Client Alert: EZ PPP Forgiveness Application and Self-Employed PPP Usage Cap
Date: June 18, 2020
Key Changes:
- For borrowers using a 24-week Covered Period, per-employee compensation for purposes of determining Payroll Costs is capped at $46,154, but for owner-employees their owner replacement compensation is capped at 2.5 months’ worth of 2019 net profit, up to $20,833, per owner-employee.
- If eligible, a borrower may apply for forgiveness using PPP Loan Forgiveness Application Form 3508EZ, which does not require the same employee-by-employee FTE and wage/salary reduction analysis as required in the full forgiveness application.
- The full forgiveness application, PPP Loan Forgiveness Application Form 3508, has been revised consistently with the Flexibility Act and the new IFR. It has also been made more user friendly by bifurcating the application and its instructions into separate documents.
- There is no indication that a borrower can apply for forgiveness earlier than after the full Covered Period.
New IFR Revising IFRs 3 and 6
The new IFR, effective June 16, 2020, updates the IFR on Additional Eligibility Criteria and Requirements for Certain Pledges of Loans (the “3rd IFR”), posted to the SBA’s website on April 14, 2020, and the IFR on Disbursements (the “6th IFR”), posted to the SBA’s website on April 28, 2020.
The major takeaways in the 3rd IFR are how the 60% rule will be applied and how the maximum amount of permitted compensation will be adjusted as a result of the 24-week Covered Period. First, the IFR provides that “at least 60 percent of the PPP loan proceeds shall be used for payroll costs” (emphasis added), which includes the amount of any Economic Injury Disaster Loan refinanced into the borrower’s PPP. This 60% floor does not apply for purposes of forgiveness. For loan forgiveness, the rule is that no more than 40% of the amount forgiven can be attributed to nonpayroll costs.
With respect to the amount of the compensation portion of Payroll Costs permitted for the forgiveness calculation, compensation is subject to the following limits:
- On a per-employee basis (excluding owner-employees), in a 24-week covered period, wages are capped at $46,154 (the limit for 8 weeks is still $15,385). The IFR notes that, given the 2.5 multiple in the PPP loan amount calculation, this per-employee maximum would only be reached if the borrower had reduced FTEs but was eligible for a safe harbor to avoid a reduction in forgiveness.
- Owner replacement compensation under the 24-week covered period is capped at 2.5 months’ worth of 2019 net profit, up to $20,833 (the limit for 8 weeks is still $15,385). The SBA’s stated goal is to prevent a windfall to owners, who may have been inclined to lay off employees, rely on a safe harbor to avoid the FTE forgiveness reduction, and pay themselves $46,154. The IFR gives as an example that a small business with one employee-owner and one other employee would receive a maximum loan amount equal to five months of payroll (2.5 months of payroll for the owner plus 2.5 months of payroll for the employee). If the owner laid off the employee and availed itself of the safe harbor in the Flexibility Act from reductions in loan forgiveness for a borrower that is unable to return to the same level of business activity the business was operating at before February 15, 2020, the owner could treat the entire amount of the PPP loan as Payroll Costs to himself, with the entire loan being forgiven, thereby providing the owner-employee with 5 months of payroll but defeat the CARES Act’s goal of protecting the paycheck of the other employee.
EZ Loan Forgiveness Application (the “EZ Application”) and EZ Loan Forgiveness Application Instructions (the “EZ Instructions”)
This is a seismic shift in the PPP forgiveness process and, for many borrowers, streamlines the paperwork required for the forgiveness application. In the full application, borrowers must work through an employee-by-employee analysis of FTE and wage/salary reduction calculations, and analyze each potential safe harbor. The EZ Application does not require an employee-by-employee analysis and, instead, is available to borrowers who do not have an FTE or wage/salary reduction, or, if they would have an FTE reduction, are eligible for the new safe harbors provided in the Flexibility Act or the refusal to return to work safe harbor.
While eligibility for the EZ Application is not dependent on loan size, borrowers seeking $2 million or more in forgiveness may still want to use the full forgiveness application. This is because the SBA has stated that it will audit each such application, and in connection with an audit, the borrower likely will still have to provide the same information that is required in the full forgiveness application.
However, any borrower may use the EZ Application if it can certify to one of the following three statements:
- The borrower is a self-employed individual, independent contractor, or sole proprietor who had no employees at the time of the PPP loan application and did not include any employee salaries in the computation of average monthly payroll in its PPP loan application.
- The borrower did not reduce annual salary or hourly wages of any employee by more than 25% during the Covered Period or Alternative Payroll Covered Period compared to the period between January 1, 2020 and March 31, 2020 (where “employee” means only employees that did not receive, during any single period during 2019, wages or salary at an annualized rate of pay in an amount more than $100,000) AND either
a. the borrower did not reduce the number of employees or the average paid hours of employees between January 1, 2020 and the end of the Covered Period, ignoring (i) reductions that arose from an inability to rehire individuals who were employees on February 15, 2020 if the borrower was unable to hire similarly qualified employees for unfilled positions on or before December 31, 2020 and (ii) reductions in an employee’s hours that the borrower offered to restore and the employee refused; or
b. the borrower was unable to operate during the Covered Period at the same level of business activity as 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, or the Occupational Safety and Health Administration, related to the maintenance of standards of sanitation, social distancing, or any other work or customer safety requirement related to COVID-19 (the “Reduced Business Activity Safe Harbor”).
This update is a major benefit to small businesses as it greatly reduces the required paperwork, especially for sole proprietors and those who will rely on the first or third certification. The second certification (under paragraph 2(a) above) appears to still require the additional step of comparing the number of employees and average paid hours for the pay periods including January 1, 2020 and the last day of the Covered Period; though this is still far easier than conducting an employee-by-employee analysis, as required in the full forgiveness application.
Loan Forgiveness Application and Loan Forgiveness Application Instructions
The SBA revised the original loan forgiveness application to incorporate the changes required by the Flexibility Act and the new guidance provided in the IFR discussed above, but otherwise does not provide new information. SBA has also split the original application into two separate documents (which is much easier to follow): an application form and the instructions.
There is one change in FTE calculation. The original form compared average FTEs on payroll per month, but this revised application compares average FTEs on payroll per week. In practical terms, this change should not meaningfully impact the FTE reduction calculation.
The latest guidance still leaves open questions:
SBA needs to clarify whether the limitation on owner replacement income eligible for forgiveness applies only to Schedule C or F filers, or to all persons who own any interest in the borrower (even if an S or C corporation). Employee-owners of an S corporation, for example, must pay themselves a reasonable salary, which is wage income that would not appear on a Schedule C or F.
Under the Reduced Business Activity Safe Harbor, which Congress added in the Flexibility Act, it is unclear whether this means an inability to operate at full capacity at any point during the Covered Period, for a significant portion of the Covered Period or for the entire Covered Period. Certainly borrowers who are in a business that fundamentally requires in-person gatherings like restaurants, entertainment venues and social clubs, would appear to be within the intended scope of the Reduced Business Activity Safe Harbor, but for other borrowers, we believe that a reasonable interpretation is “significant portion” of the Covered Period, unless there is further guidance.
Similarly, how direct or indirect does the impact of sanitation and social distancing rules need to be for purposes of the Reduced Business Activity Safe Harbor? For example, does this safe harbor apply to janitorial contractors who no longer need to service entertainment venues, offices and schools as frequently as before February 15, 2020, but who do not themselves need to apply (as extensively) social distancing or sanitation guidelines to their work?
There is no affirmative statement about when and how the borrower elects a covered period of 8 or 24 weeks, and the applications provide blank spaces to state the first and last day of the Covered Period (which were in the original application as well). Thus, there does not appear to be a need to elect a Covered Period until submitting either the EZ Application or the full forgiveness application.
It is unclear, then, whether a borrower who received a PPP loan before June 5, 2020, electing an 8-week Covered Period must submit an application within 10 months from the end of the 8- or 24- week period. Until we know more, borrowers who wish to use an 8-week period should plan to submit their forgiveness application within 10 months from the end of their 8-week Covered Period.
Finally, it is not explicitly stated whether or not a borrower can submit an “early” application, rather than waiting until the end of the 24-week period, even if the borrower has used all of their PPP loan proceeds, say, by week 10. Nonetheless, due to the language in the applications and the safe harbors, it appears that borrowers cannot elect a covered period between 8 and 24 weeks – instead, it must use one or the other.
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.