Updates on PPP Loan Forgiveness and New Forms Released by SBA

The Small Business Administration (SBA) released the loan forgiveness application 3508 Form and instructions (including 3508 EZ and instructions) on June 16, 2020. The new forms reflect changes enacted in the Paycheck Protection Program (PPP) Flexibility Act of 2020.

Every borrower’s situation is different. It may be beneficial to elect the eight-week covered period or it may be more beneficial to elect the 24-week covered period. Payroll levels, number of employees at different measurement periods, employee compensation changes and anticipated changes in operations over the next quarter could all impact the loan forgiveness amount.

We have updated our PPP Loan Forgiveness Calculator to reflect the most recent updates.

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Here is a detailed run-down of the changes that were made:

Revised Form 3508 Loan Forgiveness Application

The revised application reflects changes made to the PPP Flexibility Act of 2020 including:

  • Payroll costs that qualify for loan forgiveness include cash compensation, employee benefits, and owner compensation.
    • For each individual employee, the total amount of cash compensation eligible for loan forgiveness may not exceed an annual salary of $100,000 as prorated for the covered period. For an eight-week covered period that total is $15,385 and for a 24-week covered period that amount is $46,154.
    • Employee benefits include:
      • Employer contributions for employee health insurance excluding pre-tax or after-tax contributions by employees. Do not include employer health insurance contributions made on behalf of a self-employed individual, general partners, or owner-employees of an S-corporation, because such amounts are already included in their compensation.
      • Employer contributions made to employee retirement plans excluding pre-tax or after-tax contributions by employees. Do not include employer retirement contributions made on behalf of a self-employed individual or general partners since such payments are already included in their compensation. Contributions made on behalf of owner-employees are capped at 2.5 months’ worth of the 2019 amount.
      • Employer state and local taxes paid by the borrower assessed on employee compensation (e.g. state unemployment tax).
    • Amounts paid to owner-employees, a self-employed individual, or a general partner are capped at the lesser of the following for a 24-week cover period: (1) $20,833 for each individual or (2) the 2.5 month equivalent of their applicable 2019 compensation. For an 8-week covered period the cap is the lesser of (1) $15,385 or (2) 8/52 of their 2019 compensation.
    • For the payroll and non-payroll costs eligible for forgiveness borrowers are only required to report payments that they want to include in the forgiveness amount. This may mean that if borrowers will have enough payroll during the 24-week covered period to cover their loan amount, they would not need to report any non-payroll costs.
    • If the borrower is filling out the EZ application, did not reduce the salaries or wages of their employees by more than 25 percent, and did not reduce the number or hours of their employees, they are required to submit the average number of full-time equivalent employees on payroll employed on 1/1/2020 and at the end of the covered period.
    • The borrower must maintain the following documentation but are not required to submit it with their loan forgiveness application:
      • Documentation supporting the fact that annual salaries or hourly wages were not reduced by more than 25% during covered period or alternative payroll covered period relative to the period between 1/1/20-3/31/20. This must include payroll records that separately list each employee and show the amounts paid to each employee during the covered period or alternative payroll covered period and the period between 1/1/20-3/31/20.
      • Documentation regarding any employee job offers and refusals, refusals to accept restoration of reductions in hours, firings for cause, voluntary resignations, written requests by any employee for reductions in work schedule, and any inability to hire similarly qualified employees for unfilled positions on or before 12/31/20.
      • Documentation supporting that 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 (other than any reductions that arose from an inability to rehire individuals who were employees on 2/15/20, if the borrower was unable to hire similarly qualified employees for unfilled positions on or before 12/31/20). This documentation must include payroll records that separately list each employee and show the amounts paid to each employee between 1/1/20 and the end of the covered period.
      • Documentation, if applicable, that supports that the borrower was unable to operate between 2/15/20 and the end of the covered period at the same level of business activity as before 2/15/20 due to compliance with requirements established or guidance issued between 3/1/20 and 12/31/20 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. This documentation must include copies of the applicable requirements for each borrower location and relevant borrower financial records.
      • All records relating to the borrower’s PPP loan, including documentation submitted with its PPP loan application, documentation supporting the borrower’s certifications as to the necessity of the loan request and its eligibility for a PPP loan, documentation necessary to support the borrower’s loan forgiveness application, and documentation demonstrating the borrower’s material compliance with PPP requirements. The borrower must retain all such documentation in its files for six years after the date the loan is forgiven or repaid in full, and permit authorized representatives of SBA to access such files upon request.
    • FTE Reduction Safe Harbor #1 added to PPP Schedule A, which exempts the borrower from a reduction in loan forgiveness based on a reduction in FTE employees if it can document in good faith that it was unable to operate between 2/15/20 and the end of 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 3/1/20-12/31/20 by Secretary of Health and Human Services, Director of 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.
    • Step #4 of Safe Harbor #2 on the PPP Schedule A calculation now states to enter the borrower’s total FTE as of the earlier of 12/31/20, and the date the application is submitted.
New Form 3508EZ:

The 3508EZ can be used by borrowers that satisfy at least one of the following:

  • Self-employed individual, independent contractor, or sole proprietor with no employees at the time of the PPP loan application and did not include any employee salaries in computation of average monthly payroll on the loan application form;
  • 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 1/1/20-3/31/20 for employees whose annualized wages were less than $100,000 during any single pay period in 2019 AND the borrower did not reduce the number of employees or the average paid hours of employees between 1/1/20 and the end of the covered period (excluding any reduction exemptions); OR
  • 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 1/1/20-3/31/20 for employees whose annualized wages were less than $100,000 during any single pay period in 2019 AND the borrower was unable to operate during the covered period at the same level of busines activity as before 2/15/20 due to compliance with requirements established or guidance issued between 3/1/20-12/31/20 by Secretary of Health and Human Services, Director of 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.
6.17.20 Interim Final Rule:

The SBA also published the Interim Final Rule dated 6/17/20 that amends the interim final rules posted on April 14 and April 28, 2020, respectively, for changes effective with the passage of the PPP Flexibility Act of 2020, which was signed into law on June 5, 2020. It clarifies the following:

  • Only borrowers that received their PPP proceeds prior to June 5 are allowed to use the optional eight-week covered period. PPP proceeds received after that date must use a 24-week covered period.
  • Owner replacement compensation for Sch C and F filers and partnership pass-through income allowable towards loan forgiveness is increased from 8/52 of 2019 reported amount (not to exceed $15,385) for an eight-week covered period to 2.5 months’ worth (2.5/12) of 2019 reported amount (not to exceed $20,833) for a 24-week covered period per owner in total across all businesses.
  • FTE and salary/hourly wage reductions will be applied towards total allowable expenses incurred during the covered period

Be sure to connect with your trusted advisor at BerganKDV for assistance in making the best decision for your situation. You can call our task force and we’ll get you the answers, the listening ear and/or the quick support you need: 888-356-2295 or info@bergankdv.com.

CATEGORIES: COVID-19 | Featured | Tax, Audit & Accounting

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