PPP Loans and the New Loan Forgiveness Guidance

Only two short months ago, Congress passed the Coronavirus Aid, Relief, and Economic Security Act or the CARES Act.  As many readers are aware, one of the many highpoints of the CARES Act was the Paycheck Protection Program (PPP).  Since its enactment, Freeman Law’s attorneys have extensively covered the PPP, including publishing the following PPP-related materials:

• Jason Freeman’s Forbes Posts: Flattening The Economic Curve:  The High Points of Coronavirus Tax Relief; Five Things Every Paycheck Protection Program Borrower Should Do After Receiving a Loan; PPP Loans:  Do Private Equity And Venture Capital Backed Companies Qualify?; Self-Employed And Need a PPP Loan?  The SBA Just Issued New Guidance For You; Why The SBA’s New Self-Employed PPP Guidance Got It Wrong; Set. Go. Small Businesses And The Race For Round 2 PPP Funds; PPP Lawsuits Allege Banks Favored Larger Customers, A Second Round of Funding Likely; Congressional Leaders Tell Treasury That PPP Borrowers Should Be Entitled To Deductions; PPP Borrowers And False Certifications:  SBA Extends Amnesty Under Safe Harbor; SBA Issues PPP Loan Forgiveness Guidance, A Few New Rules:  What You Need to Know Now; and Everything PPP Borrowers Need to Know About Why The SBA’s 75% Rule Is Wrong.
• Freeman Law’s Attorneys’ Prior Insight Coverage: Paycheck Protection Program SBA Loans (“PPP Loans”); Paycheck Protection Program (PPP) Information Sheet; SBA Issues Significant FAQ Guidance on Paycheck Protection Program (PPP) Loans; SBA Issues Additional Interim Final Rule; Congress Set to Appropriate More Funds to PPP Loan Program:  Self-Employed and Independent Contractors Who Missed Out Should Ensure Their PPP Loan Program Applications are Ready; Answers to Some of the More Common PPP Loan Forgiveness Questions.
• Consistently Updated Compendiums: We have issued several versions of up-to-date Compendiums covering changes in the tax laws and the PPP. Our most recent 72-page Compendium can be found here.

1. CARES Act Guidance

• Since the passage of the CARES Act, the Small Business Administration and the Treasury have issued a flurry of guidance on various provisions of the PPP.  These include:
  • Interim Rules (all published or to be published in the Federal Register).
  • First Interim Rule (published in Federal Register on April 15, 2020);
  • Second Interim Rule (published in Federal Register on April 15, 2020);
  • Third Interim Rule (published in Federal Register on April 20, 2020);
  • Fourth Interim Rule (published in Federal Register on April 28, 2020);
  • Fifth Interim Rule (published in Federal Register on April 30, 2020);
  • Sixth Interim Rule (published in Federal Register on May 4, 2020);
  • Seventh Interim Rule (published in Federal Register on May 4, 2020);
  • Eighth Interim Rule (published in Federal Register on May 8, 2020);
  • Ninth Interim Rule (published in Federal Register on May 19, 2020)
  • Tenth Interim Rule (published in Federal Register on May 19, 2020);
  • Eleventh Interim Rule (published in Federal Register on May 21, 2020).
• Frequently Asked Questions.
• Affiliation Guidance.
• PPP Loan Forgiveness Application.

II.  May 22, 2020 Interim Final Rules

On May 22, 2020, the SBA, in conjunction with the Treasury Department, issued two additional Interim Final Rules.  The first May 22, 2020, Interim Final Rule provides guidance to borrowers and lenders in preparing and submitting PPP loan forgiveness applications.  That Interim Final Rule can be found here.  The second May 22, 2020, Interim Final Rule provides guidance to borrowers and lenders regarding the SBA’s process for reviewing PPP loan applications and loan forgiveness application forms.  That Interim Final Rule can be found here.

A.  Borrower/Lender Guidance for Preparation and Submission of PPP Loan Forgiveness Applications

Some of the highpoints from the SBA/Treasury guidance is below:

1. Loan Forgiveness Process

• • The PPP Loan Forgiveness Process is as follows:  (1) borrower preparation and submission SBA Form 3508 (or lender equivalent) to the lender; (2) review of Form 3508 and lender decision regarding loan forgiveness; (3) communication by lender to SBA of amount of loan forgiveness (has to be done within 60 days from receipt of a complete application) and request for payment from SBA of loan forgiveness amount; (4) potential review of loan or Form 3508 by SBA and payment from SBA to lender of loan forgiveness amount (including applicable interest) no later than 90 days after the lender issues its decision to SBA.
  • If the SBA determines during the course of its review that the borrower was ineligible for the PPP loan at the time of the borrower’s loan application, loan will not be eligible for loan forgiveness.  If only a portion of the 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 2-year maturity period.

2. Furloughed Employees, Bonuses, and Hazard Pay

• • Salary, wages, or commission payments to furloughed employees – in addition to bonuses and hazard pay – made during the covered period are eligible for loan forgiveness, provided they do not exceed the $100,000 prorated limitation per employee.

3. Caps on Loan Forgiveness for Owner-Employees and Self-Employed Individuals

• • The amount of loan forgiveness requested for owner-employees and self-employed individuals’ payroll compensation can be no more than the lesser of 8/52 of 2019 compensation or $15,385 per individual in total across all businesses.
  • Owner-employees are capped by the amount of their 2019 employee cash compensation and employer retirement and health care contributions made on their behalf.  Schedule C filers are capped by the amount of their owner compensation replacement, calculated based on 2019 net profit (as reflected on their 2019 Schedule C).
  • No additional forgiveness is provided for retirement or health insurance contributions for self-employed individuals, including Schedule C filers, as such expenses are paid out of their net self-employment income.

4. Advanced Payments of Interest on Mortgage Obligations

• • These payments are not eligible for loan forgiveness.  In addition, principal on mortgage obligations are not eligible for forgiveness under any circumstances.

5. Laid-Off Workers Who Decline Offers to Work

• • Employees whom the borrower offered to rehire are generally exempt from the CARES Act’s loan forgiveness reduction calculation.  This exemption is also available if a borrower previously reduced the hours of an employee and offered to restore the employee’s hours at the same salary or wages.  More specifically, in calculating the loan forgiveness amount, a borrower may exclude any reduction in full-time equivalent employee headcount that is attributable to an individual employee if:

1. 1. 1. The borrower made a good faith, written offer to rehire such employee (or, if applicable, restore the reduced hours of such employee) during the covered period or the alternative payroll covered period;
      2. The offer was for the same salary or wages and the same number of hours as earned by such employee in the last pay period prior to the separation or reduction in hours;
      3. The offer was rejected by such employee;
      4. The borrower has maintained records documenting the offer and its rejection; and
      5. The borrower informed the applicable state unemployment insurance office of such employee’s rejected offer of reemployment within 30 days of the employee’s rejection of the offer.

6. Restoration of Employee Salaries or Wages or FTE Employees by June 30, 2020

• • Section 1106(d)(5) of the CARES Act provides that 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 June 30, 2020, or earlier, the borrower is exempt from any loan forgiveness amount that would otherwise be required due to reductions in salaries and wages under section 1106(d)(3) of the CARES Act.  Similarly, if a borrower eliminates any reductions in FTE employees during the safe harbor period by June 30, 2020, or earlier, the borrower is exempt from any reduction in loan forgiveness amount that would otherwise be required due to reductions in FTE employees.

7. Employees Fired For Cause, Voluntary Resignations, or Voluntary Requests for Schedule Reductions

• • When an employee of the borrower is fired for cause, voluntarily resigns, or voluntarily requests a reduced schedule during the covered period or the alternative covered period (FTE reduction event), the borrower may count such employee at the same full-time equivalency level before the FTE reduction event when calculating the section 1106(d)(2) FTE employee reduction penalty.  Borrowers must maintain records demonstrating that each such employee was fired for cause, voluntarily resigned, or voluntarily requested a schedule reduction.

B.  SBA Review Procedures

Some of the highlights from the SBA/Treasury guidance is below:

1. When will SBA Review a PPP Loan Forgiveness Application?

• • For a PPP loan of any size, SBA may undertake a review at any time in SBA’s discretion.

2. Will I Have an Opportunity to Respond to SBA’s Questions in a Review?

• • If loan documentation submitted to SBA by the lender or any other information indicates that the borrower may be ineligible for a PPP loan or may be ineligible to receive the loan amount or loan forgiveness amount claimed by the borrower, SBA will require the lender to contact the borrower in writing to request additional information.  SBA may also request information directly from the borrower.  Failure to respond to SBA’s inquiry may result in a determination that the borrower was ineligible for a PPP loan or ineligible to receive the loan amount or loan forgiveness amount claimed by the borrower.

3. If SBA Determines that a Borrower is Ineligible for a PPP Loan, Can the Loan be Forgiven?
   • No.  If SBA determines that a borrower is ineligible for the PPP loan, SBA will direct the lender to deny the loan forgiveness application.  Further, if SBA determines that the borrower is ineligible for the loan amount or loan forgiveness amount claimed by the borrower, SBA will direct the lender to deny the loan forgiveness application in whole or in part.  SBA may also seek repayment of the outstanding PPP loan balance or pursue other available remedies.
4. May a Borrower Appeal SBA’s Determination that the Borrower is Ineligible for a PPP Loan or Ineligible for the Loan Amount or the Loan Forgiveness Amount Claimed by the Borrower?

• • Yes. SBA intends to issue a separate interim final rule addressing this process.

Business Tax Planning Lawyer

Need assistance in managing the business planning processes? Freeman Law advises clients with corporate and other entity formations and reorganizations. Restructuring entities—through conversions, mergers, and liquidations—can involve particularly complex tax and regulatory considerations. Freeman Law provides experienced tax and business counsel, helping our clients achieve their organizational goals in a tax-efficient manner. Schedule a consultation or call (214) 984-3000 to discuss your corporate structuring or business and tax planning concerns.