The Small Business Administration (SBA) released two new interim final rules on the Paycheck Protection Program (PPP). One set covers the requirements for loan forgiveness, confirming and expanding upon the previously released loan forgiveness form and instructions and the other addresses the SBA’s procedures for reviewing applications for loans and loan forgiveness. Key takeaways from both sets of rules are below. The guidance is effective immediately.
Separately, the House and Senate introduced bipartisan bills to amend the PPP. Both bills propose to expand the covered periods in which borrowers can use loan proceeds and qualify for forgiveness, and remove the limit on the amount of non-payroll costs that can be forgiven. The Senate bill would also allow expenses funded with forgiven loan proceeds to be deductible, overriding Notice 2020-32 previously issued by the IRS. While numerous members of the House indicated support for such a provision, the House bill does not include a similar provision. The House is expected to vote on its bill this week, but timing for the Senate is less certain at this time.
Requirements for loan forgiveness
Cash compensation eligible for forgiveness is generally limited to $15,385 per employee over the eight-week covered period in 2020 ($100,000 limit multiplied by (eight-week covered period divided by 52-week year)), however, the interim rule imposes an additional limit on “owner-employees,” being the lesser of $15,385, or 8/52 of 2019 compensation in total, across all businesses. The “across all business” requirement may come as a surprise to many and may serve to further limit the amount of owner compensation eligible for forgiveness.
Unfortunately, the term “owner-employees” is not defined for this purpose. It presumably includes S corporation shareholders in accordance with general tax principles. This additional limitation could render substantial amounts paid by borrowers under previous guidance no longer eligible for forgiveness. It is also unknown whether attribution rules will apply to pull in related-party salaries into a single limitation. Consider a family business taxed as an S corporation. If the business has a sole equity shareholder whose family members are salaried employees, it is unclear whether attribution rules would apply and additionally limit the forgiveness of the amounts paid to the family members.
The rules include new limitations on health insurance for owners. In general, noncash compensation paid to employees, such as retirement and healthcare contributions made on their behalf, is additionally eligible for forgiveness, and these amounts do not count toward the above-mentioned limit on cash compensation.
The interim rule provides these additional amounts cannot increase the compensation cap described above for amounts paid for self-employed individuals, including Schedule C filers and general partners.
However, the interim rule does not discuss S corporation owner-employees for this purpose. It is unclear whether this exclusion reflects a policy position or a drafting error.
Bonuses and hazard pay as well as salaries, wages and commission payments to furloughed employees during the covered period are eligible for loan forgiveness, subject to the $100,000 limit prorated for the covered period.
A full-time equivalent (FTE) employee is defined as one who works 40 hours or more on average each week. The rule provides the methodology for calculating FTEs by dividing the average number of hours paid for each employee per week by 40 and capping the result at 1.0. This echoes the guidance included in the loan forgiveness application. For part-time employees, employers have the choice of computing FTEs by average actual hours during the covered period or they can use a default FTE of 0.5 for each part-time employee regardless of actual hours worked.
Prepayments of eligible costs other than mortgage interest are eligible for forgiveness.
The guidance also addressed documentation requirements for employers regarding reduced headcounts if they attempt to rehire the same employee but the employee rejects the offer. Specifically, in calculating the loan forgiveness amount, a borrower may exclude any reduction in FTE employee headcount that is attributable to an individual employee if:
i. 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;
ii. The offer was for the same salary or wages and same number of hours as earned by such employee in the last pay period prior to the separation or reduction in hours;
iii. The offer was rejected by such employee;
iv. The borrower has maintained records documenting the offer and its rejection; and
v. 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.
Loan application review procedures
Borrowers are responsible for the accuracy of the PPP forgiveness calculation as well as the supporting loan forgiveness application and documentation.
The SBA may review PPP loans of any size and at any time. Specifically whether:
– The borrower was eligible for the loan, based on the Coronavirus Aid, Relief, and Economic Security (CARES) Act and guidance available at the time the loan was applied for,
– The loan amount was calculated correctly,
– The loan proceeds were used for eligible costs, and
– The borrower is eligible for the amount of loan forgiveness applied for.
Borrowers will have the opportunity to respond to questions posed by the SBA and/or the lender during the loan review process.
Lenders must approve or deny an application for loan forgiveness within 60 days of submission. Borrowers will have an opportunity to appeal a denial of PPP loan forgiveness under soon-to-be-issued guidance.
Borrowers must retain documentation supporting the PPP loan and corresponding forgiveness for six years after the loan is forgiven or repaid in full.