SBA Revises PPP Loan Forgiveness Application and Issues EZ Forgiveness Application

June 23, 2020 - William R. Johnson
Following the adoption of the Paycheck Protection Program Flexibility Act (PPP Flexibility Act), the Small Business Administration (SBA) has released a revised loan forgiveness application, a simplified loan forgiveness application for certain borrowers and instructions to both applications.

Key aspects of the revised application, the new application and the instructions are as follows:
 
Revised Loan Forgiveness Application and Instructions

The revised loan forgiveness application largely tracks the original form, with updates to reflect the change in the covered period from 8 weeks to 24 weeks (unless a borrower who receives its PPP loan before June 5, 2020, elects the 8-week covered period). Further, the revised application incorporates the new safe harbor from the PPP Flexibility Act for full-time equivalent (FTE) reductions where the borrower was unable to operate between February 15, 2020, and the end of the covered period at the same level of activity as before February 1, 2020, due to compliance with HHS, CDC or OSHA guidance relating to COVID. In addition, the revised application incorporates the 60% payroll threshold, as recently clarified by the SBA (see previous blog post).

With respect to the original FTE safe harbor, the revised application incorporates the PPP Flexibility Act’s extension of time to restore reductions from June 30, 2020, to December 31, 2020. However, on the Schedule A Worksheet, the revised application provides that for purposes of restoring any reductions, the borrower must enter its total FTEs as of December 31, 2020, or the date the application is submitted, whichever is earlier. This language appears inconsistent with the language of the PPP Flexibility Act, which simply states that the borrower qualifies for the FTE safe harbor if (1) its FTEs declined from February 15, 2020, to April 26, 2020, and (2) it restores the decline on or prior to December 31, 2020. While the PPP Flexibility Act does not include a maintenance requirement, the revised application provides a rigid approach of measuring FTEs for this purpose as of the date the forgiveness application is submitted. Borrowers should, therefore, be cautious about relying on this safe harbor if they have restored FTEs at one point in time but may experience a reduction in FTEs later.

The instructions to the revised application incorporate the SBA position that the payroll costs for owner-employee, self-employed individuals and general partners are capped at $15,385 for borrowers using an 8-week covered period or $20,833 for borrowers using a 24-week covered period. For other employees, cash compensation is capped at $15,385 for borrowers using an 8-week covered period or $46,154 for borrowers using a 24-week covered period.

The instructions provide that for employer contributions to employee health insurance, the borrower should not include contributions made on behalf of a self-employed individual, general partner, or owner-employee of an S corporation because such payments are already included in their compensation. They do not speak to contributions to owner-employees of a C corporation or LLC. The simplified forgiveness application instructions discussed below track the same language.
 
Loan Forgiveness EZ Application and Instructions

The SBA released an alternative, simplified loan forgiveness application for borrowers that meet one of three criteria:

(1) The borrower is a self-employed individual, independent contractor or sole proprietor who had no employees at the time of its loan application and did not include any employee salaries in computing its loan amount.

(2) The borrower did not reduce salary or wages of any employee by more than 25% during its applicable covered period compared to the first quarter of 2020 (but excluding any employees who were paid $100,000 or more on an annualized basis in any pay period in 2019), and the borrower did not reduce the number of employees or average paid hours between January 1, 2020, and the end of the covered period (disregarding reductions from an inability to rehire former employees or similarly qualified replacements on or before December 31, 2020).

(3) The borrower did not reduce salary or wages of any employee by more than 25% during its applicable covered period compared to the first quarter of 2020 (but excluding any employees who were paid $100,000 or more on an annualized basis in any pay period in 2019), and the borrower was unable to operate during the covered period at the same level of activity as before February 15, 2020, due to compliance with HHS, CDC or OSHA guidelines relating to COVID.

The simplified forgiveness application is considerably less burdensome for borrowers, as it does not include Schedule A or the tedious Schedule A worksheet. Instead, it simply captures expenses eligible for forgiveness and applies the 60% threshold for payroll costs to arrive at the forgiveness amount. However, the instructions clarify that the borrower is required to maintain (but not submit) documentation supporting the required certification that the borrower did not reduce annual salaries or wages by more than 25% during its applicable covered period and the additional certification from item (2) or (3) above, as applicable.

The instructions to the simplified forgiveness application include an interesting statement that does not appear in the full forgiveness application. They provide that employer retirement contributions for owner-employees are capped at 2.5 months’ worth of the 2019 contribution amount. This limitation presumably prevents an employer from obtaining complete forgiveness for 2020 retirement contributions within the covered period for owner-employees if those contributions are for an extended period of time.
 
Please contact Will Johnson or your HSB attorney for additional information on the Paycheck Protection Program.