The Small Business Administration (SBA) and Treasury Department have recently issued additional guidance on PPP loans and released a simplified loan forgiveness application for PPP borrowers with loans under $50,000. We realize many of you are wondering if you should apply for loan forgiveness now or wait for anticipated additional guidance. Our recommendations follow this reminder of what we already know – and more importantly, what still awaits further guidance at this time.

A Reminder of What We Already Know

  • PPP loans can be used for the following expenses – payroll (and payroll-related costs such as health insurance, 401(k) and state and local employer taxes), rent, utilities and interest on business loans.
  • Bonuses and hazard pay are qualified payroll costs.
  • Borrowers had an 8-week period (since extended to 24 weeks) to utilize the proceeds. Eligible expenses that were paid OR incurred during that time period qualify for forgiveness.
  • At the end of the period selected by the borrower, a forgiveness application is filed with the lender, who has 60 days to process the application and remit it to the SBA. The SBA then has 90 days to determine if they agree with the forgiveness.
  • Forgiveness is affected by a reduction in full-time employees during the covered period and/or by a reduction in wages of 25% or more on any particular employee (unless the employee was earning above $100,000).
  • 60% of the PPP proceeds MUST be used on payroll costs.
  • For loans issued prior to June 5, 2020, any amounts not forgiven will be due within 2 years and incur interest of 1%. If the loan was issued after June 5, any amounts not forgiven will be due within 5 years and incur interest at 1%.
  • Borrowers with PPP loans over $2 million will be scrutinized to determine necessity of the funding.
  • Funding was extended beyond the original June 30 deadline; however, after August 8, 2020 applications were no longer accepted.

Recent Clarifications

Recent clarifications and further guidance for PPP borrowers includes the following:

  • NON-OWNER compensation was originally capped at $15,384 ($100,000 annualized), but with the extension to 24 weeks that number jumped to $46,154 ($100,000 annualized). Owner compensation is now capped at the lesser of:
    • current compensation in the covered period up to a maximum of $20,833 (based on the calculation $100,000 divided by 12 x 2.5 months) or
    • 2019 annual compensation divided by 12 x 2.5 months.
  • Less than 5% business owners are excluded from the owner compensation limits, and wages up to the $46,154 cap qualify.
  • SBA Loan Forgiveness FAQ #8 (a link to the SBA FAQs on loan forgiveness can be found here) discusses how owner compensation is calculated and what other types of payroll costs (health insurance, retirement, taxes) are allowed for owners depending on their entity type.
  • Rental payments to related (owner-occupied) entities are now limited to the amount of interest due on mortgage obligations during the covered period, and the leases must be in existence prior to February 15, 2020. If there is no mortgage associated with the related party rent, then rent expense DOES NOT qualify.

The biggest news came for borrowers with PPP loans under $50,000 with the release of Form 3508S. Borrowers with proceeds under $50,000 may use Form 3508S REGARDLESS of whether or not they reduced employee wages or FTEs; however, reports and documentation of costs must still be provided and it does appear forgiveness will still be reduced if the borrower has received an Economic Injury Disaster Loan (EIDL).

So Which Form Should You Use?

With three forms to choose from, which one you choose depends on your situation:

  • 3508S – if the original PPP loan is $50,000 or less.
  • 3508EZ – if the borrower is self-employed and has no employees (although if you are self-employed with no employees it is recommended you now use 3508S since your original PPP loan would be less than $50,000), did not reduce salaries and wages by more than 25% and did not have a reduction in full-time employees.
  • 3508 – all other borrowers.

All of the above applications expire October 31, 2020; however, this DOES NOT mean a borrower need apply by that date. The expectation is the date will be updated or new applications will be released.

I Received a Notice from My Bank – Now What?

You may have received a notice from your bank informing you that principal and interest will be due within 10 months of the covered period end date. No need to be alarmed. Banks are required by the SBA to send this notification to clarify that ALL PPP loan borrowers now have 10 months to apply as opposed to the original 6-month deferral period stated in the CARES Act.

An Alert to Business Owners Planning a Change of Ownership

If a PPP borrower wishes to transfer 20% or more of their business ownership this MUST be approved by the SBA. Additionally, before closing any change-of-ownership transaction, a PPP borrower is required to notify the PPP lender in writing of the contemplated transaction and provide the PPP lender a copy of the documentation underpinning the proposed transaction. The SBA has 60 calendar days to review and provide a determination of its approval.

Awaiting Further Guidance

Will there be additional funding coming from Congress? To date all parties remain at an impasse. This is most likely due to the upcoming election and there is hope something will be passed after November 3. Here is what still awaits further guidance:

  • Will there be automatic forgiveness for loans less than $150,000? This remains to be seen. With the release of the above-mentioned Form 3508S it does appear that automatic forgiveness is being offered to those with loans less than $50,000; however, this higher amount has reached the House and Senate floors and in the latest negotiations automatic forgiveness of amounts as high as $350,000 has been discussed.
  • What will the IRS stance be on the deductibility of the expenses? Right now the expenses paid with PPP proceeds (that are ultimately forgiven) are NOT deductible for tax purposes. Will this change as it was not the intent of Congress when they passed the bill?
  • What if you regularly claim the R&D credit? If allowed, should you consider including more payroll weeks (if you don’t need the full 24 for forgiveness) to utilize people not performing R&D functions? If the IRS does not allow the deduction of expenses then the wages paid for R&D may not qualify as R&D expenditures for purposes of the credit.
  • What happens if only partial forgiveness is awarded, or it’s rejected? According to SBA FAQ #3 under the general section of the PPP Loan Forgiveness, it appears as long as the forgiveness application was submitted within 10 months of the end of the covered period that no repayment of principal or interest would be required while the SBA makes their decision; however, this seems to address only full loan forgiveness.
  • Assuming the loan was in place prior to June 5, 2020, will banks offer a 5-year loan payback period instead of the original two years on any unforgiven balances? This is yet to be determined.

Final Considerations

In most cases it will make the most sense to utilize a 24-week period. Due to the extension of the period and the fact that funding really only covered 10 weeks of payroll we recommend the forgiveness application focus on payroll costs and not rent, utilities and interest. This should make the calculation easier and require less documentation.

As noted above, many things remain unclear. More changes and/or guidance is still expected and the forgiveness deadline that will apply to most (if not all) borrowers is several months away. It is very possible further clarity may not come until 2021. We understand the desire to apply and begin the process of seeking loan forgiveness (especially as you approach 24 weeks), but be aware you may encounter several issues during the process and those with loans between $50,000 and $350,000 may still have a chance at automatic forgiveness.

Additional Notes

  • The PA Office of Unemployment Compensation (UC) has issued statements to all UC accounts that they are still working to update their system to not assess charges for COVID-related UC claims. Many current account statements appear as if the charges are being applied against the employer’s account. UC is aware of the situation and is working to resolve it before the new year.
  • If you have utilized the Employee Retention Credit OR the payroll tax deferral programs they are set to expire December 31, 2020. Any deferral tax repayments will begin in 2021.
  • If you applied for Hazard Pay, the 10-week period expires October 24, 2020 and the application for reimbursement is due by October 31, 2020.

We know this is a lot to digest and, as always, we stand ready to help. Please reach out to your DunlapSLK team member with any questions you may have.