COVID-19 Resources

New Interim Final Rule Allows Borrowers to Apply for Forgiveness as soon as Loan Proceeds are Exhausted [PPP Updates for Borrowers]

Written by Will Aderholt and Van Trefethen on June 29, 2020

Warren Averett interim final rule image

Editor’s Note: June 30, 2020 is the deadline to apply for the Paycheck Protection Program loans, and as of today, there are still PPP funds available for small businesses that are considering applying.

The SBA has released a new Interim Final Rule (IFR) to reflect the changes made by the PPP Flexibility Act.  This primarily incorporates:

  • The extension of the covered period for using loan proceeds to 24 weeks;
  • The extension of the date to restore employee headcount from June 30, 2020 to December 31, 2020; and
  • The reduction of the percentage required to be used for payroll costs from 75% to 60%.

While most of this new guidance relates to formally incorporating these changes into the regulations, there are three noteworthy items in the new IFR.

1.    Using an Interim Covered Period

The passing of the Flexibility Act extended the PPP covered period to 24 weeks, but existing borrowers have the option to remain at 8 weeks. Using 24 weeks could be potentially beneficial because it would allow more time to use loan proceeds for qualifying expenses. The potential downside of using 24 weeks is that the headcount and wage reduction limitations would extend to 24 weeks also, which could limit a borrower’s ability to reduce headcount or wages and receive full loan forgiveness.

Until this guidance, there was no option to choose an interim period in between; it was either 8 weeks or 24 weeks.  The new IFR appears to open the possibility of using an interim covered period (with limitations). It reads:

“When must a borrower apply for loan forgiveness or start making payments on a loan?

A borrower may submit a loan forgiveness application any time on or before the maturity date of the loan – including before the end of the covered period – if the borrower has used all of the loan proceeds for which the borrower is requesting forgiveness. If the borrower applies for forgiveness before the end of the covered period and has reduced any employee’s salaries or wages in excess of 25 percent, the borrower must account for the excess salary reduction for the full 8-week or 24-week covered period, as described in Part III.5. If the borrower does not apply for loan forgiveness within 10 months after the last day of the covered period, or if SBA determines that the loan is not eligible for forgiveness (in whole or in part), the PPP loan is no longer deferred and the borrower must begin paying principal and interest. If this occurs, the lender must notify the borrower of the date the first payment is due. The lender must report that the loan is no longer deferred to SBA on the next monthly SBA Form 1502 report filed by the lender.”

As you can see, this appears to allow a borrower the flexibility to use an interim covered period by applying for forgiveness as soon as all loan proceeds are used on qualifying expenses in order to stop the headcount and wage testing requirements.

This development leaves many questions for which we may need to await guidance. For example:

  • The guidance provides a specific rule related to wage reductions in excess of 25%, stating that the reduction has to be extrapolated out over 24 weeks, even if the application is filed early. It does not, however, speak to how the full-time employee (FTE) headcount reduction test is treated in this case.  One might assume that, absent a specific rule, a borrower’s headcount would be calculated through the date of the loan application, and FTE testing requirements would then cease.
  • From a practical standpoint, most banks are not processing forgiveness applications at this time.  Further, it seems impractical to be able to perform the needed calculations for the application in real-time in order to cut off the data on the application date. This may present issues with the current forgiveness application forms. One might assume that the application would be revised to allow for an effective date so that a borrower can designate what date it chose to make its application effective, but this was not addressed in the IFR.

2.    Caps on Qualifying Wages

The IFR also clarified the caps on qualifying expenses for wages paid to owner-employees and self-employed individuals.

For an 8-week covered period, the cap is the lesser of the following, in total across all businesses:

  • $15,385 per individual; or
  • 8/52 of 2019 compensation.

For a 24-week covered period, the cap is the lesser of the following, in total across all businesses:

  • $20,833 per individual or;
  • 2.5/12 of 2019 compensation

It further clarifies what is included as 2019 compensation for purposes of this test:

  • For C-corporation owner-employees, the 2019 compensation cap includes cash compensation, plus employer retirement plan contributions and health insurance contributions made on their behalf
  • For S-Corporations, compensation includes cash and retirement plan contributions (but excludes health insurance)
  • General Partners in a partnership are capped by the amount of their 2019 net earnings from self-employment from Schedule K-1 of the partnership tax return, less section 179 deduction (and a few other deductions), multiplied by 0.9235.  Retirement plan and health insurance contributions are included in this amount and shouldn’t be included as an additional expense.
  • Self-employed individuals filing Schedules C or F are capped by the amount of their 2019 net profit

All other employees are limited to $15,385 (benefits can exceed this amount) for an 8-week covered period and $46,154 (plus benefits) for a 24-week covered period. It’s important to note that the IFR is silent regarding prorating the salaries for a potential interim covered period. If the borrower cut off the covered period early and applied for forgiveness prior to the 24-week period ending, would the maximum compensation per employee be reduced? We will need guidance to clarify.

The IFR codifies the exemption related to positions or work hours which are unable to be refilled after bona fide written offers to employees are made by the borrower.  Note that borrowers are required to report the rejected offer to the state unemployment insurance office in order to take advantage of the exemption.

3.    Full-Time Employee Equivalent Reductions

The IFR also clarifies a broad exemption related to FTE reductions caused by a direct or indirect compliance with COVID-19 requirements issued by state or local shutdown orders.

“Borrowers are also exempted from the loan forgiveness reduction arising from a reduction in the number of FTE employees during the covered period if the borrower is able to document in good faith an inability to return to the same level of business activity as the borrower was operating at before February 15, 2020, due to compliance with requirements established or guidance issued between March 1, 2020 and December 31, 2020 by the Secretary of Health and Human Services, the Director of the Centers for Disease Control and Prevention (CDC), or the Occupational Safety and Health Administration related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID-19 (COVID Requirements or Guidance). Specifically, borrowers that can certify that they have documented in good faith that their reduction in business activity during the covered period stems directly or indirectly from compliance with such COVID Requirements or Guidance are exempt from any reduction in their forgiveness amount stemming from a reduction in FTE employees during the covered period. Such documentation must include copies of applicable COVID Requirements or Guidance for each business location and relevant borrower financial records. The Administrator, in consultation with the Secretary, is interpreting the above statutory exemption to include both direct and indirect compliance with COVID Requirements or Guidance, because a significant amount of the reduction in business activity stemming from COVID Requirements or Guidance is the result of state and local government shutdown orders that are based in part on guidance from the three federal agencies.

Example: A PPP borrower is in the business of selling beauty products both online and at its physical store. During the covered period, the local government where the borrower’s store is located orders all non-essential businesses, including the borrower’s business, to shut down their stores, based in part on COVID-19 guidance issued by the CDC in March 2020. Because the borrower’s business activity during the covered period was reduced compared to its activity before February 15, 2020 due to compliance with COVID Requirements or Guidance, the borrower satisfies the Flexibility Act’s exemption and will not have its forgiveness amount reduced because of a reduction in FTEs during the covered period, if the borrower in good faith maintains records regarding the reduction in business activity and the local government’s shutdown orders that reference a COVID Requirement or Guidance as described above.”

PPP Loan Forgiveness

The IFR reiterates that the accurate calculation of loan forgiveness (and the attestation thereof) is the responsibility of the borrower, and a lender is only required to do a good-faith review of the borrower’s calculation and supporting documents.

If you have questions, please reach out to your Warren Averett advisor, or have one of our team members reach out to you.  Warren Averett’s PPP Taskforce will continue to keep you up to date with any other developments, specifically around the possibility of filing a forgiveness application before 24-week period ends, as they are made available.

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