SBA Announces Changes to Paycheck Protection Program
On June 16, 2020, the U.S. Small Business Administration (SBA) released a new interim final rule (IFR) providing revised and additional guidance on the Paycheck Protection Program (PPP). This ruling made a few additional conforming changes to previously released IFRs, and notably provided needed clarifications for payroll costs and an update to the loan forgiveness application.
In the initial release of the PPP, the payroll cost for an employee earning in excess of $100,000 a year was maxed out in the forgiveness calculation at $15,385 per individual. With the enactment of the Paycheck Protection Program Flexibility Act of 2020 (PPPFA), which extended the covered period from eight weeks to 24 weeks, there was no clear guidance if this would be recalculated to include the full 24-week period. The new ruling provides:
- The 24-week covered period (CP) or alternative payroll covered period (APCP) cap on cash compensation for non-owner employees is $46,154 per individual
- A corresponding update to the definition of owner compensation replacement for self-employed individuals. The IFR clarified that for a 24-week CP or APCP, the owner compensation replacement is two and a half months’ worth (two and a half out of 12) of 2019 net profit. The maximum owner compensation replacement for the 24-week CP or APCP is $20,833. It also is important to note those with multiple schedules C or F are limited to the $20,833 per owner, in total, across all businesses
The SBA also released a highly anticipated update to the forgiveness application. While this may lead you to believe you can start applying for forgiveness, it is ultimately still up to your lender as to when it will start accepting applications for forgiveness. The updated Form 3508, PPP Loan Forgiveness Application and instructions now reflect conformity to the PPFA and the PPP interim rules. A couple of items of note from the instructions to the Form 3508. First, it was clarified that S corporation shareholders are included in the definition of owner-employees that are subject to additional payroll cost caps and exclusions. There had been questions about their inclusion in that definition. The second item to note is that for both the FTE and the salary/wage reduction restoration safe harbors, the instructions modified the time at which the restoration is measured. Under the PPPFA, the date was hard coded to be December 31, 2020. The instructions for both restoration provisions now say the measurement date is the earlier of the date the Form 3508 is filed or December 31, 2020. This subtle change will provide a significant amount of flexibility to borrowers that intend to use one or both of the restoration exceptions.
- You are self-employed or a sole proprietor, i.e., a schedule C or F filer, with either no employees or no employees at the time of the PPP loan application and did not include any employee salaries in the calculation of the average monthly payroll on the Borrower Application Form (Form 2483).
- You didn’t reduce annual salary or wages of any employee by more than 25 percent during the CP or APCP when compared to January 1, 2020, and March 31, 2020. For this purpose, you can exclude any employee that for any single pay period during 2019 had annualized wages or salary in excess of $100,000. If you meet this exception, you must also certify one of the following:
- You didn’t reduce employee head count for the period from January 1, 2020 to the end of the CP or APCP (note, you can exclude reductions in head count that relate to the inability to rehire or employees that refused an offer to rehire)
- You were unable to operate during the CP or APCP 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 director of the Centers for Disease Control and Prevention or the Occupational Safety and Health Administration related to the maintenance of standards of sanitation, social distancing, or any other work or customer safety requirements related to COVID-19 that was issued between March 1, 2020, and December 31, 2020.
While the interim final rule answered some questions and provided clarity to taxpayers, we still have a few frequently asked questions that are top of mind.
- “The 24-week period is longer than I need to obtain maximum forgiveness, but the eight-week period is too short, can I elect something in the middle?”
- No, the ruling replaced the eight-week period with 24 weeks but provided an option to those who already had a loan as of June 5, 2020, to use the original eight-week period. Without further guidance, the election appears binary based on the legislative text, meaning 24 weeks and eight weeks are the only options.
- “My PPP funds are about to run out, or have run out—can I apply for another PPP loan?”
- Not at this time; however, senators have introduced a bill that would allow an option for some small businesses to re-apply. The outlook of this bill is uncertain at this time.
- “Do I have to file a separate form to elect to use the eight-week CP or APCP?”
- No, both the forms 3508 and 3508EZ have a line you complete with what your elected CP or APCP is. No separate election form is required to be filed.
- What options are available for relief beyond PPP loans to help with cash flow?”
- SBA Economic Injury Disaster Loan
- Main Street Lending Programs
- Paid sick leave and family leave credits
- Employee retention credit
- Tax deferral options
- Tax planning opportunities for net operating losses, relaxed business interest expense limitation, and the “retail glitch” fix
- Wealth transfer and philanthropic planning
Be sure to reach out to your BKD Trusted Advisor™ or use the Contact Us form below if you have additional questions and visit our COVID-19 Resource Center for more information and industry-specific updates.