OUTDATED: Congress passed the Flexibility Act that changed many of the rules below. See this post.
The SBA issued new rules for PPP loans–most of which I already gleaned from the PPP loan forgiveness application form in my post on May 19th. Congress also is considering various proposals that would loosen many of the restrictions on the use of PPP loan amounts, relative to loan forgiveness.
Recall that PPP loans are authorized by the CARES Act and provide for forgiveness of up to 100% of the principal amount spent for permitted uses during an 8-week forgiveness period. The rules for that loan forgiveness are complicated. Unfortunately for many early borrowers, they are already most of way through their 8-week period and cannot change their course of action for the weeks already passed.
The new rules, available here, clarify the following:
- Eligibility for the PPP program and “Necessary”: Loans under $2 million will not be individually reviewed as a matter of course; applicants for forgiveness will be required to certify the need for the loan under penalty for civil and criminal fraud
- Borrowers are required to retain their records for 6 years in the event of a review by SBA
- “Payroll costs” include regular pay, furlough pay, commissions, tips (based on records of past tips or reasonable, good faith estimate), vacation pay, parental leave pay, family leave pay, sick pay, bonuses, hazard pay, healthcare insurance premiums, retirement contributions, and state and local taxes on employee compensation
- The $100,000 per employee compensation limit will be pro-rated to $15,385 for compensation to any one employee during the 8-week covered period
- Timing
- Payroll costs must be paid in the covered period, except that costs during the last pay period in the covered period (or alternative payroll covered period) are eligible for forgiveness if paid on or before the next regular pay date
- Payroll costs are paid the day checks are distributed or the ACH transaction is initiated
- “Alternative Payroll Covered Period”: Businesses may use their normal payroll period, as opposed to the loan funding date to measure the 8-week loan forgiveness period; the period must begin on the first payroll date after loan funding
- E.g., a borrower funded on Thursday, April 9 could instead start the 8-week period on its regular bi-weekly payroll date of Friday, April 17
- However, the non-payroll expenses are still subject to the 8-week covered period beginning on the loan funding date
- Owner compensation: If an owner or self-employed individual is paying himself as part of the loan, he is limited to the lesser of (a) 8/52 of 2019 compensation; or (b) $15,385
- There are additional, very complicated limits applicable to owner employees on healthcare and retirement plan contributions that depend on the type of entity
- Non-Payroll Costs (eligible for loan forgiveness)
- “Interest” includes interest payments on business mortgages on personal or real property (in place prior to 2/15/20), but not any payment of principal or any prepayment of interest
- However, payment of past interest obligations are eligible for forgiveness if they are paid during the covered period
- Interest accrued during the covered period that is paid on or before the next billing cycle is eligible
- “Rent” includes business rent obligations on real and personal property under a lease (in place before 2/15/20)
- May be deferred rent that accrued before the covered period that was paid during the covered period
- “Utilities” includes electricity, gas, water, transportation, telephone, and internet access and any expenses paid during the covered period, regardless of when the costs were incurred (service must have been in place prior to 2/15/20)
- Timing: Non-payroll expense must be paid during the covered period or incurred in the covered period and paid on or before the next billing date (even if that date falls outside the covered period)
- “Interest” includes interest payments on business mortgages on personal or real property (in place prior to 2/15/20), but not any payment of principal or any prepayment of interest
- Reductions in loan forgiveness
- The 75/25 Rule: If a business uses more than 25% of the loan proceeds for non-payroll expenses, only the portion that exceeded the 25% limit will be excluded from forgiveness, not the entire loan or the entire non-payroll amount
- Reduction – generally:
- FTE Reductions: Loan forgiveness is reduced proportionally by the percentage reduction in FTEs, comparing the covered period (or alternative payroll covered period) to the selected reference period
- E.g., a reduction from 10.0 to 8.0 FTES will reduce loan forgiveness by 20%, barring an exception, see below
- Salary Reductions: Salary reductions greater than 25% will reduce loan forgiveness by the dollar amount of the salary or wage reduction
- Salary reductions are judged against the annualized equivalent of the employee’s pay from 1/1/20-3/31/20
- Restoring pay by June 30th eliminates the loan forgiveness reduction
- E.g., reducing an employee’s weekly salary from $1000 per week (from 1/1/20-3/31/20) to $700 per week during the covered period (or alternative payroll covered period) would reduce loan forgiveness by $400 ($50 each week for 8 weeks) because the first $250 weekly reduction is exempted
- No double counting: Reductions in hours will reduce loan forgiveness as a reduction in FTEs, but not as a salary reduction (because the hourly rate remains the same)
- FTE Reductions: Loan forgiveness is reduced proportionally by the percentage reduction in FTEs, comparing the covered period (or alternative payroll covered period) to the selected reference period
- “Full-time equivalent employee” means an employee working 40 hours or more per week, on average
- Employers may calculate the average number of hours for part-time employees and determine an FTE equivalent number by dividing by 40 or use 1.0 for employees working 40+ hours and 0.5 for all other employees
- Reluctant re-hires: If an employee refuses a good faith offer to return to work, loan forgiveness is not affected, provided that the employer reports the employee to the applicable state unemployment agency
- To qualify for the exception:
- The offer must be a good faith, written offer for the same salary or wages and hours (as the last pay period prior to layoff);
- The offer must be rejected;
- There must be records documenting the offer and rejection; and
- The employer must notify unemployment of the rejected offer (for Ohio, ODJFS) – additional information is forthcoming from SBA regarding how employers are to notify the State.
- To qualify for the exception:
- Terminated employees: Employees who are terminated for cause, voluntarily resign or reduce their hours, die, or are incapacitated will not affect loan forgiveness as an FTE reduction
Notably, Congress has proposed changes to the Paycheck Protect Program (PPP), among them:
- Extending the 8-week period to use loan proceeds and qualify for forgiveness to 16 or 24 weeks;
- Permitting employers to slowly bring back workers by as late as December 31st (presently, the safe harbor date to bring back furloughed workers is June 30th);
- Extending the loan term for amounts not forgiven to 5 years (from 2 years);
- Eliminating the 25% limit on non-payroll expenses;
- Expanding the list of eligible expenses for loan forgiveness; and
- Clarifying that business expenses are tax deductible, even if the loan amount is forgiven (undoing an IRS interpretation of the PPP loan program and CARES Act).