Paycheck Protection Program - Applying for Loan Forgiveness

September 17, 2020

Background – The Coronavirus Aid, Relief, and Economic Security (CARES) Act, which established the Paycheck Protection Program (PPP), was passed on March 27, 2020. The PPP loans provided for by the Act are administered by the SBA. The SBA issued various Interim Final Rules (IFRs) and FAQs regarding the PPP, however the guidance left many questions unanswered. The Paycheck Protection Program Flexibility Act (PPPFA) was passed on June 5, 2020, to fill gaps left by the IFRs and FAQs. The PPPFA extended loan maturity from two years to five years;revised the nonpayroll cost limitation from 25% to 40%; and extended the covered period from 8 weeks to 24 weeks.

The Health, Economic Assistance, Liability Protection, and Schools (HEALS) Act was introduced late July 2020. The Act would allow PPP funds to be spent on technology improvements, restoring property damage due to civil disorder, and supplier costs. Additionally, the Act would allow businesses to apply for a second loan if they meet SBA size requirements, have less than 300 employees, and can demonstrate at least a 50% reduction in receipts of Q1 and Q2 2020 compared to 2019. Congress is now back in session, so stay tuned for updates regarding the Act.

Timing – The SBA window for acceptance of loan forgiveness applications is open, however not all lenders are accepting applications. The majority of lenders do not plan to accept applications until the end of September. Borrowers should check with their lender regarding when applications will be accepted.

  • Huntington Bank will start accepting forgiveness applications for PPP loans on September 21, 2020 for loans in excess of $150,000. Borrowers should receive an email with more details and a link to the online portal.
  • Fifth Third Bank is now accepting PPP forgiveness applications via their online self-service application. Borrowers will receive an email with login instructions in waves occurring through the end of September.
  • Wells Fargo is not accepting applications at this time. Borrowers will receive an email when the online application is available. The link will also be available at https://www.wellsfargo.com/biz/paycheck-protection-forgiveness.
  • Capital One is not accepting loan forgiveness applications at this time. Once their loan forgiveness application is ready, Capital One will contact its borrowers.

Beware: Borrowers should be cautious of emails purporting to be from the SBA. An alert was sent out stating a hacker was spoofing the SBA’s COVID relief webpage through phishing emails using the subject line “SBA Application Review and Proceed.” The email was sent from “Disastercustomerservice@sba.treasury”. Borrowers should be on the alert for such emails and avoid clicking “SBA links” provided in emails. Borrowers should instead go directly to the SBA website.

Important Time Periods for Loans – Relevant dates for PPP loans include the loan disbursement date and the date of maturity. The loan disbursement date is the date the loan was deposited into the borrower’s account. Loans disbursed prior to June 5, 2020 have a maturity date of two years. Lenders and borrowers can mutually agree to modify terms, but the default maturity date is two years. All other loans have a maturity date of five years. Loan maturity is only relevant if a portion of a loan is not forgiven.

Important Time Periods for Loan Repayment – If a borrower applies within 10 months of the end of the covered period, then no payments are due until the SBA reviews the application for forgiveness and provides the forgiveness amount to the lender.Lenders have 60 days to review the application and submit a decision to the SBA.Lenders must notify borrower of the SBA loan amount or if there was no portion that was allowed to be forgiven.Lender also needs to provide the date that first payment is due if there was any portion not forgiven. If the loan forgiveness application is not filed within 10 months of the end of the covered period, the principal and interest payments are due. Borrowers are able to submit the application before the end of the covered period. Early application might be something to consider for borrowers who have maxed out expenses.

Important Time Periods for Loan Forgiveness – In order to calculate loan forgiveness, the covered period and reference period are both important. The covered period begins on the date the loan is received by the borrower. For loans disbursed prior to June 5, 2020 the covered period is either 8 weeks or 24 weeks. For all other loans the covered period is 24 weeks.

There is an alternative payroll covered period which can be used instead of the covered period. This alternative covered period applies only to payroll costs and can only be used if borrower has bi-weekly or more frequent payroll. Under the alternative payroll covered period, the covered period starts on the first day of the first pay period following the PPP loan disbursement date.

Example: Borrower received loan proceeds on Monday April 20, 2020 and first day of pay period after loan is received is April 26. The first day of the regular covered period would be April 20, while the first day of the alternative covered period would be April 26.

The reference period is the time period borrower elects to compare to the covered period/alternative covered period for full time equivalent (FTE) count to determine if there is a reduction in forgiveness. Borrower may choose to use either February 15, 2019 through June 30, 2019, or January 1, 2020 through February 29, 2020 as the reference period. Seasonal employers may use any consecutive 12-week period between May 1, 2019 and September 15, 2019 as the reference period.

Application Options – There are two different SBA loan forgiveness application forms, a regular form and a shortened form.  These forms are available at https://home.treasury.gov/policy-issues/cares/assistance-for-small-businesses. However, lenders are allowed to provide equivalent applications so borrowers should confirm with their lender which form should be submitted.

Option 1: Form 3508 EZ – This is the short form application. In order to use this form, the borrower must meet one of the following:

  • Borrower is a self-employed individual, independent contractor, or sole proprietor who had no employees at the time of the PPP loan application and did not include any employee salaries in the computation of average monthly payroll in the Borrower Application Form. 
  • Borrower did not reduce annual salary or hourly wages of any employee by more than 25% during the covered period compared to the period between January 1, 2020 and March 31, 2020. AND 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.
    • Note: When determining salary and wage reductions borrower should ignore reductions that arose from an inability to rehire individuals, situations where borrower was unable to hire similarly qualified employees, and any reduction in employee’s hours where the borrower offered to restore hours, 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 period between January 1, 2020 and the end of the covered period AND 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 by the Secretary of Health and Human Services, the CDC, or OSHA.

Form 3508EZ does not require FTE or wage reduction calculations, but a borrower may need these calculations to support that it met one of the EZ requirements.

Option 2: Form 3508 – This is the regular application, which requires certain certifications, additional calculations, and more documentation. The application steps listed below apply to this form.

Loan Forgiveness Calculation - Allowed costs paid or incurred during covered period will be forgiven. Allowed costs include: payroll (including cash compensation and noncash compensation); healthcare benefits; retirement plans; mortgage interest payments; rent; transportation; utilities; and refinancing SBA Economic Injury Disaster Loans.60% of proceeds must be spent on payroll costs in order to receive full forgiveness.

Cash compensation includes: salary/wages; commissions; bonuses; cash; gross tips; hazard pay; vacation; parental, family, medical, or sick leave; and severance payments.Cash compensation is limited to an annualized salary of $100,000 per employee.For a 24-week covered period the cash compensation limit is $43,152 for any one employee. For an 8-week covered period the cash compensation limit is $15,384. Owners have different cash compensation caps. Owners include owner-employees, those self-employed, and general partners. For a 24-week covered period the cap is the lessor of $20,833 or 2.5/12 of 2019 compensation/net profit/SE earnings. For an 8-week cover period the cap is the lessor of $15,384 or 2.5/12 of 2019 compensation/net profit/SE earnings. Cash compensation does not include any amount in excess of the $100,000 limit per employee, any compensation for employees whose principal place of residence is outside the U.S., or any qualified sick leave wages that borrower receives a credit for under the Families First Coronavirus Response Act.

Noncash compensation includes: health benefits (employer expense for employee group healthcare); retirement benefits (employer contributions); and state and local taxes. C corporation owner-employees can include state and local taxes, employer contributions for health insurance, and retirement contributions (capped at 2.5/12 of 2019 amount). S corporation owner-employees can include state and local taxes, and employer retirement contributions (capped at 2.5/12 for 2019 amount). Self-employed or Schedule C filers do not include noncash compensation in loan forgiveness calculation.

Tax Implication of Forgiveness – Forgiveness isn’t taxable income, but expenses paid with PPP funds that are later forgiven are not tax deductible (Notice 2020-32). Consider other tax implications (i.e. R&D, QBID, 163j).

Form 3508 – Application Steps

Form 3508EZ

PPP Loan Forgiveness Calculation Form

 

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