On June 17, 2020 the SBA issued the revised PPP Loan Forgiveness Application(s) and issued Interim Final Rule on Revisions to the Third and Sixth Interim Final Rules. Both provide necessary updates to loan forgiveness pursuant to the PPP Flexibility Act signed into law on June 5, 2020 including the allowance (or requirement if applied after June 5, 2020) of a 24-week Covered Period, reduction of required payroll costs to 60%, and new safe harbors included within the Flexibility Act. Below are key takeaways:
Key Clarifications / Points related to both Form 3508 and Form 3508EZ
- Forms 3508 and 3508EZ allow Borrowers that received PPP loan prior to June 5, 2020 to elect either an 8-week Covered/Alternative Covered Period or a 24-week Covered/Alternative Covered Period. Borrowers that receive PPP loans on or after June 5, 2020 must use the 24-week Covered/Alternative Covered Period. The ‘election’ is accomplished by merely completing the beginning and ending dates of the Borrowers Covered/Alternative Covered Period on Page 1 of the Form 3508 or Form 3508EZ.
- Forms 3508 and 3508EZ allow Borrowers that choose the 24-week Covered/Alternative Covered Period to cap employee compensation at $46,154. The logic being it is $100,000 annualized for the Covered/Alternative Covered Period.
- FML notes that there inconsistencies here (allowing Borrowers to pay employees $46,154 when the loan amount was based on a maximum of $20,833 per employee), however, also notes that with the new safe harbors that were introduced by the Flexibility Act, certain Borrowers may need ability to pay employees more than $15,385.
- Forms 3508 and 3508EZ require Borrowers that choose the 24-week Covered/Alternative Covered Period to cap owner compensation at $20,833 which is the 2.5 equivalent of $100,000. The SBA guidance justifies the inconsistency between employee compensation capped at $46,154 and the owner compensation cap of $20,833 by stating that allowing owners to claim more than $20,833 would provide windfalls to owners.
- With respect to the 60%/40% test for payroll, the SBA was consistent in its application of such payroll minimum requirements. A cap on loan forgiveness is calculated by dividing amounts spent of ‘payroll’ by 60%. For example, if a Borrower’s loan amount is $100,000 and the Borrower spent $55,000 on payroll and $45,000 on non-payroll, the Borrowers loan forgiveness would be $91,666 (assuming no other adjustments are required) which is $55,000 / 60%.
- Forms 3508 and 3508EZ allow for the application of the Flexibility Act safe harbor related to ‘inability to operate at pre-Covid (February 15, 2020) levels” due to compliance with requirements established or guidance issued between March 1, 2020 and December 31, 2020 by HHS, CDC or OSHA related to maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement. However, unlike the Flexibility Act language which allows for a proportionate safe harbor, Forms 3508 and 3508EZ appear to allow a full safe harbor if the Borrower can document this impact. Forms 3508 and 3508EZ state that the documentation must include copies of applicable requirements for each Borrower location and relevant Borrower financial records. Unfortunately, neither the SBA guidance nor Forms 3508 or 3508EZ provide any additional information on how this safe harbor will be reviewed. For example, what direct nexus must be established to take advantage of this safe harbor. For the restaurant business, there appears to be a direct nexus between HHS, CDC and OHSA requirements and their ability to operate, however, how should Borrowers that supply the restaurant business apply this provision?
- Forms 3508 and 3508EZ both have an expiration date of October 31, 2020, however, neither include a ‘due date’. Pursuant to the Flexibility Act and SBA guidance, loan applications are due within 10 months of the end of the Covered/Alternative Covered Period. Accordingly, Forgiveness Applications will be filed after October 31, 2020 and the SBA will need to adjust this expiration date.
Form 3508 Only
- With respect to the Safe Harbor allowing the Borrower to disregard loan forgiveness reduction related to either FTE reductions or salary/hourly wage reductions during the Covered/Alternative Covered Period if the Borrower restores FTE levels or salary/hourly wage levels to the same levels as February 15, 2020, Form 3508 allows Borrowers to accomplish this task by the earlier of (1) the loan forgiveness application date and (2) December 31, 2020. This is a key clarification for many Borrowers that intended on restoring FTE levels or salary/hourly wages to February 15, 2020 levels. The Flexibility Act struck all references to the previous the safe harbor date of June 30, 2020 by replacing any reference to June 30, 2020 with December 31, 2020. This change appeared to require Borrowers to wait until December 31, 2020 to apply this safe harbor, however, Form 3508 appears to allows this safe harbor to be accomplished earlier than December 31, 2020.
Form 3508EZ Introduced:
- Form 3508EZ allows Borrowers to by-pass the FTE calculations on the Form 3508EZ pursuant to three specific situations discussed below, however, FML notes that the SBA still requires Borrowers to submit documentation to their Lender supporting FTE’s if the Borrower has selected Reason #2.
- Reason #1 – The Borrower is a self-employed individual, independent contractor, or sole proprietor who did not have any employees at the time of the PPP loan application and did not include any employee salaries in the computation of the average monthly payroll on the Borrower Application Form.
- Reason #2 – The Borrower did not reduce annual salary or hourly wages of any qualified employee by more than 25% during the Covered/Alternative Covered Period as compared to Q1-2020 (Qualified employee is any employee that did not receive in any single pay period in 2019 wages or salary at an annualized rate of $100,000 (i.e. more than $1,923-weekly, $3846-bi-weekly, or $4,166-twice a month);
AND - The Borrower did not reduce the number of employees or average paid hours of employees between January 1, 2020 and the end of the Covered/Alternative Covered Period. For purposes of the this Basis, Borrowers are allowed to ignore reductions related to the inability to rehire individuals who were employees as of February 15, 2020 if the Borrower was unable to hire similarly qualified employees for unfilled positions on or before December 31, 2020. Borrower are also allowed to ignore reductions in employee hours that the Borrower offered to restore and the employee refused.
- Reason #3 – The Borrower did not reduce annual salary or hourly wages of any qualified employee by more than 25% during the Covered/Alternative Covered Period as compared to Q1-2020 (Qualified employee is any employee that did not receive in in any single pay period in 2019 wages or salary at an annualized rate of $100,000 (i.e. more than $1,923-weekly, $3846-bi-weekly, or $4,166-twice a month);
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 HHS, CDC, or OHSA related to maintenance of standards for sanitation, social distancing, or any other work or customer safety requirement related to COVID-19.
- Form 3508EZ dispenses with the provision of Table 1 and Table 2 for reporting purposes. Table 1 and Table 2 are required on the long form 3508 for purposes of payroll reduction calculations.
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