May 27, 2020
IS YOUR BUSINESS PREPARED TO MAXIMIZE PAYCHECK PROTECTION PROGRAM LOAN FORGIVENESS?
Now that your business has secured a loan through the Small Business Administration’s Paycheck Protection Program, are you prepared to navigate loan forgiveness under Section 1106 of the CARES Act?
On May 18, the Small Business Administration released the forgiveness application for borrowers who received a PPP loan. Subsequently, on May 22, the Small Business Administration issued its interim final rule to assist borrowers with the forgiveness process.
In order to obtain loan forgiveness, borrowers must complete and submit the Loan Forgiveness Application (SBA Form 3508 or lender equivalent) to their lenders. The lenders then have 60 days to review the application and submit a decision regarding loan forgiveness to the SBA. Subject to its own review process, the SBA will reimburse the lenders for any amounts which the lenders determine are entitled to forgiveness under the currently applicable regulations. Lenders will notify borrowers of the forgiveness amount. If only part of a loan is forgiven or if the forgiveness request is denied, any remaining balance due on the loan must be repaid by the borrower on or before the two-year maturity of the loan.
The SBA’s interim final rule also provides guidance to address issues that have generated much confusion for borrowers since the PPP was launched, namely how to determine payroll costs eligible for loan forgiveness and how to measure the 8-week period during which time borrowers must spend their loan money (“Covered Period”).
In order to be forgiven, at least 75% of the PPP funds spent during the Covered Period must be spent on payroll costs. According to the SBA, “payroll costs” that can be forgiven include payroll that was paid during the Covered Period as well as payroll that was incurred during the Covered Period but paid on or before the borrower’s next regular pay date. The SBA further explained that for purposes of the CARES Act, the term “payroll costs” should be defined broadly to include salaries, wages, commissions, or other compensation paid to employees, such as bonuses and hazard pay. “Payroll costs” can also include wages paid to furloughed employees, as long as the wages do not exceed an annual salary of $100,000 per employee, as prorated for the Covered Period. As for owner-employees and self-employed individuals, the amount of loan forgiveness for their payroll costs can be no more than the lesser of 8/52 of their 2019 cash compensation and employer retirement and healthcare contributions made on their behalf or $15,385 per individual in total across all businesses. (See 85 FR 21747, 22150.)
With respect to measuring the 8-week Covered Period, the new guidance provides employers with more flexibility in determining the applicable weeks. Previously, the only date available for employers to use in measuring the Covered Period was the date on which the PPP loan was disbursed. The SBA’s guidance states that the SBA Administrator, “in consultation with the Secretary of Treasury, recognizes that the eight-week covered period will not always align with the borrower’s payroll cycle,” thereby making the administration of the loan proceeds more difficult for borrowers. For “administrative convenience of the borrower,” the SBA now allows borrowers with a bi-weekly (or more frequent) payroll cycle to elect to use the alternative method of measuring the Covered Period.
SBEMP Partners, Marc Empey and John Pinkney assisted many of our clients in successfully applying for PPP loans and are prepared to guide businesses through the tricky loan forgiveness application, including determining whether SAFE HARBOR clauses for FTE counts. Please contact either Mr. Empey or Mr. Pinkney at (760) 322-2275.