Updated PPP Loan Forgiveness Application
The Small Business Administration (SBA) has released an updated Paycheck Protection Program (PPP) Loan Forgiveness Application (Form 3508). The updated form and instructions provide borrowers and lenders with a better understanding of how the original rules of the CARES Act passed in March 2020 merge with the more relaxed guidelines under the PPP Flexibility Act passed on June 5, 2020.
Here are some things you should know about the updated loan forgiveness application form:
Extended Covered Period
PPP loans now offer a longer “covered period” of 24 weeks, beginning on the date of the loan disbursement. Generally, only costs paid or incurred within the 24-week period are eligible for forgiveness. The covered period may not extend past December 31, 2020.
Payroll costs include some additional flexibility. There is an “alternative payroll covered period” that may be used which allows borrowers to begin the 24-week period on the first day of the first pay period following receipt of the loan disbursement. This allows a business to neatly align its covered period with the beginning of a pay period. For example, if you received a PPP loan on Monday, April 20, 2020, and the first day of your next pay period is Sunday, April 26, 2020, you may elect to count the payroll costs for the 24-week period beginning April 26, 2020, rather than the 24-week period beginning April 20, 2020. The last day of the alternative payroll covered period would be Saturday, October 10, 2020.
The updated instructions also clarify that payroll costs are incurred on the day they are earned, allowing the payroll costs incurred for the last pay period of the 24-week period to be eligible for forgiveness, as long as they are paid no later than the next regular payroll date.
For non-payroll costs, such as mortgage interest, rent and utilities to be forgiven, these must either be: 1) paid during the 24-week covered period or 2) incurred during the 24-week period and paid by its next regular due date, even if that due date is after the 24-week period.
A borrower who received a loan prior to June 5, 2020, the date the PPP Flexibility Act was passed, may still elect to use the 8-week covered period under the CARES Act.
The maximum amount of compensation per employee that can be forgiven is still capped at $100,000, but it is now pro-rated over 24 weeks, so $46,154 (24/52 weeks * $100,000) for each employee.
The following employee non-payroll costs are also allowed to be added to the amount forgiven:
- Payments for employer provided group health insurance
- Contributions to employee retirement plans
- Employer state or local tax assessed on employee compensation
For self-employed individuals with no employees, the forgivable payroll cost or “owner replacement cost” is capped at 2.5/12 months of the borrower’s 2019 Form Schedule C net profit, up to $100,000. So, a self-employed individual who had at least $100,000 of Schedule C net profit in 2019 will be allowed forgiveness of $20,833 (2.5/12 months * $100,000).
Schedule A of Form 3508 separates the amount that applies to general partners and owner-employees of a C or S corporation. The maximum payroll cost for 2020 is capped at 2.5 months of an annualized $100,000 salary, or $20,833. This is lower than the $46,152 maximum amount a non-owner employee can be paid throughout the covered period.
Health insurance contributions for self-employed individuals, general partners or owner-employees of an S corporation are not included in the forgiveness amount.
Payroll and owner replacement costs must be at least 60% or more of the forgiveness amount.
A borrower is still subject to a reduction of the loan forgiveness amount if the annual salary or hourly wages of any employee is reduced by more than 25%, or if it reduces its full time employees (FTEs) during the covered period or alternative covered period.
The updated application form reflects new safe harbors under the PPP Flexibility Act:
- Borrowers will not be required to reduce the loan forgiveness amount if FTEs or salary/ hourly wages are restored to February 15th levels by December 31, 2020.
- The amount of loan forgiveness will not be reduced for businesses that are unable to operate at the same level of business activity as before February 15th until the end of the 24-week covered period or December 31, 2020, due to compliance with requirements established by federal agencies related to COVID-19.
Simplified Forgiveness Application
The SBA has released a simplified forgiveness application (Form 3508EZ) which can be used if the borrower meets one or more of the following criteria:
- The borrower is a self-employed individual, independent contractor, or sole proprietor who had no employees at the time of the PPP loan application.
- The borrower did not reduce the salary of any employee by more than 25% during the covered period or the alternative payroll covered period or reduce their FTEs.
- The borrower did not reduce the salary of any employee by more than 25% during the covered period or the alternative payroll covered and they fall within the safe harbor for businesses unable to operate during the covered period, due to compliance with requirements established by federal agencies related to COVID-19.
Extended Application Deadline
Lastly, the deadline for submitting the application for a PPP loan is now June 30, 2020. If you have not applied for a PPP loan forgiveness and are still considering doing so, you have a few more days left to submit the application.
We are here to help you navigate various COVID-19 pandemic relief programs available to your business. Please connect with us for guidance.