional 16 weeks may elect to retain the 8-week covered period. Aside from minor conforming changes to the third and sixth interim final rules, the third interim final rule was updated to provide guidance as to how the change in the covered period impacted the per-individual Cash Compensation limitations as well as the owner compensation replacement for self-employed individuals and partners in partnerships.
The per-individual limitation for Cash Compensation (salaries, wages, commissions, etc.) has been increased from $15,385 per employee to $46,154 per employee. Since the PPP loan amount was based on 2 ½ months of 2019 Payroll Costs, most borrowers are unlikely to utilize the full $46,154 per-individual limitation to maximize their forgiveness. That said, borrowers with proportionately lower Non-Payroll costs (rent, utilities, and mortgage interest expense) may be able to take advantage of the additional 16 weeks of payroll to maximize their forgiveness. Those borrowers electing to retain the 8-week covered period will be required to apply the prior $15,385 per-employee limitation on Cash Compensation.
While self-employed individuals and partners in partnerships also benefit from the extension of the covered period from 8 to 24 weeks, their allowable owner compensation replacement limitation is not commensurately tripled. Instead, the owner compensation replacement allowable for forgiveness is increased from 8 weeks (8/52) to 2 ½ months (2.5/12) of their 2019 net profit. The SBA reasoned that the PPP Loan borrowing base for self-employed individuals and partnerships was 2 ½ months of net profit plus 2 ½ months of Payroll Costs for employees and that it would be inappropriate to allow self-employed individuals and partners in partnerships to receive forgiveness for owner compensation replacement in excess of the original borrowing base applicable to owner compensation replacement. Additionally, since one of the primary motivations behind the PPP loan is to encourage borrowers to maintain headcount and employee compensation levels, the SBA wants to prevent self-employed individuals and partners in partnerships from reducing employee compensation and receiving forgiveness with respect to Payroll Costs that are paid to owners in lieu of employees.
It should also be noted that the revised language of the third interim final rule retains the original limitation on Non-Cash Compensation (company paid health insurance & retirement, state unemployment taxes, etc.). Such Non-Cash Compensation paid during the covered period on behalf of employees (but not owners) is includable in forgivable Payroll Costs. Additionally, it is not yet clear how the above $46,154 per-individual limitation on Cash Compensation might be limited for employee-owners. As discussed in a previous article (click here to read), the SBA appears to be treating owner-employees similar to self-employed individuals and partners in partnerships. As such, it is likely that Cash Compensation paid to each owner-employee will be limited to 2 ½ months (2.5/12) of their respective 2019 compensation (i.e. a maximum of $20,833 instead of $46,154, assuming 2019 Cash Compensation of at least $100,000). Unfortunately, the SBA has yet to define “owner-employee” (i.e. whether the term refers to all owners or if there is an ownership percentage threshold). In the meantime, borrowers should consider the potential lower owner-employee limitations when planning to maximize loan forgiveness.
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.
Abeles and Hoffman, P.C.