A constant theme surrounding the Paycheck Protection Program (PPP) is change. Since it was designed to help businesses in immediate need due to the COVID-19 emergency, there was not much time to build out program specifics. This has led to a healthy dose of updates and new guidance to address the concerns and issues of borrowers. In June, Congress passed the PPP Flexibility Act of 2020 which implemented several changes from application through forgiveness. These changes required the Small Business Administration (SBA) to update the loan forgiveness application to include the required modifications. On June 17, two streamlined forgiveness applications were released including SBA Form 3508 and SBA Form 3508 EZ along with accompanying instruction guides. The new applications are designed to be borrower-friendly as they are less complex and much shorter than the original. To help clients, prospects, and others, Clayton & McKervey has provided a summary of key modifications below.
EZ Loan Forgiveness Application
Since there are fewer calculation and documentation requirements, only qualifying businesses are allowed to use this form. The eligibility criteria are listed below.
- A borrower must be a self-employed individual, independent contractor, or sole proprietor without employees at the time of loan application submission.
- A borrower must not have reduced annual salary or hourly wages of any employee by more than 25% during the covered period as compared to January 1, 2020 – March 31, 2020, and operating at reduced levels due to COVID-19.
Other Application Highlights
In both application versions, there were a number of instructions outlined and changes made, including:
- Covered Period Election – Borrowers that received a loan prior to June 5 can elect if they want to retain the original 8-week covered period or transition to the new 24-week covered period. There is also the option to select the Alternative Covered Period.
- Allowable Nonpayroll Expense – Updated information on the allowable expense ratio between payroll costs and non-payroll costs has been adjusted to reflect the lowered 60% requirement. This allows borrowers greater freedom to address expenses essential to business operations.
- FTE Calculations – This calculation is used to determine whether loan forgiveness will be impacted based on the reduction of full-time equivalent (FTE) employees. A reduction is possible if the average weekly FTE employees during the covered period was less than the chosen reference period. Remember, borrowers can select between two periods which include February 15, 2019, to June 30, 2019, or January 1, 2020, to February 29, 2020.
- FTE Reduction Exceptions – FTE reductions will not impact forgiveness under the following circumstances.
- In situations where a good faith, written offer was made to rehire an employee and where the borrower was unable to hire similarly qualified employees for unfilled positions before December 31, 2020.
- When the borrower made a good faith written offer to restore reduction in hours, at the same salary or wages and the employee rejected the offer.
- When an employee was fired for cause, voluntarily resigned, or requested a reduction in hours during the covered period.
- Required Documentation – Forgiveness application should include the following documentation.
- Payroll – Documentation provided should include that which verifies cash compensation and non-cash benefits paid during the covered period. This can include bank statements, third party payroll reports, and tax forms such as IRS Form 941.
- Nonpayroll – Documentation should include any information which verifies the existence of obligations prior to February 15, 2020, and eligible payments made during the covered period.
- FTE – Documentation should include the average number of FTE employees on payroll per week employed by the borrower between February 15, 2019, and June 30, 2019, or January 1, 2020 and February 29, 2020. This can include payroll tax filings reported (IRS Form 941), state quarterly business, and individual employee wage reporting and unemployment insurance tax filings.
- Documentation to Maintain – There are also instructions about what documentation should be maintained but not submitted with the application.
- Documentation supporting the listing of each individual employee in Schedule A including the “Salary/Hourly Wage Reduction” calculation, if necessary.
- Documentation supporting the listing of each individual employee in PPP Schedule A Worksheet Table 2; specifically, that each listed employee received during any single pay period in 2019 compensation at an annualized rate of more than $100,000.
- Documentation regarding any employee job offers and refusals, refusals to accept the restoration of reductions in hours, firings for cause, voluntary resignations, written requests by any employee for reductions in work schedule, and any inability to hire similarly qualified employees for unfilled positions on or before December 31, 2020.
- Documentation supporting the certification, if applicable, a borrower was unable to operate between February 15, 2020, and the end of the covered period at the same business level as before February 15, 2020, due to COVID-19 orders.
- Any information related to the FTE Reduction Safe Harbor including copies of the documents included with the forgiveness application and information demonstrating compliance with PPP requirements.
These documents should be retained for a period of six years starting on the date the loan is forgiven or repaid in full.
The certifications which borrowers need to make when filing a forgiveness application are identical regardless of application version.
- Use of Funds – A certification must be made that the dollar amount of the requested forgiveness amount was used for qualifying purposes. The borrower must certify that proceeds were used to pay costs eligible for forgiveness (payroll costs to retain employees, business rent or lease payments or business utility payments), that payroll costs were equal to at least 60% of the forgiveness amount, for 8-week Covered Periods the amount does not exceed 2.5 months of 2019 compensation for owner employees or the self-employed limited to $20,883. Finally, if the 8-week Covered Period was elected, then the borrower must certify the forgiveness amount does not exceed 8 weeks of 2019 compensation limited to $15,385.
- Unauthorized Fund Usage – A borrower must also certify they understand that if loan funds were used for unauthorized purposes, the SBA may pursue recovery of loan amounts and consider civil/criminal charges.
- Salary/Wage Reductions – Forgiveness applicants must afford that salary or hourly wages were not reduced by more than 25% for an employee during the Covered Period between January 1, 2020 and March 31, 2020. It is important to note the term employee includes only those that did not receive 2019 wages or salary at an annualized pay rate greater than $100,000.
- Payment Verification – Confirm the verification of payments for eligible payroll and nonpayroll costs. It is also necessary to confirm proper documentation verifying the payment of these expenses has been provided to the Lender.
- Employee Reduction – The borrower must confirm they did not reduce the number of employees or average wages paid between January 1, 2020 and the end of the Covered Period (other than reductions which occurred due to the inability to rehire those individuals who were employees on February 15, 2020 and reductions in hours that were attempted to be restored but were refused).
- Inability to Operate – If a borrower can not make the above certification then they must confirm they were unable to operate between February 15, 2020 and the end of the Covered Period at the same level of business activity as before February 15, due to compliance with COVID-19 orders.
While the new applications may be less complex and easier to understand than prior versions, it is necessary to carefully review all items which may result in a forgiveness reduction. For this reason, it is important to consult with an experienced advisor to carefully review all calculations. If you have questions about the information outlined above or need assistance with a PPP issue, Clayton & McKervey can help. For additional information please call us at 248.208.8860 or click here to contact us. We look forward to working with you soon.
The above represents our best understanding and interpretation of the material covered as of the date of this post. Things are moving at a rapid pace, and as such, information is subject to change. This information is provided for informational purposes only and is not intended to be a substitute for obtaining accounting, tax, or financial advice from an accountant.