Revisions to Loan Forgiveness Interim Final Rule and SBA Loan Review Procedures Interim Final Rule

Since the PPP Flexibility Act was signed into law on June 5th by the POTUS, the SBA has been issuing revisions to previously issued Interim Final Rules (IFR) to provide borrowers with the most up-to-date guidance on the PPP loan and PPP loan forgiveness program.

Today, the SBA released a new IFR:  Revisions to Loan Forgiveness Interim Final Rule and SBA Loan Review Procedures Interim Final Rule.  This new IFR deals specifically with loan forgiveness issues and demonstrates the SBAs efforts to provide clarity in areas where borrowers had concerns.

Wouch Maloney has reviewed the new IFR and has highlighted the most pertinent revisions impacting loan forgiveness below:

• Borrowers may submit a loan forgiveness application before the end of the covered period if the borrower has used all of the loan proceeds for which the borrower is requesting forgiveness.
• Borrowers applying for loan forgiveness before the end of the covered period that have reduced employee’s salaries or wages in excess of 25% must account for the excess salary reduction for the full 8-weeks or 24-weeks. Borrowers do not get to pro-rate the 25% forgiveness reduction if the full 8-week or 24-week periods are not needed to spend the funds.
• The IFR is silent concerning the requirement to maintain FTE levels for the full 8-week or 24-week period for purposes of the FTE forgiveness reduction. Therefore, this would imply that borrowers need not worry about maintaining FTE levels once all PPP monies have been spent since the authors have only provided a penalty for the 25% forgiveness reduction category.

WM Wisdom:  This is welcome news for borrowers who will require more than 8-weeks but less than 24-weeks to spend PPP proceeds.  If a borrower has not reduced the salary or wage levels of their employees and have satisfied the FTE testing periods or safe harbors; they will be able to submit an early PPP Loan Forgiveness Application.

• The IFR clarifies that non-payroll costs are eligible for loan forgiveness if they are paid during the covered period; or incurred during the covered period and paid before the next regular billing date even if the billing date is after the covered period.

WM Wisdom:  The IFR is silent about the potential to prepay non-payroll costs such as rent during the covered period.  However, the SBA indicates that a simplified approach to the calculation of forgivable non-payroll costs is supported by the law and the increase to a 40% cap will help to avoid excessive inclusion of these costs.

• The IFR clarifies the cash compensation cap for owners of various entity structures (not to exceed $15,385 for 8-weeks or $20,833 for 24-weeks) includes the following types of compensation
  • C-Corporation: only cash compensation
  • S-Corporation: cash compensation and health payments
  • General Partner: cash compensation, health and retirement payments
  • Sole Proprietor/Schedule C/F Filer: cash compensation, health and retirement payments

 WM Wisdom:  Unfortunately, owner-employees of different legal entity types are not being treated on the same level playing field.

• The IFR clarifies the various FTE forgiveness reduction safe harbors including providing additional details for borrowers who are unable to return to the pre-COVID level of business due to compliance requirements set forth by HHS, the CDC and OSHA. Borrowers who can certify that their reduction in business activity has been directly or indirectly impacted by these COVID compliance requirements (including complying with state shut-down orders during their covered period), will not face an FTE forgiveness reduction.

WM Wisdom:  The IFR FTE reduction clarification is a game changer for most borrowers.  The example provided by the SBA describes a borrower who was deemed a non-essential retail business by their local government that was required to shut-down their store as a result of COVID-19 CDC guidance issued in March 2020.  To the extent the borrower can demonstrate that their business activity was reduced during the covered period due to a government shutdown, they will not face an FTE reduction to their loan forgiveness.  For example, it would appear that a construction company deemed non-essential at any point during the covered period could satisfy this safe harbor and NOT face a forgiveness reduction since they likely were unable to perform services.

DISCLAIMER: The WM Daily Update COVID-19, COVID-19 Business Resources and COVID-19 Client News Alerts and other related communications are intended to provide general information on legislative COVID-19 relief measures as of the date of this communication and may reference information from reputable sources. Although our firm has made every reasonable effort to ensure that the information provided is accurate, we make no warranties, expressed or implied, on the information provided. As legislative efforts are still ongoing, we expect that there may be additional guidance and clarification from regulators that may modify some of the provisions in this communication. Some of those modifications may be significant. As such, be aware that this is not a comprehensive analysis of the subject matter covered and is not intended to provide specific recommendations to you or your business with respect to the matters addressed.