Loan Forgiveness Interim Final Rule

This article was updated on May 26, 2020. Updates to this article will be made as new information becomes available.

Schneider Downs continues to track the evolving landscape of Federal financial programs offered due to the disruption caused by the coronavirus crisis (COVID-19). On May 22, 2020, the U.S. Small Business Administration (SBA), in consultation with the Department of the Treasury, released an Interim Final Rule (IFR) on Loan Forgiveness related to the Paycheck Protection Program (PPP).

General

The IFR provides that borrowers receiving a PPP loan under the CARES Act are eligible for loan forgiveness in an amount equal to the sum of:

  1. Payroll costs
  2. Non-payroll costs:
    1. Interest payments on any business mortgage obligation for real or personal property incurred prior to February 15, 2020;
    2. Payments of business rent for real or personal property under a lease in force before February 15, 2020, and;
    3. Business utility payments for the distribution of electricity, gas, water, transportation, telephone, or internet access for which service began before February 15, 2020.

The component of payroll costs is consistent with previous guidance issued by the SBA and Department of Treasury. Additionally, the IFR noted, as set forth in the First Interim Final Rule (85 FR 20811), that eligible non-payroll costs cannot exceed 25% of the loan forgiveness amount.

Loan Forgiveness Process

The IFR provides borrowers a general overview of the loan forgiveness progress, which will be initiated by the borrower through the submission of the Loan Forgiveness Application (SBA Form 3508) or the lender’s equivalent. Upon receipt of the loan forgiveness application, the lender is required to make the decision on forgiveness within 60 days of submission by the borrower. Following the decision, the lender shall receive reimbursement in the amount of principal and accrued interest from the SBA within 90 days, subject to any SBA review of the loan or loan application review.

Also, the IFR provides borrowers some clarity if, upon review, certain certifications were deemed to be inadequate. The IFR states:

If SBA determines in the course of its review that the borrower was ineligible for the PPP loan based on the provisions of the CARES Act, SBA rules or guidance available at the time of the borrower’s loan application, or the terms of the borrower’s PPP loan application (for example, because the borrower lacked an adequate basis for the certifications that it made in its PPP loan application), the loan will not be eligible for loan forgiveness. The lender is responsible for notifying the borrower of the forgiveness amount. If only a portion of the loan is forgiven, or if the forgiveness request is denied, any remaining balance due on the loan must be repaid by the borrower on or before the two-year maturity of the loan.

Payroll Costs Eligible for Loan Forgiveness

Generally, payroll costs eligible for loan forgiveness remain consistent with our description in our previous article related to the release of the loan forgiveness application. You can read that article at https://www.schneiderdowns.com/our-thoughts-on/sba-releases-ppp-loan-forgiveness-application.

There have been a lot of questions regarding bonuses and hazard payments during the covered period. Under this IFR, such payments incurred and paid (subject to the time period requirements of payroll costs) would be eligible for loan forgiveness.

Consistent with the loan application, payroll costs for owner-employees are treated differently than other employees. Forgiveness for owner-employees will more closely align with the provisions that are applicable to self-employed/independent contractor businesses. That is, their payroll costs are limited to 8/52 of 2019 cash compensation and health insurance and retirement benefits made on their behalf, subject to the $100,000 annualized threshold. Also, the $100,000 annualized limitation, or $15,385 during the covered period, is to be considered across all businesses.

General partners are capped by the amount of their 2019 net earnings from self-employment, which is required to be reduced by the sum of claimed Section 179 expense deduction, unreimbursed partnership expenses, and depletion from oil and gas properties and multiplied by 0.9235.

Non-payroll Costs Eligible for Loan Forgiveness

Borrowers are eligible for loan forgiveness for non-payroll costs that were (1) paid during the covered period; or (2) incurred during the covered period and paid on or before the next regular billing date, even if the billing date is outside the covered period. The example in the IFR confirms that a non-payroll cost paid in the covered period that was incurred prior to the covered period is forgivable.

Borrowers are not eligible for forgiveness on advance payments of mortgage interest.

Reduction to Loan Forgiveness Amount

The reduction to the loan forgiveness stipulations remain consistent with our description of them in our article related to the release of the loan forgiveness application. You can read that article at https://www.schneiderdowns.com/our-thoughts-on/sba-releases-ppp-loan-forgiveness-application.

A borrower’s forgiveness should not be reduced in response to any employees who were given a good-faith, written offer to return to work at the same wage and hours during the covered period if the employee(s) rejected the offer. Borrowers are required to inform the applicable state unemployment insurance office of the employee’s rejected offer of reemployment within 30 days. Also, employees terminated for cause, voluntarily resigning or voluntarily requesting and receiving a reduction of their hours should not reduce a borrower’s forgiveness.

Borrowers seeking forgiveness must document their average number of FTE employees during the covered period (or the alternative payroll covered period) and their selected reference period. Forty (40) hours per week remains the determination factor for a borrowers’ forgiveness reduction calculation on the workforce reduction. An employee is limited to 1.0 FTE even if they work more than 40 hours in a week during the covered period (or the alternative payroll covered period) and their selected reference period.

For each new employee in 2020 and each existing employee who was not paid more than the annualized equivalent of $100,000 in any pay period in 2019, borrowers are subject to a salary and wage reduction for employees that are in excess of 25%, unless an exception applies. The calculation is to be calculated on an employee by employee basis. To ensure that borrowers are not penalized twice, the salary/wage reduction applies only to the portion of the decline in employee salary and wages that is not attributable to the FTE reduction, i.e., furloughed employees would not be included in the salary and wage reduction because it is anticipated that they would be included in the FTE reduction calculation.

Exceptions to the reduction are consistent with the information outlined in our article related to the release of the loan forgiveness application.

Documentation

The documentation requirement remains consistent with the information noted in the loan forgiveness application which must be made available to the SBA upon request.

The IFR as issued is accessible through https://home.treasury.gov/system/files/136/PPP-IFR-Loan-Forgiveness.pdf

If you need more information or assistance regarding the PPP or the forgiveness calculations for PPP loans, please reach out to any of your contacts at Schneider Downs or contact Joel Rosenthal (jrosenthal@schneiderdowns.com).

You’ve heard our thoughts… We’d like to hear yours

The Schneider Downs Our Thoughts On blog exists to create a dialogue on issues that are important to organizations and individuals. While we enjoy sharing our ideas and insights, we’re especially interested in what you may have to say. If you have a question or a comment about this article – or any article from the Our Thoughts On blog – we hope you’ll share it with us. After all, a dialogue is an exchange of ideas, and we’d like to hear from you. Email us at contactSD@schneiderdowns.com.

Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.

© 2020 Schneider Downs. All rights-reserved. All content on this site is property of Schneider Downs unless otherwise noted and should not be used without written permission.

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