Client Alert: Latest PPP Regulations Allow Early Forgiveness Application
Date: June 24, 2020
Early Forgiveness.
The headline is that SBA has answered a question that practitioners and borrowers have been asking since the enactment of the Flexibility Act: Can a borrower submit a forgiveness application earlier than following the full 24-week (or even 8-week) covered period? The answer in the New IFR is “yes”; specifically, that “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.” (emphasis added).
With respect to the wage reduction test for loan forgiveness reduction, the New IFR provides that, if a borrower requests forgiveness early and has reduced any employee’s salary or wage in excess of 25%, the borrower must account for the excess salary reduction for the full 8 or 24 week covered period. So, if an employee’s excess wage reduction is $50, and a borrower applies for forgiveness after 12 weeks, the borrower must still reduce its forgiveness by $1,200 for that employee ($50 x 24 = $1,200).
Unfortunately, the New IFR does not provide guidance regarding how or whether the FTE calculation would change as a result of an early forgiveness application.
Practically speaking, borrowers who did not have any substantial wage rate reduction or a decrease in FTE head count would be good candidates for an early forgiveness application. Borrowers who have had to reduce FTEs or wages beyond 25% would want to wait to apply for forgiveness until they have had an opportunity to restore those numbers, unless safe harbors apply (such as a business reduction due to health and safety guidance; an inability to rehire employees; or employees requesting reduction or being terminated for cause).
For example, a sit-down restaurant that, due to state or local shut-down orders, could not provide table service throughout most of the 8 week covered period and still has to operate at 50% capacity for indoor tables, would qualify for the business reduction safe harbor due to compliance with social distancing requirements safe harbor. Accordingly, it would not have to worry about comparing its number of FTEs prior to March 1 to its number of FTEs during the covered period. If that restaurant operator exhausted its PPP loan through qualifying expenditures during the 8 week covered period and did not have any substantial wage rate reduction, then it probably should apply for forgiveness when its lender is ready to receive an application.
A practical issue is whether lenders will be ready to accept early forgiveness applications. Lenders may develop their own forgiveness applications so long as they comply with SBA’s forms and certifications. Many lenders, especially "Fintech" companies, likely will need to develop electronic applications and processes for uploading documentation and may not be prepared to accept an application right away.
Treatment of Owner-Employees.
The New IFR specifically addresses how the compensation cap applies to C-corporation and S-corporation owner-employees, Schedule C or F filers and general partners. For any borrower using the 8 week covered period, forgivable compensation to all owner-employees and self-employed individuals of is limited to the lesser of $15,385 or 8/52 of that person’s 2019 compensation (as described below) as earned “in total across all businesses.” For a borrower using the 24 week covered period, forgivable compensation is limited to the lesser of $20,833 or 2.5/12 of that person’s 2019 compensation (as described below) as earned “in total across all businesses.”
- 2019 compensation for C-corporation owner-employees are the amount of their 2019 employee cash compensation and employer retirement and health insurance contributions made on their behalf.
- 2019 compensation for S-corporation owner-employees are their 2019 employee cash compensation and employer retirement contributions made on their behalf, but employer health insurance contributions made on their behalf cannot be separately added.
- 2019 compensation for Schedule C or F filers are their owner compensation replacement, calculated based on 2019 net profit.
- 2019 compensation for general partners are their 2019 net earnings from self-employment (reduced by claimed section 179 expense deductions, unreimbursed partnership expenses, and depletion from oil and gas properties) multiplied by 0.9235.
For all self-employed individuals (Schedule C or F, & general partners), retirement and health insurance contributions are included in their net self-employment income and cannot be added as forgivable payroll if such inclusion results in exceeding the maximum thresholds described above.
Some Guidance on the Reduced Business Activity Safe Harbor.
A safe harbor added by the Flexibility Act provides that borrowers are exempted from the loan forgiveness reduction arising from a reduction in FTEs 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 social distancing and sanitation requirements related to COVID-19. The New IFR provides specifically that “borrowers can certify in good faith that their reduction in business activity … stems directly or indirectly” from complying with such guidance. (emphasis added)
However, SBA has clarified that “indirectly” means the guidance affecting a borrower indirectly stems from the federal guidelines; namely, state and local government shutdown orders that are based in part on guidance from the federal agencies. SBA gives as an example a borrower that had to shut down its physical store due to a local government order related to non-essential businesses, that was based on COVID-19 guidance issued by the CDC in March 2020.
This would appear to mean that any nonessential business that suffered a reduction in business because it had to close under state and local orders would come within this safe harbor. But a business that was unable to return to the same level of business because of the indirect effect of shutdown orders (e.g., general economic downturn causes its customers or clients to have less disposable income) may not be able to use this safe harbor.
The New IFR also addresses the documentation required for this safe harbor: the borrower must maintain copies of the applicable guidance for each business location that resulted in the reduced business and “relevant borrower financial records”.
FTE Rehire Safe Harbor Modifications.
On May 22, 2020, SBA provided a safe harbor for FTE reduction that permitted a borrower to exclude an FTE reduction when the borrower offered to rehire a terminated employee and the employee refused that offer. The Flexibility Act added a similar safe harbor providing that forgiveness is determined without regard to an FTE reduction if the borrower is able to document, in good faith, an inability to rehire individuals who were employees of the borrower on February 15, 2020 and an inability to hire similarly qualified employees for unfilled positions on or before December 31, 2020.
SBA determined that its safe harbor pertaining to rejected offers to re-hire employees was similar to the safe harbor of the Flexibility Act and, therefore, that SBA’s safe harbor is superseded by the Flexibility Act. Still, SBA provides additional guidance to the Flexibility Act safe harbor that borrowers are exempt from the loan forgiveness reduction due to reduced FTEs if the borrower is able to document in good faith the following:
- An inability to rehire individuals who were employees on February 15, 2020;
- An inability to hire similarly qualified individuals for unfilled positions on or before December 31, 2020;
- That the borrower informed the state unemployment insurance office of former employee’s rejected hiring offer within 30 days.
Lender review of Forgiveness Request.
The IFR details the lender’s duties in reviewing a forgiveness application, most of which are unchanged from the prior regulations issued on this topic. It is worth noting that, if the lender approves a forgiveness request and informs SBA of that decision, then within 90 days SBA must repay the forgiven amount to the lender unless SBA overturns the forgiveness request or determines that the borrower was ineligible for a PPP loan.
Forgiveness Denial Appeal.
If the lender will issue a denial decision to SBA, the lender must notify borrower of that decision. SBA may review a lender denial in its sole discretion. Borrowers have 30 days from the date of the lender’s denial decision to notify the lender that it is requesting SBA to review the lender’s decision and, within 5 days thereof, the lender must notify SBA of the request for review. SBA may decline that request for review. If SBA declines review of a denied forgiveness application, on its own denies a forgiveness application, or upon review determines that a borrower was ineligible for a PPP loan, it is unclear how a borrower could appeal SBA’s determination.
The information contained here is not intended to provide legal advice or opinion and should not be acted upon without consulting an attorney. Counsel should not be selected based on advertising materials, and we recommend that you conduct further investigation when seeking legal representation.