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Asking for Forgiveness: Revised PPP Loan Forgiveness Applications and Guidance

January 25, 2021

Overview

Below are 10 important things to know about the Paycheck Protection Program (“PPP”) Loan Forgiveness ‎Applications and the detailed instructions for the revised and updated applications posted on January 19, 2021, ‎as well as other forgiveness procedures as updated by the Economic Aid to Hard-Hit Small Businesses, Nonprofits, ‎and Venues Act (the “Economic Aid Act” or “PPP2 Act”). This is the guidance that we expected after the enactment of the Consolidated Appropriations Act, 2021 ‎‎(“2021 Appropriations Act”) on December 27, 2020.

The PPP2 Act and 2021 Appropriations Act included several ‎changes to the forgiveness documents and process, which affected existing forms and the processes. The ‎most important of these changes were the tax deductibility of expenses, the forgiveness of loans of ‎‎$150,000 or less, the expansion of eligible costs, and the borrower’s ability to select its covered period ‎within a timing window between 8 and 24 weeks. In addition, the Economic Aid Act sets aside over $284 billion for ‎PPP loans, both for new First Draw PPP Loans and Second Draw PPP Loans. See our articles “What to Know about the Paycheck Protection Program, Round Two and “Economic Aid Act: 10 Things to Know about Second Draw PPP Loans.”

As of January 19, 2021, there were three applications and instructions: (a) PPP Loan Forgiveness Application Form 3508S Revised January 19, 2021 (“Form 3508S”); (b) PPP Loan Forgiveness Application Form 3508EZ Revised January 19, 2021 (“Form 3508EZ”); and (c) PPP Loan Forgiveness Application Form 3508 Revised January 19, 2021 (“Form 3508”). There is also a new form—Paycheck Protection Program Borrower’s Disclosure of Certain Controlling Interest (“Form 3508D”), discussed below in Item 10.

Also on January 19, 2021, the Small Business Administration (the “SBA”) in consultation with the Department of Treasury (“Treasury”) posted the Interim Final Rule on Loan Forgiveness Requirements and Loan Review Procedures as Amended by Economic Aid Act (“2021 Forgiveness IFR”). The 2021 Forgiveness IFR incorporates and restates the prior interim final rules relating to loan forgiveness and makes revisions to conform the prior interim final rules[1] to the amendments made by the Economic Aid Act. In addition and on an ongoing basis, the SBA posts Frequently Asked Questions (most recently updated December 9, 2020) (“FAQs”) and Frequently Asked Questions on Loan Forgiveness (most recently updated 10/13/2020) (“Forgiveness FAQs”). The SBA has stated that the 2021 Forgiveness IFR should be interpreted consistently with the FAQs and the Forgiveness FAQs; however, the Economic Aid Act overrides any conflicting guidance in the FAQs and Forgiveness FAQs, and the SBA will be revising the FAQs and Forgiveness FAQs to conform to the Economic Aid Act “as quickly as feasible.” Please note that section 1106 of the CARES Act is now codified as section 7A of the Small Business Act.

The forms and 2021 Forgiveness IFR are effective immediately, and the rules in the 2021 Forgiveness IFR apply to loans that were made in 2020 but for which the SBA has not yet remitted forgiveness to the lender.

For borrowers with loans over $2 million dollars: around October 26, 2020, the SBA asked PPP lenders to request certain information from borrowers with loans over $2 million. The SBA has posted these questionnaires on the Treasury website, and on December 9, 2020, it posted FAQ #53 discussing the “Necessity Questionnaire.” Please see our article “PPP Loans Over $2 Million and the PPP Necessity Questionnaires.”

This article summarizes 10 things to know about the revised and updated PPP loan forgiveness applications:

  1. Covered Period
  2. Timeline For Submitting Application and Deferral
  3. Eligible Payroll Costs
  4. Nonpayroll Costs
  5. Form Eligibility
  6. Forgiveness Calculation
  7. Forgiveness Reductions Based on Head Count, Sale Harbors, and Rehiring Forgiveness Guidance
  8. Forgiveness Reductions Based on Salary or Wages
  9. Documents
  10. Form 3508D—Borrower’s Disclosure of Certain Controlling Interests

1. COVERED PERIOD:

The covered period is the period beginning on the date the lender disburses the PPP loan and ending on the date selected by the borrower that occurs during the period (i) beginning on the date that is 8 weeks after the date of disbursement, and (ii) ending on the date that is 24 weeks after the date of disbursement (the “Covered Period”). Please note that the option to elect an alternative covered period was removed because the Economic Aid Act provided borrowers flexibility to choose the end of their Covered Period. The Covered Periods for a First Draw PPP Loan and a Second Draw PPP Loan cannot overlap; the borrower must use all proceeds for the First Draw PPP Loan for eligible expenses before disbursement of the Second Draw PPP Loan.

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2. TIMELINE FOR SUBMITTING APPLICATION AND DEFERRAL:

A borrower may submit a loan forgiveness application any time on or before the maturity of the loan if the borrower has used all of the loan proceeds for which the borrower is requesting forgiveness, except that a borrower applying for forgiveness of a Second Draw PPP Loan that is more than $150,000 must submit the loan forgiveness application for its First Draw PPP Loan before or simultaneously with the loan forgiveness application for its Second Draw PPP Loan. If the borrower does not apply for loan forgiveness within 10 months after the last day of the maximum Covered Period of 24 weeks, or if the SBA determines that the loan is not eligible for forgiveness (in whole or in part), the PPP loan is no longer deferred and the borrower must begin paying principal and interest. If this occurs, the lender must notify the borrower of the date the first payment is due.

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3. ELIGIBLE PAYROLL COSTS:

  • Paid or Incurred: Borrowers are generally eligible for forgiveness for the payroll costs paid and payroll costs incurred during the Covered Period (“payroll costs”). Payroll costs are considered paid on the day that paychecks are distributed or the borrower originates an ACH credit transaction. Payroll costs incurred but not paid during the borrower’s last pay period of the Covered Period are eligible for forgiveness if paid on or before the next regular payroll date; otherwise, payroll costs must be paid during the Covered Period to be eligible for forgiveness. Payroll costs generally are incurred on the day the employee’s pay is earned (i.e., on the day the employee worked). For employees who are not performing work but are still on the borrower’s payroll, payroll costs are incurred based on the schedule established by the borrower (typically, each day that the employee would have performed work). For each individual employee, the total amount of cash compensation eligible for forgiveness may not exceed $100,000, as prorated for the Covered Period. Count payroll costs that were both paid and incurred only once. Payroll costs should only include employees whose principal place of residence is in the United States.
    • Furloughed employees: if a borrower pays furloughed employees their salary, wages, commissions, hazard pay, or bonuses during the Cover Period, those payments are eligible for forgiveness so long as they do not exceed an annual salary of $100,000 as prorated for the period during which the payments are made or the obligations to make the payments is incurred.
  • Cash Compensation:
    • For purposes of calculating cash compensation, the applications and Forgiveness FAQs provide that borrowers should use the gross amount before deduction for taxes, employee benefits payments, and similar payments.
    • Payroll costs consist of compensation to employees (whose principal place of residence is the United States) in the form of salary, wages, commissions, or similar compensation; cash tips or the equivalent (based on employer records of past tips or, in the absence of such records, a reasonable, good-faith employer estimate of such tips); payment of vacation, parental, family, medical, or sick leave (not including leave covered by the Families First Coronavirus Response Act); allowances for separation or dismissal; payment for the provision of employee benefits consisting of group health care or group life, disability, vision, or dental insurance, including insurance premiums, and retirement; payment of state and local taxes assessed on compensation of employees; and for an independent contractor or sole proprietor, wages, commissions, income, or net earnings from self-employment, or similar compensation. Payroll costs that are qualified wages taken into account in determining the Employer Retention Credit are not eligible for loan forgiveness. Note that forgivable cash compensation per employee is limited to $100,000 on an annualized basis.
  • Group Health Care Benefits: Employer expenses for employee group health care benefits that are paid or incurred by the borrower during the Covered Period are payroll costs eligible for loan forgiveness. However, payroll costs do not include expenses for group health care benefits paid by employees (or beneficiaries of the plan) either pre-tax or after tax, such as the employee share of their health care premium. Forgiveness is not provided for expenses for group health benefits accelerated from periods outside the Covered Period. If a borrower has an insured group health plan, insurance premiums paid or incurred during the Covered Period qualify as “payroll costs,” as long as the premiums are paid during the applicable period or by the next premium due date after the end of the applicable period. Only the portion of the premiums paid by the borrower for coverage during the applicable Covered Period is included, not any portion paid by employees or beneficiaries or any portion paid for coverage for periods outside the applicable period. Note that there is another rule that applies to owner health insurance.
  • Retirement Benefits: Generally, employer contributions for employee retirement benefits that are paid or incurred by the borrower during the Covered Period qualify as “payroll costs” eligible for loan forgiveness. The employer contributions for retirement benefits included in the loan forgiveness amount as payroll costs cannot include any retirement contributions deducted from employees’ pay or otherwise paid by employees. Forgiveness is not provided for employer contributions for retirement benefits accelerated from periods outside the Covered Period. Note that there is another rule for the treatment of retirement benefits for owners.
  • Owner-Employee or Self-Employed Individuals: Forgiveness is capped at 2.5 months’ worth (2.5/12) of an owner-employee or self-employed individual’s 2019 or 2020[2] compensation (up to a maximum $20,833 per individual in total across all businesses.) The individual’s total compensation may not exceed $100,000 on an annualized basis, as prorated for the period during which the payments are made or the obligation to make the payments is incurred. The 2021 Forgiveness IFR contains examples, showing a cap of $15,385 per individual for an 8 week Covered Period, a cap of $19,231 per individual for a 10 week Covered Period, and for a Covered Period longer than 2.5 months, a cap of $20,833. The amount of compensation of owners who work at their business that is eligible for forgiveness depends on the business type:
    • C-corporation owner-employees (with an ownership stake of 5% or more) are capped by the prorated amount of their 2019 or 2020 (use whichever year was used to calculate the borrower’s loan amount) employee cash compensation and employer retirement and health, life, disability, vision, and dental insurance contributions made on their behalf.
    • S-corporation owner-employees (with an ownership stake of 5% or more) are capped by the prorated amount of their 2019 or 2020 (use whichever year was used to calculate the borrower’s loan amount) amount employee cash compensation and employer retirement and health, life, disability, vision, and dental insurance contributions made on their behalf; however, employer health, life, disability, vision, and dental insurance contributions made on their behalf cannot be separately added, as those payments are already included in their employee cash compensation.
    • Schedule C or F filers are capped by the prorated amount of their owner compensation replacement, calculated based on 2019 or 2020 net profit. For self-employed borrowers that file Form 1040, Schedule F and have no employees, gross income may be used instead of net profit. For self-employed borrowers that file Schedule F and have employees, the difference between gross income and employee payroll costs may be used instead of net profit. For self-employed individuals, including Schedule C or F filers, retirement and health, life, disability, vision, or dental insurance contributions are included in their net self-employment income and therefore cannot be separately added to their payroll calculation.
    • General partners are capped by the prorated amount of their 2019 or 2020 net earnings from self-employment (reduced by claimed section 179 expense deduction, unreimbursed partnership expenses, and depletion from oil and gas properties) multiplied by 0.9235. For general partners, retirement and health, life, disability, vision, or dental insurance contributions are included in their net self-employment income and therefore cannot be separately added to their payroll calculation.
    • Limited liability company (“LLC”) members are subject to the rules based on their LLC’s tax filing status in the reference year used to determine their loan amount.
    • Fishing boat owners may not include as payroll costs in their application for loan forgiveness any compensation paid to a crewmember who received his or her own PPP loan and is seeking forgiveness for amounts of compensation the crewmember received for performing services described in Section 3121(b)(20) of the Internal Revenue Code with respect to that owner’s fishing boat.

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4. NONPAYROLL COSTS:

  • In General: Nonpayroll costs eligible for forgiveness consist of: (a) covered mortgage obligations: interest payments on any business mortgage obligation on real or personal property that was incurred before February 15, 2020 (but not any prepayment or payment of principal); (b) covered rent obligations: payments on business rent obligations on real or personal property under a lease agreement in force before February 15, 2020; (c) covered utility payments: business utility payments for the distribution of electricity, gas, water, transportation, telephone, or internet access for which service began before February 15, 2020; (d) covered operations expenditures (see definition below); (e) covered property damage costs (see definition below); (f)covered supplier costs (see definition below); and (g) covered worker protection expenditures (see definition below). An eligible nonpayroll cost must be either paid during the Covered Period or incurred during the Covered Period and paid on or before the next regular billing date, even if the billing date is after the Covered Period. Eligible nonpayroll costs cannot exceed 40% of the loan forgiveness amount. Count nonpayroll costs that were both paid and incurred only once. Covered operations expenditures, covered property damage costs, covered supplier costs, and covered worker protection expenditures were added as part of the Economic Aid Act and as such, a borrower may only receive forgiveness of these costs if the SBA had not yet remitted a forgiveness payment on the borrower’s loan to the borrower’s PPP lender as of December 27, 2020 (the date of the Economic Aid Act’s enactment). Nonpayroll costs that were both paid and incurred should only be counted once.
    • Eligibility of Tenant/Sub-Tenant and Home-Based Business Amounts: Amounts attributable to the business operation of a tenant or sub-tenant of the PPP borrower or, in the context of a home-based business, household expenses are not eligible for forgiveness. Examples are provided in the 2021 Forgiveness IFR: regarding subletting, limiting mortgage interest to the percent share of fair market value of the space not leased out to the other business, prorating rent and utility payments based on 2019 tax filings, and limiting covered expenses to the share that were deductible on 2019 tax filings. For new businesses, the borrower may use expected 2020 tax filings.
  • Interest: Interest payments on any business mortgages on real or personal property (such as an auto loan) that was incurred before February 15, 2020 (but not any prepayment or payment of principal) are eligible for loan forgiveness. Interest on unsecured credit is not eligible for loan forgiveness because the loan is not secured by real or personal property. Advance payments of interest (considered “prepayments”) and principal on a covered mortgage obligation are not eligible for loan forgiveness. Note that interest on unsecured credit incurred before February 15, 2020, is a permissible use of PPP loan proceeds, but this expense is not eligible for forgiveness. The Forgiveness FAQs also provide that interest payments on a refinanced mortgage loan during the Covered Period are eligible for loan forgiveness if the mortgage loan was on real or personal property that existed prior to February 15, 2020, and is refinanced on or after February 15, 2020.
  • Rent and Leases: Payments on business rent obligations on real or personal property under a lease agreement in force before February 15, 2020 are eligible. The Forgiveness FAQs also provide that lease payments made pursuant to a renewed lease during the Covered Period are eligible for loan forgiveness if the lease existed prior to February 15, 2020, and expired on or after February 15, 2020, and is renewed.
    • Related Party Items:
      • Rent Payments: Rent payments to a related party are eligible for loan forgiveness, as long as (1) the amount of the loan forgiveness requested for rent or lease payments to a related party is no more than the amount of mortgage interest owed on the property during the Covered Period that is attributable to the space being rented by the business, and (2) the lease and the mortgage were entered into prior to February 15, 2020. The SBA also noted that in this context, the related party itself would not also be eligible to request forgiveness for this amount. Any ownership in common between the business and the property owner is a related party for these purposes. The borrower must provide its lender with mortgage interest documentation to substantiate these payments.
      • Mortgage Interest Payments: While rent or lease payments to a related party might be eligible for forgiveness, mortgage interest payments to a related party are not eligible for forgiveness.
    • Utilities: Eligible business utility payments are for the distribution of electricity, gas, water, transportation, telephone, or internet access for which service began before February 15, 2020. Forgiveness FAQs provide that: (a) services for the distribution of transportation refers to transportation utility fees assessed by state and local governments and payment of these fees by the borrower is eligible for loan forgiveness; and (b) the entire electricity bill payment is eligible for loan forgiveness (even if charges are invoiced separately), including supply charges, distributions changes, and other charges such as gross receipts taxes.
    • Covered Operations Expenditures: a covered operations expenditure is a payment for any business software or cloud computing service that facilitates business operations, product or service delivery, the processing, payment, or tracking of payroll expenses, human resources, sales and billing functions, or accounting or tracking of supplies, inventory, records, and expenses.
    • Covered Property Damage Costs: a covered property damage cost is a cost related to property damage and vandalism or looting due to public disturbances that occurred during 2020 that was not covered by insurance or other compensation.
    • Covered Supplier Costs: A covered supplier cost means an expenditure made by a borrower to a supplier of goods for the supply of goods that (A) are essential to the operations of the borrower at the time at which the expenditure is made; and (B) is made pursuant to a contract, order, or purchase order (i) in effect at any time before the Covered Period with respect to the applicable covered loan; or (ii) with respect to perishable goods, in effect before or at any time during the Covered Period with respect to the applicable covered loan.
    • Covered Worker Protection Expenditures: A covered worker protection expenditure: (A) means an operating or a capital expenditure to facilitate the adaptation of the business activities of an entity to comply with requirements established or guidance issued by the Department of Health and Human Services, the Centers for Disease Control, or the Occupational Safety and Health Administration, or any equivalent requirements established or guidance issued by a state or local government related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID–19, during the period beginning on March 1, 2020 and ending the date on which the national emergency declared by the President under the National Emergencies Act (50 U.S.C. 1601 et seq.) with respect to the Coronavirus Disease 2019 (COVID–19) expires; (B) may include (i) the purchase, maintenance, or renovation of assets that create or expand— (I) a drive-through window facility; (II) an indoor, outdoor, or combined air or air pressure ventilation or filtration system; (III) a physical barrier such as a sneeze guard; (IV) an expansion of additional indoor, outdoor, or combined business space; (V) an onsite or offsite health screening capability; or (VI) other assets relating to the compliance with the requirements or guidance described in subsection (A), as determined by the Administrator in consultation with the Secretary of Health and Human Services and the Secretary of Labor; and (ii) the purchase of— (I) covered materials described in section 328.103(a) of title 44, Code of Federal Regulations, or any successor regulation; (II) particulate filtering facepiece respirators approved by the National Institute for Occupational Safety and Health, including those approved only for emergency use authorization; or (III) other kinds of personal protective equipment, as determined by the Administrator in consultation with the Secretary of Health and Human Services and the Secretary of Labor; and (C) does not include residential real property or intangible property.

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 5. FORM ELIGIBILITY: 

  • Form 3508S: A borrower may use Form 3508S only if the borrower received a PPP loan of $150,000 or less for an individual First or Second Draw PPP Loan. If a borrower is not eligible to use this form, the borrower must apply for forgiveness using Form 3508 or Form 3508EZ (or lender’s equivalent form). Each PPP loan must use a separate loan forgiveness application form. A borrower cannot use one form to apply for forgiveness of both a First and Second Draw PPP Loan.
  • Form 3508EZ: A borrower may use the Form 3508EZ if the PPP loan amount is more than $150,000 and the borrower can check one of the two boxes described in the bulleted list below. If the loan amount is $150,000 or less, the SBA requests the borrower use Form 3508S. All other borrowers must use the Form 3508 or lender equivalent. The two boxes are:
    • Borrower did not reduce annual salary or hourly wages of any employee by more than 25% during the Covered Period compared to the most recent full quarter before the Covered Period (for purposes of this statement, “employees” means only those employees that did not receive, during any single period during 2019, wages or salary at an annualized rate of pay in an amount more than $100,000); AND the borrower did not reduce the number of employees or the average paid hours of employees between January 1, 2020 and the end of the Covered Period (ignoring reductions: (i) that arose from an inability to rehire individuals who were employees on February 15, 2020 if the borrower was unable to hire similarly qualified employees for unfilled positions on or before December 31, 2020 (or, for a PPP loan made after December 27, 2020, the last day of the Covered Period); and (ii) in an employee’s hours that the borrower offered to restore and the employee refused).
    • Borrower did not reduce annual salary or hourly wages of any employee by more than 25% during the Covered Period compared to the most recent full quarter before the Covered Period (for purposes of this statement, “employees” means only those employees that did not receive, during any single period during 2019, wages or salary at an annualized rate of pay in an amount more than $100,000); 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 (or, for a PPP loan made after December 27, 2020, requirements established or guidance issued between March 1, 2020 and the last day of the Covered Period) by the Secretary of Health and Human Services, the Director of the Centers for Disease Control and Prevention, or the Occupational Safety and Health Administration (includes both direct and indirect compliance with COVID-19 requirements and guidance, such as state and local government shutdown orders that are based in part on guidance from the three federal agencies [based on the Interim Final Rule posted June 22, 2020]), related to the maintenance of standards of sanitation, social distancing, or any other work or customer safety requirement related to COVID-19.
  • Form 3508: Required if Form 3508S or 3508EZ (or lender equivalents) are not used.

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6. FORGIVENESS CALCULATION:

  • Form 3508S: Form 3508S requires fewer calculations and less documentation. Borrowers list the PPP loan amount, the amount of loan spent on payroll costs, and the requested loan forgiveness amount. The borrower is not required to show the calculations used to determine their loan forgiveness amount. However, the SBA may request information and documents to review those calculations as part of its loan review or audit process. If the application is being submitted for a First Draw PPP Loan approved on or before August 8, 2020 and the borrower is required to submit a Form 3508D disclosure of a controlling interest, that disclosure must be submitted to the lender not later than 30 days after submission of the loan forgiveness application. If the loan forgiveness application is being submitted for a Second Draw PPP Loan, the borrower must submit simultaneously to its lender documentation supporting the gross receipts reduction certification on the borrower’s loan application (if the borrower did not previously submit such documentation to the lender). Borrowers that use Form 3508S are not exempt from reductions for forgiveness amounts based on reductions in FTE employees or in salaries or wages. Only borrowers with loans of $50,000 or less are exempt from any reductions in the borrower’s loan forgiveness amount based on reductions in FTE employees or in salaries or wages subject to the borrower together with its affiliates not receiving First Draw PPP Loans totaling $2 million or more or Second Draw PPP Loans totaling $2 million or more.
  • Form 3508EZ: Borrowers and other interested parties can use the Form 3508EZ to calculate the forgiveness amount, by adding all eligible payroll and nonpayroll costs to calculate the potential forgiveness amount and then adjusting that amount by the payroll cost 60% requirement to arrive at the forgiveness amount. 
  • Form 3508:Borrowers and other interested parties may use the Form 3508 to calculate the amount of forgiveness by adding all eligible payroll and nonpayroll costs to calculate the potential forgiveness amount, then adjusting that amount for full-time equivalency (FTE) and salary/hourly wage reductions, and then adjusting that amount by the payroll cost 60% requirement to arrive at the forgiveness amount.

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7. FORGIVENESS REDUCTIONS BASED ON HEAD COUNT, SAFE HARBORS, AND REHIRING FORGIVENESS GUIDANCE: 

Section 7A of the Small Business Act specifically requires certain reductions in a borrower’s loan forgiveness amount based on reductions in full-time equivalent employees. It includes an important statutory exemption for borrowers that have eliminated the reductions on or before December 31, 2020 (or for a PPP loan made on or after December 27, 2020, not later than the last day of the loan’s Covered Period). The Small Business Act also allows exemptions from reductions in loan forgiveness amounts based on employee availability and business activity. In addition, the SBA and Treasury have adopted regulatory exemptions to the reduction rules for borrowers that (1) have offered to restore employee hours at the same salary or wages, even if the employees have not accepted, (2) fired an employee for cause or have an employee who voluntarily resigns or voluntarily requests a schedule reduction; (3) eliminate reductions by December 31, 2020 or, for a PPP loan made after December 27, 2020, the last day of the loan’s Covered Period, or (4) have a PPP loan of $50,000 or less.

There is some guidance in the 2021 Forgiveness IFR, the loan forgiveness applications, and the Forgiveness FAQs on implementation of statutory exemptions from loan forgiveness reduction based on reductions in full-time equivalent employees, including the calculation of the average full-time equivalency (FTE) (40 hour week), the FTE Reduction Safe Harbors, and the FTE Reduction Exceptions.

  • In General: A reduction in FTE employees during the Covered Period reduces the loan forgiveness amount by the same percentage as the percentage reduction in FTE employees. If the average number of FTE employees during the Covered Period is less than during the reference period (defined below), the total eligible expenses available for forgiveness is reduced proportionally by the percentage reduction in FTE employees. The borrower is exempt from this proportional reduction if the borrower is able to document in good faith the following: (1) an inability to rehire individuals who were employees of the borrower on February 15, 2020; and (2) an inability to hire similarly qualified individuals for unfilled positions on or before December 31, 2020 (or, for a PPP loan made on or after December 27, 2020, not later than the last day of the loan’s Covered Period). See below under “FTE Reduction Exceptions.” Borrowers are also exempted if the borrower is able to document in good faith an inability to return to the same level of business activity as the borrower was operating at before February 15, 2020, due to compliance with certain requirements. See below under “FTE Reduction Safe Harbors.”
  • “Full-Time Equivalent Employee” means an employee who works 40 hours or more, on average, each week. The hours of employees who work less than 40 hours are calculated as proportions of a single full-time equivalent employee and aggregated.
  • Reference Period: The reference period is, at the borrower’s election, either (i) February 15, 2019 through June 30, 2019; (ii) January 1, 2020 through February 29, 2020; or (iii) in the case of seasonal employers, either of the preceding periods or any consecutive 12-week period between February 15, 2019 and February 15, 2020.
  • Calculation of FTE Employees: Borrowers seeking forgiveness must document their average number of FTE employees during the Covered Period and their selected reference period. If applicable, a borrower must perform this calculation for both its First Draw PPP Loan and Second Draw PPP Loan. For purposes of this calculation, borrowers must divide the average number of hours paid for each employee per week by 40, capping this quotient at 1.0. For example, an employee who was paid 48 hours per week during the Covered Period would be considered to be an FTE employee of 1.0. For employees who were paid for less than 40 hours per week, borrowers may choose to calculate the full-time equivalency in one of two ways: (1) the borrower may calculate the average number of hours a part-time employee was paid per week during the Covered Period. (For example, if an employee was paid for 30 hours per week on average during the Covered Period, the employee could be considered to be an FTE employee of 0.75; or similarly, if an employee was paid for 10 hours per week on average during the Covered Period, the employee could be considered to be an FTE employee of 0.25); or (2) for administrative convenience, borrowers may elect to use a full-time equivalency of 0.5 for each part-time employee. Borrowers may select only one of these two methods, and must apply that method consistently to all of their part-time employees for the Covered Period and the selected reference period. In either case, the borrower must provide the aggregate total of FTE employees for both the selected reference period and the Covered Period by adding together all of the employee-level FTE employee calculations. The borrower must then divide the average FTE employees during the Covered Period by the average FTE employees during the selected reference period, resulting in the reduction quotient.
  • Restoration: if a borrower eliminates any reductions in FTE employees occurring between February 15, 2020 and April 26, 2020 (the safe harbor period) by December 31, 2020 (or, for a PPP loan made on or after December 27, 2020, by last day of the loan’s Covered Period), the borrower is exempt from any reduction in loan forgiveness amount that would otherwise be required due to reductions in FTE employees.
  • FTE Reduction Safe Harbors: There are two separate safe harbors that exempt certain borrowers from any loan forgiveness reduction based on a reduction in FTE employee levels: 
    1. Safe Harbor 1: If the borrower, in good faith, is able to document that it was 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, 2020, due to compliance with requirements established or guidance issued between March 1, 2020 and December 31, 2020 (or, for a PPP loan made on or after December 27, 2020, between March 1, 2020 and the last day of the Covered Period with respect to such loan), by the Secretary of Health and Human Services, the Director of the Centers for Disease Control and Prevention, or the Occupational Safety and Health Administration (includes both direct and indirect compliance with COVID-19 requirements and guidance, such as state and local government shutdown orders that are based in part on guidance from the three federal agencies [based on the Interim Final Rule posted June 22, 2020]), related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID-19.
    2. Safe Harbor 2: If both of the following conditions are met: (1) the borrower reduced its FTE employee level in the period beginning February 15, 2020, and ending April 26, 2020; and (2) the borrower then restored its FTE employee levels in the borrower’s pay period that included February 15, 2020 by not later than (i) December 31, 2020, for a PPP loan made before December 27, 2020, or (ii) the last day of the Covered Period, for a PPP loan made after December 27, 2020.
  • FTE Reduction Exceptions: Any FTE reductions in the following cases do not reduce the borrower’s loan forgiveness: the FTE of (1) any positions for which the borrower made a good-faith, written offer to rehire an individual who was an employee on February 15, 2020 and the borrower was unable to hire similarly qualified employees for unfilled positions on or before (a) December 31, 2020, for a PPP loan made before December 27, 2020 or (b) the last day of the Covered Period, for a PPP loan made after December 27, 2020; (2) any positions for which the borrower made a good-faith, written offer to restore any reduction in hours, at the same salary or wages and same number of hours as earned by such employee in the last pay period prior to the reduction in hours, during the Covered Period, the employee rejected the offer and the borrower maintained records documenting the offer and rejection, and (3) any employees who during the Covered Period (a) were fired for cause, (b) voluntarily resigned, or (c) voluntarily requested and received a reduction of their hours. In all of these cases, the borrower may count such employee at the same full-time equivalency level before the FTE reduction event when calculating the FTE employee reduction penalty. Borrowers that avail themselves of this de minimis exemption must maintain and provide records upon request. Any FTE reduction in these cases does not reduce the borrower’s loan forgiveness.
    • Employee Declines the Offer to Rehire: The 2021 Forgiveness IFR emphasizes that the borrower is required to inform the applicable state unemployment insurance office of any employee’s rejected rehire offer within 30 days of the employee’s rejection of the offer. The documents that the borrower should maintain to show compliance with this exemption include the written offer to rehire an individual, a written record of the offer’s rejection, and a written record of efforts to hire a similarly qualified individual.
    • Include Employees Who Made More Than $100,000: According to the Forgiveness FAQs, the FTE reduction exceptions apply to all employees, not just those who would be listed in Table 1 of the Form 3508 or lender equivalent. A borrower must include employees who made more than $100,000 in the Table 1 of the PPP Schedule A Worksheet.
    • A Borrower with a Loan of $50,000 or Less is exempt from any reductions in the borrower’s loan forgiveness amount based on reductions in FTE employees unless the borrower together with its affiliates received First Draw PPP Loans totaling $2 million or more or Second Draw PPP Loans totaling $2 million or more.

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8. FORGIVENESS REDUCTIONS BASED ON SALARY OR WAGES: 

Under Section 7A(d)(3) of the Small Business Act, a reduction in an employee’s salary or wages in excess of 25% will generally result in a reduction in loan forgiveness amount, unless an exception applies. Specifically, for each new employee in 2020 and 2021, as well as each existing employee who was not paid more than the annualized equivalent of $100,000 in any pay period in 2019, the borrower must reduce the total forgiveness amount by the total dollar amount of the salary or wage reductions that are in excess of 25% of base salary or wages of the employee during the most recent full quarter during which the employee was employed before the Covered Period (the reference period), subject to exceptions for borrowers who restore reduced wages or salaries. This reduction calculation is performed on a per employee basis, not in the aggregate. Additionally, this reduction is performed based on the Covered Period and reference period applicable to the First Draw Loan or Second Draw Loan.

  • Examples of How to Calculate the Reduction in Loan Forgiveness Amount Arising From Reductions in Employee Salary or Wage: The 2021 Forgiveness IFR contains two examples and the Forgiveness FAQs have three examples; see those for more guidance.
  • Restoration: If certain employee salaries and wages were reduced between February 15, 2020 and April 26, 2020 (the safe harbor period) but the borrower eliminates those reductions by December 31, 2020 (or, for a PPP loan made on or after December 27, 2020, by last day of the loan’s Covered Period), the borrower is exempt from any reduction in loan forgiveness amount that would otherwise be required due to reductions in salaries and wages.
  • No Double Penalty: To ensure that borrowers are not doubly penalized, the salary/wage reduction applies only to the portion of the decline in employee salary and wages that is not attributable to the FTE reduction. There is an example of this in the 2021 Forgiveness IFR.
  • A Borrower with a Loan of $50,000 or Less is exempt from any reductions in the borrower’s loan forgiveness amount based on reductions in employee salary or wages unless the borrower together with its affiliates received First Draw PPP Loans totaling $2 million or more or Second Draw PPP Loans totaling $2 million or more.
  • Only Salaries and Wages: In accordance with Forgiveness FAQS, for purposes of calculating the loan forgiveness reduction required for salary or wage reductions in excess of 25% for certain employees, the borrower should only take into account decreases in salaries or wages.

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9. DOCUMENTS:

The forgiveness applications issued by the SBA require that they be accompanied with detailed documentation and that additional documents be retained by the borrower. If the lender identifies errors in the borrower’s calculations or material lack of substantiation in the borrower’s supporting documents in the loan forgiveness applications, the lender is to work with the borrower to remedy the issue. Borrowers should take the time to make sure they have both the accompanying documentation and the documents to be maintained available at the time of the submission. A borrower should not put off getting the “retained” documents together. The SBA has a right to request that information as part of its review. If the borrower does not promptly provide documents, this might cause delays and possibly denial of forgiveness. In addition, certain documents are required for appeals of certain SBA decisions. See our articles “Key Considerations for PPP Documentation,” “A Guide to the SBA PPP Loan Forgiveness Review Process,” and “PPP Loans Over $2 Million and the PPP Necessity Questionnaires.”

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10. Form 3508D—BORROWER’S DISCLOSURE OF CERTAIN CONTROLLING INTERESTS:

All borrowers that received First Draw PPP Loans before December 27, 2020 are required to submit the form. This is a new form and its purpose is to require borrowers that received First Draw PPP Loans before December 27, 2020 to disclose whether a “Covered Individual” directly or indirectly held a “Controlling Interest” in the borrower at the time the borrower’s loan application was submitted to the PPP lenders. If the borrower submitted a loan forgiveness application to its PPP lender before December 27, 2020, then the form must be completed and submitted to the PPP lender not later than January 26, 2021. If the PPP lender has already submitted a forgiveness decision to the SBA, the PPP lender must promptly transmit the completed Form to the SBA. Otherwise, PPP lenders must transmit the completed Form 3508D to the SBA when the PPP lenders issues its forgiveness decisions to the SBA. If the borrower submits a loan forgiveness application to its PPP lender on or after December 27, 2020, the form must be completed and submitted to the PPP lender within 30 days after submitting the forgiveness application. In that case, the PPP lender must transmit the completed Form 3508D to the SBA when the PPP lender issues its forgiveness decision to SBA.

The form requires disclosure, “at the time the borrower’s application for the First Draw PPP Loan was submitted to the PPP lender” of the names of “Covered Individual(s) directly or indirectly” holding “Controlling Interest(s) in the Borrower.” Those facts and a certification is required by the Principal Executive Officer of the borrower, “or an individual performing a similar function.” An entity is prohibited from receiving a PPP loan after December 27, 2020 if a controlling interest is held directly or indirectly by the President of the United States, Vice President of the United States, the head of an Executive department, or a Member of Congress, or the spouse of any of the preceding.

For purposes of the form, the following definitions apply:

  • A Covered Individual means (a) any one of the following Government Officials: the President, the Vice President, the head of an Executive department as defined in 5 U.S.C. § 101, or a member of Congress, and (b) the Spouse, as determined under applicable common law, of a Government Official described in clause (a), determined as of the time the borrower’s loan application was submitted to the PPP lender.
  • A Controlling Interest means owning, controlling, or holding not less than 20%, by vote or value, of the outstanding amount of any class of equity interest in a borrower. Additionally, for purposes of this form and the certification, the securities owned, controlled or held by an individual and their spouse will be aggregated. The term “equity interest” means (1) a share in a borrower, without regard to whether the share is transferable or classified as stock or anything similar, (2) a capital or profit interest in a limited liability company or partnership, or (3) a warrant or right, other than a right to convert, to purchase, sell, or subscribe to a share of interest described in (1) or (2), respectively.

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We encourage you to visit Schwabe’s COVID-19CARES Act, and PPP Portal resource pages frequently for information. This article summarizes aspects of the law relevant to the PPP; it does not constitute legal advice. For legal advice for your situation, you should contact an attorney.

[1] The prior interim final rules relating to loan forgiveness and loan reviews that are incorporated in the 2021 Forgiveness IFR are: the first interim final rule on loan forgiveness (85 FR 33004) (June 1, 2020); the first interim final rule on SBA loan review procedures and related borrower and lender responsibilities (85 FR 33010) (June 1, 2020); the interim final rule incorporating Flexibility Act Amendments (85 FR 38304) (June 26, 2020); the interim final rule on Treatment of Owners and Forgiveness of Certain Nonpayroll Costs (85 FR 52881) (August 27, 2020); and the interim final rule on Additional Revisions to Loan Forgiveness and Loan Review Procedures Interim Final Rules (85 FR 66214) (October 19, 2020). The rule also incorporates the forgiveness portions of the interim final rules regarding individuals with self-employment income (85 FR 21747 (April 20, 2020) and 85 FR 36997 (June 19, 2020)) and fishing boat owners (85 FR 39066) (June 30, 2020).

[2] For First Draw PPP Loans made in 2020, borrowers use 2019. For First Draw PPP Loans made in 2021 and Second Draw PPP Loans, borrowers use the year (2019 or 2020) that was used to calculate the borrower’s loan amount.

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