The Small Business Administration (SBA) has issued an interim final rule (IFR) on Paycheck Protection Program (PPP) loan forgiveness implementing changes to the PPP effected by passage of the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (Economic Aid Act) that was included as part of the Consolidated Appropriations Act 2021 (CAA21) (which we discussed in this article). The latest IFR on PPP loan forgiveness consolidates the forgiveness provisions of eight prior IFRs, with updates to reflect the Economic Aid Act. This IFR comes on the heels of two recent IFRs that restated many other previously published IFRs and provided rules for second draw PPP loans, which we previously discussed. In this article, we summarize the highlights of this new IFR.
Proration of Cash Compensation
Borrowers generally receive PPP loan forgiveness for forgivable costs paid or incurred during the “covered period” beginning on the date the borrower receives the PPP loan. Prior to the Economic Aid Act, borrowers could use either an eight-week period or a 24-week period. Forgivable cash compensation included in payroll costs for employees (other than owner-employees) were capped at $15,385 per employee if the borrower used an eight-week covered period and $46,154 if the borrower used a 24-week covered period. The amounts equal $100,000 divided by 52 and multiplied by eight or 24, as applicable, rounded to the nearest dollar.
The Economic Aid Act retroactively provided borrowers with the ability to use any period between eight and 24 weeks. The SBA has updated its guidance for the per-employee cap on cash compensation to require borrowers to determine the cap based on the covered period selected by the borrower. For example, if a borrower uses a 20-week covered period, the cap on cash compensation would be $38,462 ($100,000/52*20).
In what appears to be a glitch, the SBA limited this cap to individual borrowers. The SBA originally discussed the cap on cash compensation in section III.1.f of the third IFR. That section provided the $15,285 cap for an eight-week covered period and applied to all borrowers. After Congress extended the covered period to 24 weeks, the SBA issued a new IFR that, in part, revised section III.1.f to add the $46,154 cap for a 24-week covered period. Interestingly, the SBA inserted the restated and revised substantive provisions of section III.1.f in new section IV.1.b titled, “For borrowers that are individuals with self-employment income who file a Form 1040, Schedule C or F, what amounts are eligible for forgiveness?” Technically, nothing in the IFR applies the prorated cap to other borrowers. We anticipate, however, that the SBA will continue to apply this cap on all borrowers.
Cap for Owner Compensation
As discussed in this article, special rules and caps apply to payroll costs for self-employed individuals, partners and owner-employees who own at least five percent of the borrower. The cap was 2.5 times the average monthly payroll in 2019 (the portion of the PPP loan attributed to the owner), with a maximum amount of $20,833 that was reduced to $15,385 if the borrower used an eight-week covered period. The SBA made two changes to these caps to conform with the Economic Aid Act. First, a revised maximum amount applies if the borrower uses a covered period between eight weeks and 2.5 months. For example, if the borrower uses a 10-week covered period, the maximum amount is $19,231 ($100,000/52*10). Second, the cap is based on average monthly payroll in 2020 for first draw PPP loans made in 2021 and second draw PPP loans if the borrower elects to use 2020 payroll to determine the amount of the first draw or second draw PPP loan.
Impact of Employee Retention Credit on Forgivable Payroll Costs
As we discussed in this article, the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (Disaster Relief Act), also included in the CAA21, made significant changes to the Employee Retention Credit (ERC), including retroactively removing the restriction that prevented PPP borrowers from claiming the ERC. The SBA has updated the PPP loan forgiveness IFR to provide that forgivable payroll costs exclude qualified wages (which include healthcare costs) taken into account in determining the ERC. Although we agree with this anti-double dipping rule as a policy matter, we worry that the mechanics and calculations necessary to back out these amounts will prove inordinately difficult unless the SBA provides some simplification conventions.
FTE Ratio Applies to Second Draw PPP Loans
Generally, the most difficult part of a PPP loan forgiveness application is calculating the FTE ratio. Because borrowers apply this ratio to the sum of forgivable expenses, including the four types of forgivable expenses added by the Economic Aid Act, over the covered period, the FTE ratio will not reduce forgiveness for many borrowers. Nonetheless, borrowers have to do the math unless they are eligible to use Form 3508EZ (Version 6, as updated on Jan. 19, 2021) or Form 3508S (Version 6, also as updated on Jan. 19, 2021). It was unclear if the Economic Aid Act incorporated the FTE ratio in the forgiveness calculation for second draw PPP loans. The SBA has confirmed that the FTE ratio does apply to second draw PPP loans. The rules for a reduction in salary or wages reducing PPP loan forgiveness that apply to first draw PPP loans also apply to second draw PPP loans.
When to Apply for PPP Loan Forgiveness
Generally, a borrower may apply for PPP loan forgiveness any time before the maturity of the loan. However, to obtain the deferral of principal and interest payments discussed in this article, a borrower must apply for PPP loan forgiveness within 10 months following the end of its covered period. In addition, borrowers obtaining a second draw PPP loan of more than $150,000 must submit the loan forgiveness application for the first draw PPP loan before or when applying for forgiveness for the second draw PPP loan.
EIDL Advance Payment
The Economic Aid Act retroactively repealed the reduction in PPP loan forgiveness for the amount of any Emergency Injury Disaster Loan (EIDL) Advance Payment received by the borrower. In the IFR, the SBA has confirmed that the SBA will not reduce PPP loan forgiveness for the EIDL Advance Payment. For borrowers that already had forgiveness reduced because of EIDL Advance Payment, “[a]ny EIDL Advance Amounts previously deducted from a borrower’s forgiveness amount will be remitted to the lender, together with interest through the remittance date.”