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Our attorneys stay on top of changes in legislation, agency regulations, case law, and industry trends—then craft timely legal alerts to keep clients up to date on legal developments important to their business.

June 26, 2020

COVID-19: SBA Releases Further Clarification to PPP Loan Forgiveness Based on PPP Flexibility Act Changes

On June 5, the Paycheck Protection Program (PPP) Flexibility Act was signed into law, amending the original PPP provisions provided for in the Coronavirus Aid, Relief, and Economic Security (CARES) Act. On June 23, the Small Business Administration (SBA) released further guidance on how borrowers and lenders should interpret the revised rules under Flexibility Act and related loan forgiveness application forms.

Consistent with what was provided for in the first iteration of the loan forgiveness application, borrowers with a bi-weekly or more frequent payroll cycle may elect to use an alternative payroll covered period that begins on the first day of the first payroll cycle after the PPP funds have been disbursed. Depending on the election of the borrower, the alternative payroll covered period will continue for either eight or 24 weeks. Payroll costs incurred during this alternative payroll covered period but paid after the end of the alternative payroll covered period are eligible for forgiveness as long as they’re paid no later than the first regular payroll date thereafter. Payroll costs are considered incurred on the day the employee’s pay is earned and paid on the day paychecks are distributed or when the borrower originates an ACH credit transaction.

Additionally, the guidance provided clarification on the maximum amount of loan forgiveness available for owner-employees and self-employed individuals’ own compensation. For such borrowers that received a loan prior to June 5 and elect to use the eight-week covered period, the amount of loan forgiveness is capped at eight weeks’ worth (8/52) of 2019 compensation (i.e., 15.38 percent of 2019 compensation) or $15,385 per individual, whichever is less.

For all other borrowers, the amount of loan forgiveness is capped at 2.5 months’ worth (2.5/12) of 2019 compensation (i.e., 20.38 percent of 2019 compensation) or $20,833 per individual, whichever is less. C-corporation owner-employees are capped at the amount of their 2019 employee cash compensation plus employer retirement and health contributions made on their behalf. By contrast, S-corporation owner-employees are capped at the amount of their 2019 cash compensation plus employer retirement contributions made on their behalf but can’t include employer health contributions, as those payments are already included in employee cash compensation.

It’s important to note these limits are applied across all businesses owned by owner-employees or self-employed individuals and isn’t a business by business cap. So, if, for example, an individual owns three separate S corporations and draws a salary of $150,000 from each S corporation, the total amount of the individual’s compensation for all three businesses that’ll qualify for loan forgiveness can’t exceed either $15,385 or $20,833 as the case may be and not $15,385 or $20,833 per corporation.

The SBA also clarified when a borrower must apply for loan forgiveness or start making payments on the loan. A loan forgiveness application may be submitted at any time on or before the maturity date of the loan, including before the end of the covered period, if the borrower has used the entirety of their loan proceeds for which the borrower is requesting forgiveness. However, if the borrower applies for forgiveness prior to the expiration of the covered period and has reduced any employee’s salaries or wages in excess of 25 percent, the borrower is required to account for the excess salary reduction for the full eight- or 24-week covered period. If the borrower doesn’t apply for loan forgiveness within 10 months after the last day of the covered period or the SBA determines the borrower isn’t eligible for forgiveness (in whole or in part), principal and interest are no longer deferred. It’s the lender’s responsibility to notify the borrower of when the first payment is due.

To receive loan forgiveness, a borrower is required to complete and submit the loan forgiveness application. When a borrower submits SBA Form 3508, SBA Form 3508EZ, or the lender’s equivalent form, the lender must:

  1. Confirm receipt of the borrower certifications contained in the respective form
  2. Confirm receipt of the documentation the borrower is required to submit to verify payroll and non-payroll costs as specified in the instructions of the respective form
  3. Confirm the borrower’s calculations, including the dollar amount of both the payroll and non-payroll costs claimed on the loan forgiveness application by reviewing the documentation submitted; and
  4. Confirm the borrower made the correct calculation on Line 10 of SBA Form 3508 or Line 7 of SBA Form 3508EZ by dividing the borrower’s eligible payroll costs claimed on Line 1 by 0.60

Providing an accurate calculation of the loan forgiveness amount is the borrower’s responsibility. Once submitted, the lender is expected to perform a good-faith review and has 60 days from receipt of a complete application to issue a decision to the SBA. Within 90 days thereafter, the SBA will, subject to any review of the loan or loan application, remit the appropriate loan forgiveness amount to the lender plus any interest accrued through the date of payment.

If you have any questions regarding the content of this alert, please contact Roger Cominsky, Financial Institutions & Lending Practice Area chair, at rcominsky@barclaydamon.com; Danielle Katz, associate, at dkatz@barclaydamon.com; or Samantha Podlas, associate, at spodlas@barclaydamon.com.

We also have a specific team of Barclay Damon attorneys who are actively working on assessing regulatory, legislative, and other governmental updates related to COVID-19 and who are prepared to assist clients. Please contact Yvonne Hennessey, COVID-19 Response Team leader, at yhennessey@barclaydamon.com or any member of the COVID-19 Response Team at COVID-19ResponseTeam@barclaydamon.com.

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