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Paycheck Protection Program Loan Updates by SBA

8 minute read
June 23, 2020

We are about three months in to the SBA PPP loan program, and the forgiveness rules are starting to become clear with the latest round of SBA guidance. This article primarily focuses on the newly issued SBA Form 3508EZ and the changes from the Paycheck Protection Program Flexibility Act of enacted on June 5, 2020.

Background

The Paycheck Protection Plan (PPP) was signed into law on March 27, 2020. The primary provision to address the needs of small business owners was the Paycheck Protection Protection. The Paycheck Protection Program provides small businesses with funds to pay up to 8 weeks of payroll costs including benefits. Funds can also be used to pay interest on mortgages, rent, and utilities.

From the beginning, there was a substantial amount of uncertainty in the provisions of this small business program. SBA and Treasury have issued regular updates trying to provide clarification on the rules for spending the funds, and the rules for forgiveness. We now have a little more clarity; although there are still provisions where we need more guidance.

SBA Form 3508EZ

The SBA has released Form 3508 EZ  for computing the amount eligible for forgiveness and you may use this form if you meet one of the following qualifications:

Qualification One

The Borrower is a self-employed individual, independent contractor, or sole proprietor who had no employees at the time of the PPP loan application and did not include any employee salaries in the computation of average monthly payroll in the Borrower Application Form (SBA Form 2483).

It should be noted that this qualification eliminates a substantial number of businesses from using the easier form.

Qualification Two

The Borrower did not reduce annual salary or hourly wages of any employee by more than 25 percent during the Covered Period or the Alternative Payroll Covered Period (as defined below) compared to the period between January 1, 2020 and March 31, 2020 (for purposes of this statement, “employees” means only those employees that did not receive, during any single period during 2019, wages or salary at an annualized rate of pay in an amount more than $100,000);

AND

The Borrower did not reduce the number of employees or the average paid hours of employees between January 1, 2020 and the end of the Covered Period. (Ignore reductions that arose from an inability to rehire individuals who were employees on February 15, 2020 if the Borrower was unable to hire similarly qualified employees for unfilled positions on or before December 31, 2020. Also ignore reductions in an employee’s hours that the Borrower offered to restore and the employee refused. See 85 FR 33004, 33007 (June 1, 2020) for more details.

Qualification Three

The Borrower did not reduce annual salary or hourly wages of any employee by more than 25 percent during the Covered Period or the Alternative Payroll Covered Period (as defined below) compared to the period between January 1, 2020 and March 31, 2020 (for purposes of this statement, “employees” means only those employees that did not receive, during any single period during 2019, wages or salary at an annualized rate of pay in an amount more than $100,000);

AND

The Borrower was unable to operate during the Covered Period at the same level of business activity as before February 15, 2020, due to compliance with requirements established or guidance issued between March 1, 2020 and December 31, 2020 by the Secretary of Health and Human Services, the Director of the Centers for Disease Control and Prevention, or the Occupational Safety and Health Administration, related to the maintenance of standards of sanitation, social distancing, or any other work or customer safety requirement related to COVID-19.

(SBA Form 3508EZ Checklist, P.1)

Photo by Eric Rothermel on Unsplash

Covered Period

The Covered Period is either: (1) the 24-week (168-day) period beginning on the PPP Loan Disbursement Date, or (2) if the Borrower received its PPP loan before June 5, 2020, the Borrower may elect to use an eight-week (56-day) Covered Period. For example, if the Borrower is using a 24-week Covered Period and received its PPP loan proceeds on Monday, April 20, the first day of the Covered Period is April 20 and the last day of the Covered Period is Sunday, October 4. In no event may the Covered Period extend beyond December 31, 2020.

The extension of the covered period to 24 weeks was part of the Paycheck Protection Program Flexibility Act. Note above, borrowers who received their loan before June 5, 2020 may elect to use the eight week covered period.

(13 CFR Part 120, Business Loan Program Temporary Changes; Paycheck Protection Program – Revisions to the Third and Sixth Interim Final Rules, SBA Form 3508EZ)

24 Week Covered Period

We have had several questions regarding the 24 week covered period and the ramifications of electing out if you received your loan before June 5, 2020. The primary consideration of the 24 week period is whether you are able to continue to maintain employment levels and wages for the 24 week period. So, for example, if the PPP loan proceeds run out, you need to consider whether the business is able to maintain employment and wage levels through 24 week period absent qualifying for one of the safe harbors.

Updated Forgiveness Rules

PAYROLL COSTS

Cash Compensation

The sum of gross salary, gross wages, gross tips, gross commissions, paid leave (vacation, family, medical or sick leave, not including leave covered by the Families First Coronavirus Response Act), and allowances for dismissal or separation paid or incurred during the Covered Period or the Alternative Payroll Covered Period.

For each individual employee, the total amount of cash compensation eligible for forgiveness may not exceed an annual salary of $100,000, as prorated for the Covered Period. For an 8-week Covered Period, that total is $15,385. For a 24-week Covered Period, that total is $46,154 for purposes of Form 3508EZ. You can only include compensation of employees who were employed by the Borrower at any point during the Covered Period or Alternative Payroll Covered Period and whose principal place of residence is in the United States.

Employee Benefits

Employer contributions for employee health insurance, including employer contributions to a self-insured, employer-sponsored group health plan, but excluding any pre-tax or after-tax contributions by employees. Do not add employer health insurance contributions made on behalf of a self-employed individual, general partners, or owner-employees of an S-corporation, because such payments are already included in their compensation.

Employer contributions to employee retirement plans, excluding any pre-tax or after-tax contributions by employees. Do not add employer retirement contributions made on behalf of a self-employed individual or general partners, because such payments are already included in their compensation, and contributions on behalf of owner employees are capped at 2.5 months’ worth of the 2019 contribution amount.

Employer state and local taxes paid by the borrower and assessed on employee compensation (e.g., state unemployment insurance tax), excluding any taxes withheld from employee earnings.

Owner Compensation

Amounts paid to owners (owner-employees, a self-employed individual, or general partners). For a 24-week Covered Period, this amount is capped at $20,833 (the 2.5-month equivalent of $100,000 per year) for each individual or the 2.5-month equivalent of their applicable compensation in 2019, whichever is lower. For an 8- week Covered Period, this amount is capped at 8/52 of 2019 compensation (up to $15,385).

OTHER ELIGIBLE NON-PAYROLL COSTS

Business mortgage interest payments paid or incurred during the Covered Period for any business mortgage obligation on real or personal property incurred before February 15, 2020 excluding pre-payments.

Business rent or lease payments paid or incurred for real or personal property during the Covered Period, pursuant to lease agreements in force before February 15, 2020.

Business utility payments paid or incurred during the Covered Period, for business utilities for which service began before February 15, 2020.

(SBA Form 3508 EZ)

Restrictions on use of PPP Loan Proceeds

At least 60 percent of the PPP loan proceeds shall be used for payroll costs. For purposes of determining the percentage of use of proceeds for payroll costs (but not for forgiveness purposes), the amount of any refinanced EIDL will be included. The rationale for this 60 percent floor is contained in the First PPP Interim Final Rule and SBA’s interim final rule posted on June 11, 2020.

(13 CFR Part 120, Business Loan Program Temporary Changes; Paycheck Protection Program – Revisions to the Third and Sixth Interim Final Rules)

Photo by Beatriz Pérez Moya on Unsplash

Documents Required With Forgiveness Application

Payroll

Documentation verifying the eligible cash compensation and non-cash benefit payments from the Covered Period or the Alternative Payroll Covered Period consisting of each of the following:

  1. Bank account statements or third party payroll service provider reports documenting the amount of cash compensation to employees.
  2. Tax forms coinciding with the covered period (Forms 941 and state unemployment tax reports)
  3. Payment receipts, cancelled checks, and other documents that substantiate the amount of health insurance premiums and retirement plan contributions made and that are included in the forgiveness application.
  4. If you checked only the second box on the checklist above, the average number of full-time equivalent employees on payroll employed by the Borrower on January 1, 2020 and at the end of the Covered Period

Non-Payroll Documentation

  1. Business mortgage interest payments: Copy of lender amortization schedule and receipts or cancelled checks verifying eligible payments from the Covered Period; or lender account statements from February 2020 and the months of the Covered Period through one month after the end of the Covered Period verifying interest amounts and eligible payments.
  2. Copy of current lease agreement and receipts or cancelled checks verifying eligible payments from the Covered Period; or lessor account statements from February 2020 and from the Covered Period through one month after the end of the Covered Period verifying eligible payments.
  3. Copy of utility  invoices from February 2020 and those paid during the Covered Period and receipts, cancelled checks, or account statements verifying  eligible payments.

In addition to the above required list of items needed to be submitted with the loan application, there are certain documents you must maintain in your files:

  1. Documentation supporting the certification that annual salaries or hourly wages were not reduced by more than 25 percent during the Covered Period or the Alternative Payroll Covered Period relative to the period between January 1, 2020 and March 31, 2020.
  2. Documentation regarding employee job offers and refusals, employee refusals to restore hours, voluntary resignations, dismissals for cause, and inability to hire qualified employees.
  3. Documentation supporting the certification, if applicable, that the Borrower did not reduce the number of employees or the average paid hours of employees between January 1, 2020 and the end of the Covered Period (other than any reductions that arose from an inability to rehire individuals who were employees on February 15, 2020.
  4. Documentation supporting the certification, if applicable, that the Borrower was unable to operate between February 15, 2020 and the end of the Covered Period at the same level of business activity as before February 15, 2020 due to compliance with requirements established or guidance issued between March 1, 2020 and December 31, 2020 by the Secretary of Health and Human Services, the Director of the Centers for Disease Control and Prevention, or the Occupational Safety and Health Administration.
  5. All documents related to the borrowers PPP loan application including any reports, forms, schedules, or any other document provided with the loan application.
The Borrower must retain all such documentation in its 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. - SBA Form 3508EZ.
Photo by Marten Bjork on Unsplash

We recommend that you begin assembling this information now to be prepared when it comes time for renewal. Just as the application process was a busy time for the bankers, the forgiveness process will be equally so. It will be a stressful time for business owners as well, and having the documents ready and organized will certainly make things easier for everyone involved.

We are located in Lubbock, TX; however, we serve clients throughout the state of Texas. Join the conversation on Facebook @bradleysmithinc

Cover Photo by The New York Public Library on Unsplash