Treasury and the U.S. Small Business Administration (SBA) released new Paycheck Protection Program (PPP) guidance Friday night that provided some clarity on several loan forgiveness questions but didn’t address the two parts of PPP that arguably have generated the most concerns among the millions of small businesses and other entities that have received funding.
Two new interim final rules issued late Friday build upon the loan forgiveness application and instructions released May 15 but they don’t make changes to either the eight-week period during which PPP funds must be spent to qualify for forgiveness or the rule requiring PPP borrowers to spend at least 75% of the funds on payroll costs to qualify for full loan forgiveness.
Those two issues are the focus of multiple bills being considered in Congress.
The Senate could vote as early as this week on a bill that would double the loan forgiveness period to 16 weeks. The House is expected to vote this week on standalone legislation that would extend the loan forgiveness period to as long as 24 weeks and also eliminate the rule requiring PPP borrowers to spend at least 75% of the funds on payroll costs to qualify for full loan forgiveness. A separate Senate bill would also expand the loan forgiveness period to 24 weeks and eliminate the 75% rule.
Critics of the eight-week loan forgiveness period argue that it isn’t flexible enough for businesses that have dealt, and in many cases continue to deal, with state and locally mandated stay-at-home orders that have kept many types of businesses closed or operating at significantly reduced capacity. Critics of the 75% rule argue that it does not do enough to accommodate businesses whose employees haven’t been able to work because of government-imposed business closures.
Through May 23, the SBA approved more than 4.4 million PPP loans totaling more than $511 billion. About $138 billion in PPP funds remained available for additional lending as of May 23.
Provisions of note in 2 new interim rules
While the two proposed bills making their way through Congress would have an impact on loan forgiveness, the two new interim final rules released Friday are the most recent authoritative guidance. One addresses requirements for loan forgiveness (read PDF) and the other outlines PPP loan review procedures and related borrower and lender responsibilities (read PDF).
The 26 pages of loan forgiveness requirements guidance, a substantial portion of which mirrors the instructions to the PPP loan forgiveness application released on May 15, answer more than a dozen questions related to the loan forgiveness process, which payroll and nonpayroll costs are eligible for forgiveness, and how various scenarios affect the amount of loan forgiveness for which a borrower qualifies. Highlights include:
- Establishment of an alternative method for determining when the eight-week period starts for businesses with pay cycles of biweekly or more frequent. These borrowers can elect an alternative payroll covered period, which is the eight-week period starting the first day of the pay period after they received the funds. Previously, the only starting date allowed was the day the lender disbursed funds to the borrower — which remains the requirement for all businesses with pay periods less frequent than biweekly. The AICPA had issued a recommendation calling for increased flexibility for the beginning of the eight week covered period to align with the borrower’s pay period to improve the efficiency of the forgiveness application process.
- Clarification that bonuses and hazard pay are eligible for loan forgiveness, as are salary, wages, and commission payments to furloughed employees. The payments cannot exceed the pro-rated amount of a $100,000 annual salary.
- Establishment of caps on the amount of loan forgiveness available for owner-employees and self-employed individuals’ own payroll compensation. Specifically, the amount requested can be no more than the lesser of 8/52 of 2019 compensation (i.e., approximately 15.38% of 2019 compensation) or $15,385 per individual in total across all businesses. For self-employed individuals, including Schedule C filers and general partners, no additional forgiveness is provided for retirement or health insurance contributions.
- Clarification on when non-payroll costs must be incurred or be paid to qualify for loan forgiveness. Specifically, the costs must be paid during the eight-week period or incurred during the period and paid on or before then next regular billing date, even if that date is after the eight weeks. The guidance also states that advance payments on mortgage interest are not eligible for loan forgiveness.
- Reiteration of the previously announced guidance setting the rules for when employers can exclude from loan forgiveness calculations employees who refuse to be rehired. The new guidance reiterates that in calculating any reduction in full time equivalent employees, employers can exclude any employees who decline a good faith offer to return at the same pay and hours as before they were laid off or furloughed. The guidance released Friday includes a requirement for borrowers to notify the state unemployment office of an employee’s rejected offer within 30 days of that rejection.
- Definition of full-time equivalent as 40 hours, and two methods for calculating FTEs for non full-time employees.
- Declaration that borrowers can restore forgiveness if they rehire employees by June 30 and reverse reductions to salaries and wages for FTE employees by June 30. The guidance said loan forgiveness totals would not be reduced for both hours and wage reductions for the same employee.
The 19-page interim rule on PPP review procedures and related borrow and lender responsibilities covers procedural details. Most notably the rule:
- Establishes that the SBA may review any PPP loan, regardless of size, to determine if the borrower is eligible for PPP loans under the CARES Act, whether the borrower calculated the loan amount correctly and used the funds for eligible costs, and whether the borrower is eligible for the amount of loan forgiveness it requests.
- Declares that borrowers may appeal SBA determinations within 30 days of receipt. The guidance also says an appeal process will be established, with the specifics coming in a later interim final rule.
- Requires lenders to decide on loan forgiveness within 60 days of receipt of the complete application from the borrower. The SBA then has 90 days to review the loan forgiveness application.
- Clarifies that borrowers may be asked questions by lenders and the SBA
- Confirms that lenders will not be paid their fees for any PPP loans the SBA deems ineligible .This includes a 1-year clawback provision on bank fees for those loans.
The PPP in brief
Congress created the PPP as part of the $2 trillion Coronavirus Aid, Relief, and Economic Security (CARES) Act, P.L. 116-136. The legislation authorized Treasury to use the SBA’s 7(a) small business lending program to fund loans of up to $10 million per borrower that qualifying businesses could spend to cover payroll, mortgage interest, rent, and utilities. PPP borrowers can qualify to have the loans forgiven if the proceeds are used to pay certain eligible costs. However, the amount of loan forgiveness will be reduced if less than 75% of the funds are spent on payroll over an eight-week loan forgiveness period.
Congress established the PPP to provide relief to small businesses during the coronavirus pandemic as part of the CARES Act. PPP funds are available to small businesses that were in operation on Feb. 15 with 500 or fewer employees, including not-for-profits, veterans’ organizations, Tribal concerns, self-employed individuals, sole proprietorships, and independent contractors. Businesses with more than 500 employees in certain industries also can apply for loans.