Last Thursday, October 8, the Small Business Administration (“SBA”) released a simplified application form (Form 3508S) and instructions for Paycheck Protection Program (“PPP”) loans of $50,000 or less. Any qualifying PPP borrower that uses the new two-page application is exempt from any reductions in the borrower’s loan forgiveness amount based on reductions in full-time equivalent employees or reductions in employee salary or wages that would otherwise apply. Accordingly, the new Form 3508S application “does not require borrowers to show the calculations” supporting the requested loan forgiveness amount, though the SBA reserves the right to request information to review the borrower’s calculations.
Borrowers using the Form 3508S application must still submit documentation to verify employee cash compensation and non-cash benefit payments and nonpayroll expenses. The instructions include examples of appropriate documentation. Borrowers must also retain all documents supporting their PPP loan application, their forgiveness application, and their compliance with PPP requirements for six years after the date their loan is forgiven or repaid in full.
A borrower with affiliates (defined by the SBA here) may not use Form 3508S if the borrower, together with its affiliates, received PPP loans totaling $2 million or more.
On Wednesday, June 3, 2020, the U.S. Senate passed the Paycheck Protection Program Flexibility Act of 2020 (H.R. 7010), which was approved by the House late last week. President Trump is expected to sign the Act into law. As a part of the larger Coronavirus Aid, Relief, and Economic Security (“CARES”) Act, the Paycheck Protection Program (“PPP”) provides loans to small-to-mid-sized businesses suffering from the COVID-19 pandemic. As enacted, the PPP loans are to be forgivable when used for specific business and payroll expenses during a specified timeframe. Any forgiven loan amounts are excluded from businesses’ taxable income. However, due to insufficient funding and lengthier pandemic-related shutdowns, the PPP relief became inaccessible for many businesses.
The changes made to the PPP by the new legislation include:
Allowing businesses 24 weeks (or until December 31, 2020, if it comes first) post-loan origination to use loan money that will qualify for forgiveness. This applies to both new and existing loans.
Reducing the amount of loan money required to be spent on payroll expenses from 75 percent to 60 percent, allowing more funds to be spent on rent, utility payments, and mortgage interest.
Extending the time period for the rehiring exception to forgiveness reduction from June 30, 2020 to December 31, 2020 and adding new exceptions for employers who could not find qualified employees or were unable to restore business operations to February 15, 2020 levels due to COVID-19-related operating restrictions.
Extending the loan terms from two to five years, unless otherwise modified by lenders and borrowers.
Permitting payroll tax deferment for businesses that receive PPP loans regardless of loan forgiveness. Under the CARES Act and subsequent interpretive guidance, payroll tax deferral could only be utilized up until a business received notification of loan forgiveness.
Replacing the six-month deferral of PPP payments due with deferral until the date on which the amount of loan forgiveness is provided to the lender.
The legislation does not clarify the parameters of the required PPP certification that “[c]urrent economic uncertainty makes [a] loan request necessary to support the ongoing operations of the Applicant.” It also does not address the deductibility of expenses paid for by PPP loan funds, as previously discussed in a prior post. Further PPP corrections and guidance are expected.
On May 22, 2020, a week after issuing the application form for the CARES Act’s Paycheck Protection Program (“PPP”) loan forgiveness, the Small Business Administration (“SBA”) released the twenty-six-page interim final rules that provide formal guidance to accompany the application package.
Most of the interim final rules reiterate the substance of the PPP loan forgiveness application, but they also include new pieces of significant guidance such as the inclusion of employee bonuses and hazard pay as forgivable payroll costs when paid to employees earning less than $100,000 a year. Such payments are eligible for forgiveness because, as a supplement to salary or wages, they are considered compensation.
Some of the other significant new guidance includes:
a further cap on the forgivable payroll expenses of owner-employees, as not to be confused with self-employed individuals, in an amount that is the lesser of 8/52 of 2019 compensation or $15,385 per employee;
application of the above cap across all business, suggesting that someone with an ownership interest in multiple business will be subject to the overall limitation; and
safe harbors to protect borrowers from a reduction in full-time employees due to the employees’ actions.
Unsurprisingly, questions remain following the release of the rules, such as the definition of an “owner-employee.” No additional IRS frequently asked questions have been released to supplement the interim final rules.