On Wednesday, June 17th, the Treasury Department released two Paycheck Protection Program loan forgiveness applications (along with instructions) that superseded the initial 11-page application released May 15th. The original form was complex, quickly obsolete after release of additional Program guidance a week later, and drew the ire of legislators, borrowers, lenders, and advisors.

The five page application posted to the Treasury website is accompanied by an alternative “EZ” application that many borrowers will be eligible to submit to their lender.

Perhaps most importantly, the release of the applications coincided with a new interim final ruling that substantially increases the compensation limits for borrowers that opt for the 24-week covered period.

When coupled with the PPP Flexibility Act provisions (discussed in a recent post on our website www.myslajek.com), the draft ruling will result in full forgiveness for the vast majority of PPP loans — as close to the “rubber stamp” we’ve been hoping for all along.

Here is what you need to know about the important PPP provisions, interim ruling release changes, and the new forgiveness application forms to date.

Summary of Important PPP Provisions

  • 4,607,098 loans have been approved by the SBA through 5,457 lenders. $128 billion remains in the Program with eight business days left to receive approval from the SBA through a participating lender (deadline to apply is June 30, 2020).
MKS: Most institutions have stopped accepting new PPP applications as they focus on their forgiveness processes.  Some fin-tech lenders like Kabbage and Square remain available options.  With the amount of funds leftover, we do not expect the PPP to be fully subscribed or for there to be additional allocations from future legislation.
  • 60% of the funded loan must be used on eligible payroll costs during the covered period.
MKS: This is not a bright line requirement. If the 60% threshold is not met, it will reduce the forgiveness amount of the loan pro-rata. Borrowers should not have issues with this rule if using the funds appropriately.
  • The covered period for Borrowers approved on or after June 5th is 24 weeks. Borrowers that received loans between April 3rd and June 4th have the choice to elect a 24-week covered period vs. the 8-week covered period they have been operating under.
MKS: Extending the covered period will be advantageous to almost all Borrowers as it guarantees the forgiveness of a correctly calculated PPP loan. However, it is important to consider the remaining summer months and how an extended covered period may impact forgiveness if a Borrower is unable to maintain staffing levels.

Interim Final Ruling Release (6/17/2020)

The new guidance released is a gift to Borrowers with no employees – these PPP loans are now fully forgivable with the ability to elect a 24-week covered period.

  • If a Borrower elects to have an 8-week covered period, owner compensation is limited to 8/52 of 2019 net profit/income, capped at $15,385.
  • If the borrower elects to have a 24-week covered period, as allowed under the recent PPP Flexibility Act, owner compensation is limited to 2.5/12 of 2019 net profit, capped at $20,833.
MKS: Recall the calculation of all PPP loans on the front end – Borrowers were eligible for 2.5 months (or 10-11 weeks) of income replacement.  By utilizing the 24-week covered period, recent legislation now allows owner employees to utilize the entire loan amount for full forgiveness.

Were you a Borrower that included compensation for employees in calculating your PPP loan? There is good news from the regulators for you as well.

  • If the borrower elects to have an 8-week covered period, the maximum per employee is $15,385 (8/52 x $100,000). This consistent with previous guidance.
  • If the borrower elects to have a 24-week covered period, as allowed under the recent PPP Flexibility Act, the maximum per employee is $46,154 (24/52 x $100,000).
MKS: If 60% of the loan proceeds are spent on eligible payroll costs, the 24-week covered period option and increase in employee compensation limits should guarantee full forgiveness of PPP loans for businesses with employees.

New Forgiveness Applications

If the Borrower is a self-employed individual, independent contractor, or sole proprietor who did not include any additional employee compensation on the original PPP loan application, the 3508EZ forgiveness application will be completed and provided to the lender who underwrote the loan.

A Borrower with employees isn’t necessarily forced into the standard forgiveness application  – we suggest all Borrowers start with the 3508EZ instructions that include a checklist to determine whether or not the 3508EZ application can be used. One of two scenarios must be met:

  • The Borrower did not reduce the salary or compensation per hour of any employee by more than 25% during the covered period compared to the first three months of 2020 (January 1, 2020-March 31, 2020); and

The Borrower did not reduce FTEs between January 1, 2020 and the end of the covered period.

  • The Borrower did not reduce the salary or compensation per hour of any employee by more than 25% during the covered period compared to the first three months of 2020 (January 1, 2020-March 31, 2020); 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 or guidance issued between March 1, 2020 and December 31, 2020 by the Secretary of Health and Human Services, Director of the Centers for Disease Control and Prevention, or the Occupational Safety and Health Administration.

MKS: It would be out of character to have PPP guidance released without forcing Borrowers to interpret uncertainty. When discussing scenario two amongst our team, it would seem incredibly easy for most Borrowers to make a case that business operations were reduced due to requirements or guidance from these government organizations.
  • Was business affected by the stay home orders?
  • Was the Borrower asked to prepare a “back to work” plan that involved re-organization of the workspace, limits on visitors, staggered employee schedules for social distancing, or purchase of special protective equipment and/or physical barriers like plexiglass for safety?
Although the perception is that many businesses are adjusting nicely to a remote work environment, it would appear quite easy to satisfy one of the scenarios above to complete the 3508EZ forgiveness application.

Final Thoughts

We are very encouraged about the recent trend of Borrower-friendly guidance and the restructured forgiveness applications. Conversation with other service professionals and our lending partners in the community share this sentiment. However, we are focusing our attention now on three main questions:

  1. If a 24-week covered period is used, can the Borrower apply for forgiveness once the funds are exhausted (a reasonable timeline to us would be around the 10-11 week mark, since the forgivable loans were designed to accommodate 2.5 months of payroll assistance)?
  2. Will Congress override the IRS to make the expenses used with PPP funds deductible?
  3. Will loans under a certain dollar amount be turned into grants?
MKS: If the answer to each of these questions turns out to be “yes,” the Program will be a home run. Our firm continues to dedicate significant resources to assist our clients and community in obtaining loans, consulting on strategies to ensure compliance, and support Borrowers in their efforts to maximize forgiveness.

If interested in a comprehensive consulting service to guide you through the covered period and manage the forgiveness process for your PPP loan, please contact Erik Ordal at [email protected].