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SBA Releases Updated Loan Forgiveness Application

Joseph Most, J.D.

6.18.20 | Client Alert – COVID-19 Update

As a result of changes to the Paycheck Protection Program (“PPP”) by Congress via the Paycheck Protection Program Flexibility Act (the “Flexibility Act”), the SBA updated its Loan Forgiveness Application and modified some of its previous Interim Final Rules (“IFRs”) to conform to the Flexibility Act.1 A summary of the key aspects of the new application and guidance are found below:

  • The SBA clarified that for loan forgiveness purposes, the requirement that 60% of the forgiveness amount be spent on payroll costs is not a cliff and that partial forgiveness is available. For example, if a borrower had a $1,000,000 PPP loan and spent $550,000 on payroll costs and $450,000 on non-payroll costs during the covered period, the borrower may be eligible for $916,667 of loan forgiveness ($550,000 / 60% = $916,667).
  • Under pre-Flexibility Act rules, the maximum forgivable amount of cash compensation that could be paid to an individual employee and be forgiven during the 8-week covered period was $15,385; which is determined by a $100,000 annual maximum, pro-rated for the 8 weeks.  For PPP borrowers electing a 24 week covered period, the SBA is now allowing $46,154 paid to an employee during this period to be forgiven, representing a 24-week proration of a $100,000 salary. However, borrowers must be careful when relying on this larger amount for loan forgiveness. When calculating its PPP loan amount, a borrower could only include a multiple of 2.5 times the monthly compensation of an employee with a maximum annual salary of $100,000. For instance, if $46,154 is paid to an employee from PPP funds (almost 6 months’ worth of salary) it is possible that wages paid to another employee were reduced.
  • The maximum loan forgiveness amount allowed for owner replacement costs (i.e. the compensation of self-employed individuals, S corporation shareholders and general partners) is now $20,833 for borrowers using a 24-week covered loan period ($100,000/12 x 2.5).
  • The SBA clarified that group medical costs of S corporation shareholders are not payroll costs eligible for loan forgiveness.
  • For purposes of determining FTE or salary/wage reductions, the entire covered period of a borrower is factored in. This means that for borrowers using the 24-week covered period, the FTE count must be maintained for 24 weeks and salary/wage reduction restrictions are measured throughout this extended period in order to determine if a borrower’s maximum loan forgiveness must be reduced.
  • The SBA released an alternative simplified loan forgiveness application, Form 3508EZ, which generally can be used in circumstances where a borrower has no reduction to its loan forgiveness amount.2

The Paycheck Protection Program continues to be very fluid because of the changing landscape of new laws and administrative guidance. We will continue to monitor the SBA for any updates to the PPP. As always, please contact your Berdon Advisor if you have any PPP questions.

1 A summary of the Flexibility Act can be found at https://www.berdonllp.com/congress-passes-paycheck-protection-program-fix/
2 Refer to the instructions to Form 3508EZ for qualification criteria.