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This week, the Small Business Administration (SBA) and US Treasury issued guidance in the form of a new Interim Final Rule implementing changes enacted with the signing of the Paycheck Protection Program Flexibility Act of 2020 (PPPFA) on June 5. PPPFA was enacted to provide borrowers of Paycheck Protection Program (PPP) loans more flexibility in spending their borrowed funds, as explained in an earlier LMC Alert.


Much of the new guidance updates now-outdated language in earlier SBA and Treasury rules to reflect changes made in PPPFA. This includes a reduction from 75% to 60% in the percentage of allowable costs that must be spent on payroll costs to qualify for full forgiveness, the expansion of the loan forgiveness Covered Period from eight to 24 weeks, and an increase from two years to five years in the term of any loan balance not subject to forgiveness.


Guidance related to terms of PPP loans may be particularly urgent to small businesses that have not yet applied for and received a PPP loan because no loans may be initiated after Tuesday, June 30. Guidance on forgiveness is timely for borrowers who took out loans in the earliest days of the program and have chosen to use the eight-week Covered Period available at that time (an election explained in a recent LMC Alert). Those borrowers may already apply for loan forgiveness.


The guidance confirms that a borrower may submit a loan forgiveness application before the end of its eight- or 24-week covered period, once it has spent all the loan proceeds for which it is requesting forgiveness. Early forgiveness may come at a cost, however, if the borrower has reduced the salary of one or more employees earning $100,000 or less by more than 25%.


Such salary reductions normally reduce the amount of forgiveness, but a special "safe harbor" rule lets borrowers avoid that reduction if an employee's salary is restored by December 31, 2020. But a borrower choosing early loan forgiveness forfeits the safe harbor and must restore the salary before the end of its eight- or 24-week Covered Period to avoided losing forgiveness.


The new Interim Final Rule also provides that:


  • It is the borrower's responsibility to provide accurate information and supporting documentation related to the loan forgiveness amount. Lenders are not required to independently verify this information if the borrower has attested to its accuracy.


  • Employer health insurance contributions for S-corporation owner/employees may not be separately included when calculating payroll costs since they are already included in owner compensation. Retirement contributions, however, are eligible.


  • Payroll costs for partners are capped by the amount of their 2019 net earnings from self- employment times 92.35%. This cannot exceed the annual owner compensation limit of $100K.


  • For self-employed individuals who file Schedule C, forgiveness for owner compensation is calculated for an eight-week Covered Period at 15.385% (or 8/52) of 2019 compensation, to a maximum of $15,385 for all Schedule C businesses. For a 24-week period, the calculation is 20.833% (2.5/12) of 2019 compensation, up to $20,833 for all businesses.


Separately, the SBA added question 49 to its continually-updated list of PPP loan FAQs on Thursday. This question addressed the maturity date of a PPP loan that was issued before June 5, 2020, when PPPFA increased the loan term from two to five years. Borrowers who received such loans continue to have a two-year term unless they and their lender mutually agree to extend the term to five years.


During this crisis, your LMC professional is available if you have questions related to the latest updates on this topic.  All our prior Alerts are available on the Updates page of our website.


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