Written by: Daniel F. Morrill
On June 17, 2020, the U.S. Small Business Administration (SBA) issued a highly anticipated Interim Final Rule, an updated application for Paycheck Protection Program (PPP) loan forgiveness (Form 3508), and a simplified application for forgiveness (Form 3508EZ). We’ve highlighted the key points of each below.
Interim Final Rule
Clarification was made as to the amount of owner compensation replacement that would be eligible for forgiveness for a business that qualified for a PPP loan under the following circumstances outlined in the third Interim Final Rule from the SBA. A business qualified if:
- You were in operation on February 15, 2020
- You’re an individual with self-employment income (such as an independent contractor or a sole proprietor)
- Your principal place of residence is the United States
- You filed or will file a Form 1040 Schedule C for 2019
The amount of owner compensation replacement eligible for forgiveness is limited to 8 weeks’ worth (8/52) of 2019 net profit (up to $15,385) for an 8-week covered period, or 2.5 months’ worth (2.5/12) of 2019 net profit (up to $20,833) for a 24-week covered period. This excludes any qualified sick leave equivalent amount for which a credit is claimed under section 7002 of the Families First Coronavirus Response Act (FFCRA) (Public Law 116-127), or qualified family leave equivalent amount for which a credit is claimed under section 7004 of the FFCRA.
This form was updated and clarified the following key items:
- Any amounts paid to owners (owner-employees, a self-employed individual, or general partners) are capped at $20,833 (the 2.5-month equivalent of $100,000 per year) for each individual if the borrower is using a 24-week covered period or the 2.5-month equivalent of their applicable compensation in 2019, whichever is lower. For borrowers using an 8-week covered period, this amount is capped at $15,385 (the 8-week equivalent of $100,000 per year) for each individual or the 8-week equivalent of their applicable compensation in 2019, whichever is lower.
- For each individual employee, the total amount of cash compensation eligible for forgiveness may not exceed an annual salary of $100,000, as prorated for the covered period. For an 8-week covered period, that total is $15,385. For a 24-week covered period, that total is $46,154.
- With the increase in the covered period to 24 weeks, it’s anticipated that many businesses will be able to have 100% of the loan forgiven from payroll costs alone. Given this situation, the SBA clarified that other qualified expenses don’t need to be included on the application if they’re not going to be used in the forgiveness calculation.
Form 3508EZ is a simplified form for borrowers that meet any one of three requirements, as outlined in the instructions. Below is a summary of the three requirements.
- Applied for the PPP loan as self-employed, an independent contractor, or a sole proprietor with no employees.
- Didn’t reduce salary or wages for any employee by more than 25%, and didn’t reduce the number of employees or the average paid hours of employees between January 1, 2020 and the end of the covered period. (Ignore reductions 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. Also ignore reductions in an employee’s hours that the borrower offered to restore and the employee refused.)
- Didn’t reduce salary or wages for any employee by more than 25% during the covered period, and 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 by the Secretary of Health and Human Services (HHS), the Director of the Centers for Disease Control and Prevention (CDC), or the Occupational Safety and Health Administration (OSHA), related to the maintenance of standards of sanitation, social distancing, or any other work or customer safety requirement related to COVID-19.
If a borrower is able to meet any one of the above qualifications, they can complete Form 3508EZ, which is a simplified version of Form 3508, as it excludes the requirement to perform the calculations for the reductions in full-time equivalent employees, salaries, and wages.
It’s important to note that if the borrower checked only the second box on the checklist (second bullet above), documentation to support the average number of full-time equivalent employees on payroll employed by the borrower on January 1, 2020 and at the end of the covered period will need to be provided to (and reviewed by) the lender. Otherwise, documentation to support the items in the second and third bullets isn’t required to be submitted to the lender, but must be maintained within the borrower’s records.
Borrowers certifying eligibility under the third option referenced above are instructed to maintain financial records documenting qualification. However, based on existing administrative guidance, it’s uncertain how a borrower is to determine whether operations during the covered period are at the same level as before February 15, 2020.