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New Guidance Issued on PPP Loan Forgiveness

New Guidance Issued on PPP Loan Forgiveness

On June 16, 2020, The Small Business Administration (SBA), released new loan forgiveness application forms and corresponding instructions for borrowers seeking forgiveness of their Paycheck Protection Program (PPP) loans.They also unveiled a new EZ form for forgiveness of PPP loans. 

On June 17,2020, SBA also released a new interim final rule #19 providing updated guidance on the use of PPP loan proceeds and loan forgiveness. These updated materials implement and clarify aspects of the recently enacted Paycheck Protection Program Flexibility Act (PPPFA) which changed several aspects of PPP loan and the calculation of loan forgiveness. 

The new guidance issued on PPP loan forgiveness and interim final rule #19 are provided below:

Key Takeaways:

  • Guidance issued on PPP loan forgiveness continues to be inconsistent. The new loan forgiveness application forms use a calculation that would exclude interest from the calculation of loan amount to be forgiven. 
  • Previously SBA had rolled out the “Alternative Payroll Covered Period” for the convenience of borrowers but the concept has been extended for borrowers who use the new 24 week covered period. However, this is available only for borrowers whose regular payroll cycle is biweekly or more frequent. 
  • Eligible amounts paid during the covered period but incurred earlier, can be included in the loan forgiveness amount. The language that created uncertainty in this point has been revised accordingly. 
  • The per employee limit or cash compensation eligible for loan forgiveness is adjusted for borrowers using the 24 week covered period, from $15385 ( 8 week covered period)  to $46154 (24 week covered period) However, the compensation for business owners using a covered period of 24 weeks are subject to lower limit of $20833 across all of their businesses. 
  • Borrowers who qualify for the newly – release EZ form of PPP loan application do not require to submit full detailed information of their employee and cash compensation and hours worked however, borrowers who are not eligible to use the EZ form are required to provide detailed information of every employee. 
  • The PPPFA safe harbor for employers who were unable to operate their businesses at the same level of activity as before February 15, 2020 refers to only guidance or requirements from CDC, OSHA or HHS. It does not include guidance or restrictions issued by state, city, county or other local authorities. 

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Prior to June 5, 2020 PPPFA allowed borrowers to obtain PPP loans to elect a 24 week covered period instead of the original 8 week covered period for PPP loan forgiveness. But this extended period has other consequences such as extending the period in which certain use restrictions apply to the PPP loan and extending the measurement period for headcount , wage reductions and salary. But after June 5, 2020 borrowers obtained PPP loans must use a 24 week covered period. These changes were partially intended by SBA’s interim rule #17 but the latest guidance provides additional clarification. 

The new guidance issued on PPP loan forgiveness reflects changes to PPP loans authorized by PPPFA, which includes reduction in the percentage of PPP loan proceeds that must be used for payroll costs from 60% from 75% and the new safe harbours of PPP borrowers who are unable to restore or rehire the wage or salary of an employee or resume their pre-February 15, 2020 level of business activity they had before Covid-19 pandemic due to compliance with health and safety guidelines for slowing the spread of the virus. 

SBA has also included the new EZ form and corresponding instructions that simplify and streamline the process of applying for loan forgiveness for certain borrowers that qualify to use the EZ form. 

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New Interim Final Rule Published:

The CARES Act indicated PPP loan proceeds had to be spent on specific eligible expenses to qualify for loan forgiveness. This includes payroll costs, payment of covered rent obligations, payment of interest on covered mortgage obligations and covered utility payments. The new loan forgiveness interim final rule #19 by SBA are:

  1. Amounts incurred or paid during the covered period are qualified to be included. The language that created uncertainty in this point has been revised accordingly. 
  2. The SBA issued rules for determining payroll costs and owner compensation in calculating PPP loan forgiveness under the new 24 week covered period. 
  3. The PPP act tripled the duration during which PPP recipients could spend the fund and still be eligible for loan forgiveness. This span of time is called the covered period. 
  4. The interim rule #19 adjusts and adds to previous guidance for calculating loan forgiveness under the original 8 week covered period. 
  5. The new interim rule establishes a 24 week covered period for full loan forgiveness at $46154 per individual. 

Application highlights:

  1. Health insurance costs for S corporation owners are not included when calculating payroll costs however, retirement costs for S corporation is eligible for payroll costs. 
  2. Borrowers that received a loan before June 5, 2020 can choose between 8 week or 24 week covered periods. 
  3. Borrowers don’t have to wait till Dec. 31 to apply for forgiveness to use the safe harbour. This is a relief for the borrowers who may be required to reduce the salaries and wages, they can restore before applying for loan forgiveness. 

New EZ application details:

The EZ form requires fewer calculations and less documentation than the full application. The EZ application can be used by borrowers that:

  • Are self-employed and have no employees
  • The borrowers who did not reduce the wages or salaries of their employees by more than 25% and also did not reduce the number of working hours
  • Experienced reductions in business activity levels due to health derivative related to COVID-19

Other Provisions:

  • All the loans made on or after June 5, 2020 the minimum term for PPP loan is raised to five years. For loans made before 5th June 2020, the two year minimum maturity remains in effect unless both the lender and the borrower agrees to extend it to five years. 
  • The application deadline to PPP loans remains to be 30th June. 
  • The proportion of PPP loan that must be used on payroll costs to be eligible for forgiveness drops to 60% from 75%
Top 5 Things You Need to Know Regarding PPP Loans Amidst Covid-19

Top 5 Things You Need to Know Regarding PPP Loans Amidst Covid-19

In the wake of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), the United States has conferred an additional $310 billion funding to the Paycheck Protection Program (PPP) that was almost running out of funds in April. The importance of PPP is ever-important in these times of economic uncertainty as PPP is one of the few opportunities that small businesses have to obtain forgivable loans to sustain employees on the Payroll.

But, there are so many questions that are yet to be answered and cleared for entrepreneurs, especially in the light of the forgivable nature of the PPP loans.

Another burning issue here is the grey area, where many public companies confessed to having taken the PPP loan which was truly meant for small businesses with employees less than 500.

To contain such malpractices, the federal government has come out with the briefing that the authorities will audit any company that levies for loans more than $ 2 Million.

This blog will provide answers to all the commonly asked questions and queries related to the PPP loan and how it can benefit your business.

Question 1: What costs are eligible for forgiveness under the PPP?

Answer: The actual forgivable part of the PPP is dependent on certain factors. These are based on the payments made and the costs incurred during the COVID-19. These are the costs that are eligible for forgiveness in the PPP loans:

  • Salary and wages or other similar payroll compensations.
  • Payments that have been made in the light of sick leaves.
  • Allowance for separation.
  • Payments made for group health care benefits, including insurance premiums.
  • Retirement benefits
  • State or federal payroll taxes
  • Please note that cash compensations that exceed $100,000 are exempted from this excuse. Additionally, the employer’s share of the federal payroll taxes is also exempted from being forgiven under the PPP.

Question 2: What costs are not eligible for forgiveness under the PPP?

Answer: Although the PPP loan is a breath of fresh air for businesses who are trying hard to genuinely retain their employees, there are still certain costs that are exempt from being forgiven under the PPP loan. These are:

  • Payments made to independent contractors.
  • Under the Family First Coronavirus Response Act, there are qualified sick leaves and parental leave wages. These, therefore, are exempt from the forgiveness under the PPP.
  • If we take February 15, 2020, as the benchmark date; then any interest payments on personal property, rent payments under agreements in existence, and utility payments like electricity bills, etc. are also not permitted for forgiveness under the PPP loan.

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Question 3: What are the limitations of loan forgiveness?

Answer: There certainly are limits to forgiveness in the PPP loans. The first is that not more than 25% of the loan forgiveness can be linked to non-payroll costs. Additionally, proceeds directed towards advance up to $10,000 on Economic Injury Disaster Loan will also be deducted from the loan forgiveness amount.

There are two formulas to determine the forgiveness amount in the loan deduction. The FTE Method and the reduction in wages.

The loan forgiveness amount is subject to reduction by multiplying it by the following fraction. These are as follows: (This is known as the FTE method)

  • The numerator of which is the average number of FTE employees per month employed by the borrower during the covered period.
  • The denomination of which, as elected by the borrower is:
    1. The average number of FTE employees per month (from Feb 15, 2019, to June 30, 2019)
    2. The average number of FTE employees per month (Jan 1, 2020, to Feb 29, 2020)

The second is the reduction of wages method. This method is applicable as follows:

  • Identify employees who did not receive the salary at an annualized rate of more than $ 100,000 for a single day in 2019.
  • Compare each covered employee’s wages during the period to his/her salary during the first quarter of 2020.
  • For an employee who is covered, the salary is reduced by more than 25%, then you need to apply the following formula:
    1. Multiply the first-quarter wages by .75
    2. Subtract the result from the covered period wages
  • The aggregated dollar amount will reduce the loan forgiveness amount. 

Question 4: What are the documents that you need to apply for forgiveness?

Answer: To receive the loan forgiveness, you need to comprehensively submit accurate copies of the following documents, complete and updated:

  • Documentation to verify the number of FTE employees on the payroll. This also includes the payroll tax filings.
  • Canceled checks, payment receipts, and transcripts of accounts verifying payments of mortgages, rent and utility payments.
  • You also need to submit an authentication certificate from a representative of the business that certifies that the information and documents submitted are accurate and the amount that is requested for forgiveness, will help retain employees.
  • In addition to these, the SBA can also ask you to submit additional documents to solidify and authenticate your case. 

Question 5: Are large businesses with adequate sources of liquidity qualify for a PPP loan?

Answer: No, the essence of PPP loans was to help small businesses, retain employees, and sail through these financially crunching times of COVID-19 smoothly. If larger businesses, who have enough sources of liquidity take this PPP loan, then the small businesses will be crushed under undue competition. Hence, as per the federal laws, for any business that takes up a loan above $ 2 Million dollars, will have to undergo a complete audit. 

What Does Your Business Need?

The essential element in COVID-19 is to sail through with as little damage as possible. With the PPP loan and the secure ability to seek forgiveness on the loan is a boon in these times. You need to seek spaces where you can seek the maximum benefits and forgiveness on the PPP loans. We hope that your essential queries were answered and cleared through this blog. For any additional query and query on the PPP loans and how it affects your business, please click here.