SBA Provides Additional PPP Guidance, Forms

By Joseph Jalbert January 25, 2021

Since we last provided an update on the Paycheck Protection Program (“PPP”), the Small Business Administration (“SBA”) has released a flurry of new guidance and forms for lenders and borrowers. Much of the information covers the forgiveness phase of the program, including changes resulting from the Consolidated Appropriations Act, 2021 (the “Act”). As it would be difficult, if not impossible, to address all of the specifics of each new document in a succinct article, we will cover what we consider to be most important for lenders and borrowers to be aware of as it relates to the PPP.

Loan Forgiveness Applications Revised

The criteria dictating which forgiveness form to use remain largely unchanged, other than Form 3508S is now available for loans of $150,000 or less (up from $50,000). Form 3508EZ may be used by certain borrowers who had no employees or who meet specific thresholds involving minimal or nonexistent wage and headcount reductions, and Form 3508 is available for all applicants. However, the SBA updated these forms and the related instructions to reflect changes resulting from the Act, including the following:

• The field where borrowers were required to note the amount of any Economic Injury Disaster Loan (EIDL) advance they have received has been removed from each form, as these advances no longer reduce the amount of forgiveness for which a borrower has been approved.
• Borrowers can now select any covered period between 8 and 24 weeks and the relevant fields have been modified to reflect this change. Because borrowers have this added flexibility, the option to elect an alternative payroll covered period has been removed.
• Newly-qualifying nonpayroll costs under the Act (covered operations expenditures, covered property damage costs, covered supplier costs and covered worker protection expenditures) have been added as lines 5 through 8 (Forms 3508 and 3508EZ only).
• Form 3508S has been updated to apply to borrowers of PPP loans of up to $150,000 (previously $50,000). Borrowers now must indicate the amount of the loan spent on payroll costs (must be at least 60% of the requested forgiveness amount).

Important note: The previous iteration of Form 3508S exempted borrowers with loans of up to $50,000 from reductions in loan forgiveness that would otherwise result from reductions of full-time equivalent (FTE) employees and/or salaries and wages. This threshold has not changed. Therefore, borrowers with PPP loans greater than $50,000 and up to $150,000 still need to comply with the requirements to maintain FTE and salary/wage levels (unless any of the permitted exceptions apply). Affected borrowers can leverage the longer Form 3508 to determine any such reductions and should maintain the completed form (or relevant portions thereof) along with supporting documentation in the event of a review by the SBA or other agency.

• New fields were added to the forms so borrowers can indicate whether they are applying for a first or second draw loan.
• Several changes were made to the required certifications on each form. In particular, Form 3508S has far fewer certifications (two compared to seven in the previous version) which simply require the borrower to attest that they complied with the program’s requirements and the information in the application is true and correct.

New IFR on Loan Forgiveness and Loan Review Procedures Issued

The SBA issued a new Interim Final Rule (IFR) regarding the loan forgiveness process as well as the SBA’s loan review procedures and related borrower and lender responsibilities. Similar to the other recently-issued IFRs we covered in our last article, this IFR consolidates previously-issued IFRs under the CARES Act and modifies them, as appropriate, to reflect any changes resulting from the Act. Only those items of note that have changed as a result of the Act will be highlighted here.

The IFR summarizes the amounts that are eligible for forgiveness, including payroll costs which are effectively unchanged; however, because the Act now permits qualifying PPP borrowers to take advantage of employee retention credits (ERC), the IFR makes it clear that any payroll costs taken into account in determining the ERC are not eligible for loan forgiveness (more on this later). Consistent with the Act and the aforementioned changes to the loan forgiveness applications, newly-qualifying nonpayroll costs (operations expenditures, property damage, supplier costs and worker protection expenditures) are discussed here as well.

Following the discussion of what is eligible for forgiveness is a summary of the loan forgiveness process. Although the process hasn’t substantially changed, the IFR wraps second draw loans into the guidance and requires borrowers of second draw loans in excess of $150,000 to submit their first draw loan forgiveness applications before or simultaneously with the second draw loan forgiveness application. The IFR also discusses caps on the amount of forgiveness available for owner-employees and self-employed individuals’ payroll compensation, which is capped at 2.5 months’ worth of their 2019 or 2020 compensation, as defined in the IFR depending on the borrower’s tax filing status. Borrowers who received a PPP loan during 2020 will be required to use 2019 compensation while borrowers who receive a PPP loan during 2021 can elect to use either 2019 or 2020 compensation, consistent with their original loan application, up to a maximum of $20,833 per individual ($100,000 / 12 x 2.5).

Observation: Owner-employees and self-employed individuals of borrowers electing a covered period of less than 2.5 months will be subject to a lower cap based on the number of days in the covered period. For example, a borrower electing an eight-week covered period will be subject to a cap of $15,385 per owner-employee or self-employed individual ($100,000 / 52 x 8).

The IFR reiterates that borrowers will need to begin paying principal and interest if forgiveness is not applied for within 10 months after the last day of a 24-week covered period. This is worth restating because although borrowers can now elect any covered period between 8 and 24 weeks, the Act was silent as to what covered period applies to a borrower who does not apply for forgiveness. The SBA was kind enough to apply the longest available covered period (24 weeks) in determining when a borrower is required to begin making payments.

The IFR discusses the effect of a reduction in a borrower’s FTE employees as well as a reduction in employees’ salaries/wages. Although the effects of such reductions are largely unchanged from earlier guidance, the IFR changes the comparison period for purposes of determining salary/wage reductions from the first quarter of 2020 to “the most recent full quarter before the covered period.” The reference period options for purposes of determining FTE reductions remain unchanged for loans received in 2020 or 2021. Safe harbors for borrowers who are able to restore FTE and/or salary/wage levels to prior levels have been updated to clarify that, for any PPP loans received during 2021, FTE and/or salary/wage levels need to be restored no later than the last day of the loan’s covered period as opposed to December 31, 2020 which applies to loans received during 2020 only.

Several lender-specific provisions are included in the IFR, most of which are carried forward from previously-issued IFRs and/or are noted in the Act itself. Such provisions include: lender hold harmless language, as specified in the Act; the loan forgiveness process for lenders, including a lender’s responsibilities for review of submitted documents; procedures when a lender denies forgiveness in whole or in part; and procedures for when a lender receives notice of a review of a loan by the SBA.

Additional Miscellaneous Guidance

The SBA published two very helpful white papers outlining how to calculate maximum loan amounts for first draw and second draw loans, by business type, and the documentation required to be provided for each. The white paper covering second draw loans also provides detailed guidance for determining and supporting decreases in gross receipts as one of the necessary criteria for second draw eligibility. The specifics of these guides are beyond the scope of this article and prospective borrowers are strongly encouraged to review the portions of the guides that apply to their circumstances.

Also released recently by the SBA were several procedural notices for lenders’ use, including the following:

• Guidance on First Draw Paycheck Protection Program Loan Increases After Enactment of the Economic Aid Act
• Guidance on PPP Borrower Resubmissions of Loan Forgiveness Applications Using Form 3508S, Lender Notice Responsibilities to PPP Borrowers, and Offset of Remittances to Lenders for Lender Debts
• Guidance on PPP Excess Loan Amount Errors 

What Are We Waiting For?

The IFR discussed above noted the SBA will be revising its Frequently Asked Questions (FAQs) to fully conform to the Act “as quickly as feasible” (this, of course, is not defined). These FAQs may offer limited new guidance, but this remains to be seen.

Under the Act, PPP borrowers meeting certain eligibility requirements are now able to claim employee retention credits (ERCs); however, as we discussed in previous articles, further guidance is needed to understand the interplay between the ERCs and the PPP as they apply to 2020 and 2021 wages. The American Institute of Certified Public Accountants recently sent a letter to Treasury and the IRS recommending the bodies provide guidance stating that the filing of a PPP loan forgiveness application does not constitute an election to forgo the ERC with respect to the amount of wages reported on the application exceeding the amount of wages necessary for loan forgiveness.

Many states have yet to issue specific guidance with respect to the state tax treatment of PPP loan forgiveness and the deductibility of expenses paid with PPP loan proceeds. While some states are electing to conform to the federal tax treatment of these items (i.e. loan forgiveness is not taxable and expenses paid with PPP loan proceeds are deductible), others are taking different approaches that won’t be as advantageous for state tax purposes.

We continue to monitor developments in these areas and will be providing updates as more information becomes available. Until then, the SBA has provided enough guidance to keep us busy for the foreseeable future.

For more information or a discussion on how this may impact you, please contact your BNN advisor at 800.244.7444.