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SBA Releases Revised PPP Loan Forgiveness Application and Guidelines for Disclosing Identities of Borrowers

    Client Alerts
  • June 23, 2020

This alert was updated on June 25 based on additional guidance from the Small Business Administration.

The Small Business Administration (SBA) released on June 16 two revised loan forgiveness applications (each, along with separate instructions, available here). Borrowers of a Paycheck Protection Program (PPP) loan must use one of these forms to determine the forgivability of the loan. The new “long-form” application replaces the May 15 version, previously released by the SBA, and takes into account the changes made by the PPP Flexibility Act (PPPFA) effective as of June 5, which we discussed in our alert here. The other loan forgiveness application is a simplified and shorter “EZ” version, which can only be used by borrowers meeting certain criteria. In addition, on Friday, June 19, SBA and the Department of Treasury revealed how the identities of PPP borrowers will be made public and what level of detail will be included, and this is discussed further below. Finally, on June 23 the SBA released its 19th interim final rule (IFR) to revise its previously issued Loan Forgiveness IFR and SBA Loan Review Procedures IFR in light of the PPPFA. Many of the provisions in the 19th IFR overlap with contents of the revised loan forgiveness application, but we have noted below where the 19th IFR has provided additional insight or clarification, most notably by allowing borrowers to apply for forgiveness at any time after spending the PPP proceeds, even if this occurs before the end of the applicable covered period.

Highlights from the loan forgiveness application include:

Changes to Long-Form Application

The key provisions from the PPPFA that necessitated the new version of the long-form application were the extension of the “covered period” during which PPP funds must be spent to be eligible for forgiveness from eight weeks to 24 weeks and the reduction of the percentage of PPP proceeds that must be spent on payroll from 75% to 60%. While these changes are mostly mechanical, some valuable insights to be drawn from the new application include:

  • The $100,000 annualized wage/salary cap that applies to payroll costs for each W-2 employee of a borrower has been increased from $15,385 to $46,154 if the borrower has a 24-week covered period. If a borrower whose loan number was issued before June 5 chooses to use an eight-week covered period, the per-employee wage/salary cap is still $15,385. However, for (i) a self-employed individual, (ii) general partners, or (iii) owner-employees of an S-corporation or C-corporation who choose to use a 24-week covered period, the cap on owner compensation replacement does not increase anywhere near as much. While it is capped at the lower of (a) 8/52 of 2019 compensation or (b) $15,385 for an eight-week covered period, for a 24-week covered period it only is increased to the lower of (x) the 2.5-month equivalent of their applicable compensation in 2019 or (y) $20,833 (this amount is approximately equal to 2.5 months’ worth of an annualized 2019 compensation equal to $100,000).
  • In addition to being limited to a proportion of 2019 compensation based on the covered period chosen, self-employed individuals, general partners, and owner-employees of an S-corporation should keep in mind other restrictions on forgivable payroll costs:
    • Health insurance contributions made on behalf of (i) a self-employed individual, (ii) general partners, or (iii) owner-employees of an S-corporation are excluded from payroll costs, because such payments are already included in their compensation.
    • Employer retirement contributions made on behalf of (i) a self-employed individual or (ii) general partners are not part of payroll costs, because such payments are already included in their compensation.
    • Although employer retirement contributions made on behalf of self-employed individuals and general partners are disallowed, they may be counted as payroll costs for “owner-employees of S-Corporations,” although they are subject to the wage/salary cap discussed above. Additionally, while the 19th IFR makes clear that employer retirement contributions and health insurance contributions made on behalf of owner-employees of a C-corporation may also be counted as payroll costs, such employer contributions will count against the applicable cap on such owner-employee’s wages. This is all in contrast to non-owner W-2 employees’ payroll costs, for which retirement and healthcare contributions are not subject to the $100,000 annualized wage/salary cap.
    • While the application seemed to indicate that the term “owner-employee” is synonymous with “owner-employees of an S-corporation” and does not include employees who are equity owners of other types of legal entities, the 19th IFR partially clarified the term with respect to C-corporations by stating that “C-corporation owner-employees” face caps on payroll costs in the same manner as owner-employees of S-corporations, sole proprietors and general partners. However, this still leaves open several important questions. Although it is now clear that the term “owner-employee” includes employee-shareholders of a C-corporation as well as an S-corporation, it is not clear what thresholds exist for being considered an owner-employee. For example, while many would accept that a shareholder who owns 51% of the stock of a C-corporation or S-corporation would be deemed an “owner-employee,” it is not clear whether minority shareholders of a corporation and cannot control it would also be deemed an “owner-employee.” Similarly, it is not clear whether employees who are minority members of a limited liability company or have a profits-only interest in a limited liability company are subject to the restrictions placed on “owner-employees.”
  • Before the PPPFA and under the previous form of forgiveness application, borrowers had to restore the wages of certain employees or restore full-time equivalent (FTE) employee headcount by June 30, 2020, to take advantage of the “Salary/Hourly Wage Reduction Safe Harbor” or the “FTE Reduction Safe Harbor 2.” Under the revised application, the salary/wage levels or FTE headcount must be restored by the earlier of (a) the date the forgiveness application is submitted or (b) December 31, 2020. This change makes clear that borrowers who apply for forgiveness before December 31, 2020, may take advantage of either safe harbor when they apply for forgiveness and need not wait until December 31 to see if the safe harbor is met. This is a clarification that will be especially helpful for borrowers who utilize an eight-week covered period.
  • For any borrowers which have had employee reductions due to decreased operations that are the result of public health measures note that “FTE Reduction Safe Harbor 1” was added by the PPPFA. FTE Reduction Safe Harbor 1 is a safe harbor borrowers may use if employee reductions are caused by decreased operations that are 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 for sanitation, social distancing, or any other worker or customer safety requirement related to COVID-19, which the 19th IFR labels as “COVID Requirements or Guidance.” Initially, many believed that this language in the PPPFA did not permit businesses to take advantage of FTE Reduction Safe Harbor 1 if the decrease in business was due to orders imposed by a state or local government or a federal agency other than the three explicitly mentioned. However, the 19th IFR has expanded the applicability of the safe harbor by stating that it will apply if a borrower’s reduction in business activity during the covered period is the result of direct or “indirect compliance with COVID Requirements or Guidance, because a significant amount of the reduction in business activity stemming from COVID Requirements or Guidance is the result of state and local government shutdown orders that are based in part on guidance from the three federal agencies.” In order to take advantage of this safe harbor, the 19th IFR notes that borrowers must maintain documentation, including “copies of applicable COVID Requirements or Guidance for each business location and relevant borrower financial records.” Additionally, the 19th IFR indicates that if a borrower is claiming indirect compliance with COVID Requirements or Guidance due to a state or local order, the applicable state or local order must “reference a COVID Requirement or Guidance” issued by one of the three federal agencies. Therefore, it is important that borrowers seeking to take advantage of FTE Reduction Safe Harbor 1 based on indirect compliance with the federal COVID Requirements or Guidance carefully review the applicable state and local orders to see whether they reference any of the federal COVID Requirements or Guidance.
  • While not covered by the PPPFA, the applications for loan forgiveness make clear that borrowers who choose to utilize a 24-week covered period and have a biweekly (or more frequent) payroll schedule may also take advantage of an “Alternative Payroll Covered Period.” Rather than beginning on the day the loan is disbursed, the Alternative Payroll Covered Period begins on the first day of their first pay period following day the loan is disbursed. For example, if the Borrower is using a 24-week Alternative Payroll Covered Period and received its PPP loan proceeds on Monday, April 20, and the first day of its first pay period following its PPP loan disbursement is Sunday, April 26, the first day of the Alternative Payroll Covered Period is April 26 and the last day of the Alternative Payroll Covered Period is Saturday, October 10.
  • Finally, the 19th IFR introduces another potentially complex wrinkle and related uncertainty into the timing for the loan forgiveness process by granting borrowers flexibility to apply for forgiveness before their eight- or 24-week covered period is over, despite the PPPFA not including any such flexibility. By making the date of the forgiveness application a moving target, this wrinkle raises many more questions than it answers and only further complicates the decisions PPP borrowers must make.
    • Notably, the IFR states, “If the borrower applies for forgiveness before the end of the covered period and has reduced any employee’s salaries or wages in excess of 25 percent, the borrower must account for the excess salary reduction for the full 8-week or 24-week covered period, as described in Part III.5.” It is unclear what “must account for” means in this situation, but an example in Part III.5 of the IFR shows that “accounting” for an excess salary reduction means, at a minimum, that borrowers who apply for forgiveness before the end of the covered period and who are then subject to a wage/salary reduction will need to reduce their forgiveness as if such wage/salary reductions were in effect for the remainder of the covered period.
    • This flexibility contained in the IFR appears to allow a borrower to, in essence, fix the amount of loan forgiveness based solely on the date the forgiveness application is submitted. For example, assume a borrower is only partly through its covered period, has spent all of its PPP funds on forgivable costs, has reduced some employees pay beyond 25%, and foresees further pay cuts in the coming weeks. Such a borrower could seemingly take advantage of this early filing flexibility to “lock in” the current pay cut reduction despite the looming pay cuts. If the same borrower were to instead foresee raises in the coming weeks, the borrower could choose to delay filing for forgiveness so that the impending raises can reduce (or potentially eliminate) the current pay cut reduction. It is unclear whether this added wrinkle will similarly lead to flexibility with respect to the FTE reduction calculation or the various safe harbors. Accordingly, borrowers should begin working now to model the amount of potential forgiveness under all timing scenarios, keeping in mind that due to regulatory uncertainty they may face scrutiny regarding wage/salary reductions. In particular, it is worth noting again that the IFR’s flexibility on the length of the covered period is not contained in the PPPFA and the covered period explicitly included in the PPPFA is 24-weeks or 8-weeks, not an intermediate length of time. Therefore, this flexible interpretation may be subject to change by the SBA and the SBA or other regulators could “look past” the date on which a borrower applies for forgiveness and reduce forgiveness more than expected if in fact the wages of a borrower’s employees are cut further.
  • As you can see, applying forgiveness principles can get complicated, particularly when applying for forgiveness prior to the end of the applicable covered period. We are monitoring to see if the SBA will issue additional guidance to help clarify these issues.

New Simplified “EZ” Application

The shorter, less detailed and ostensibly less burdensome EZ application is only three pages long, together with four pages of instructions. However, the EZ application may only be used by those PPP borrowers that fall into at least one of the following categories:

  • Borrowers that are self-employed and have no employees;
  • Borrowers that did not reduce the salaries or wages of certain “covered employees” by more than 25% and did not reduce the number or hours of their FTE employees (however, borrowers are allowed to ignore reductions in FTE employees that arose from an inability to rehire certain individuals and employee’s refusal to work previously reduced hours that a borrower has offered to restore); or
  • Borrowers that did not reduce the salaries or wages of “covered employees” by more than 25% and experienced reductions in business activity as a result of health directives made by certain federal agencies that were related to COVID-19.

The “covered employees” described above are those who had annualized compensation of less than $100,000 in every single pay period in 2019 or were not employed in 2019. Borrowers who believe they may use the EZ application should review the requirements above carefully and confirm that they can, in fact, use the EZ application, otherwise, they run the risk of making a false certification and facing civil and criminal penalties in addition to losing forgiveness.

Importantly, the SBA has not yet released guidance on how to determine and document whether reductions in business activity are a result of health directives made by certain federal (not state or local) agencies that were related to COVID-19, so it is not clear how a borrower can claim this exception.

Disclosure of Names of PPP Borrowers

Despite early comments from leaders such as Senator Marco Rubio and Secretary Treasury Steven Mnuchin indicating that the names and amounts borrowed by all PPP borrowers would be disclosed, pushback from industry groups had recently cast doubt on whether the government would disclose any such details. However, on Friday, June 19, the SBA and Treasury released what they deemed a compromise approach, which is intended to provide the public some level of disclosure while not releasing exact loan amounts, as such exact figures could potentially be trade secrets.

Rather than identifying the exact amount of their loan, borrowers will be identified as having received a PPP loan amount that is within a range of figures. The ranges of loan amounts that borrowers will be identified by are:

  • $150,000-350,000
  • $350,000-1 million
  • $1-2 million
  • $2-5 million
  • $5-10 million

For borrowers with loan amounts at or above $150,000, the SBA will disclose the name of the borrower and such borrowers’ addresses, NAICS codes, zip codes, business type, demographic data, nonprofit information and jobs supported. For borrowers with PPP loans below $150,000, SBA will not release the names of the borrowers, but the total loan amounts will be released, aggregated by zip code, by industry, by business type, and by various demographic categories.

The situation for each PPP borrower will be unique and discrete issues will come to light as a borrower’s loan forgiveness application is put together. Therefore, we suggest that individual borrowers, regardless of how long they have had PPP funds and even if not yet ready to apply for forgiveness, work through the application as best as possible on a projected basis so the borrower can better forecast the level of forgivability. Working with accountants, payroll providers, and other financial advisors may be helpful in gathering and analyzing the data required to complete the application and in getting a more clear picture of how the rules will affect forgivability.

We have a team of people at Parker Poe who are tracking all of this constantly. For more information, please contact us or your regular Parker Poe contact. You can also find our other COVID-19 related alerts here.