Sean Bryan Authors Article on Revisions to PPP Loan Rules for Loan Forgiveness

Sean Bryan's article—entitled "Revisions to PPP Loan Rules for Loan Forgiveness”—addresses changes in the law, as well as the announcement of a simplified PPP Loan Forgiveness Application Form.

As the period for applying for a Paycheck Protection Program loan closes next week on June 30, attention is fully on maximizing the forgiveness of the existing PPP loans.  For perspective, as of June 20, there remained $128.354 billion available for PPP loans, and since June 6, there have been only 134,677 new PPP loans for a total of about $2.4 billion approved.  

Following the enactment of the Paycheck Protection Program Flexibility Act of 2020 on June 5, the Small Business Administration and US Treasury Department, on June 22, posted revisions to prior Interim Final Rules regarding PPP loan forgiveness and SBA review.  These revisions address changes in the law, as well as the promulgation of a simplified PPP Loan Forgiveness Application Form 3508EZ for PPP loan borrowers who are self-employed without employees or for employers who do not have sufficient reductions in employee headcount or wages to trigger a reduction in the forgiveness amount, as described in the instructions:

Loan Forgiveness  

Most of the changes are language revisions to conform to the statutory changes, but there are a few pieces of new information.  First, the revisions clarify that a borrower may submit a loan forgiveness application prior to the end of the new 24-week “covered period” if all the PPP loan proceeds have been fully used, but, for purposes of determining and applying employee headcount or wage levels that have been reduced below 25%, the entire 8-week or 24-week excess salary reduction must be accounted for; it cannot be cut off mid-period by an early application.  

The changes expand and clarify caps on owner-employees by separately addressing owner-employees of C corporations, S corporations, Schedule C or F filers, and general partners.  While C-corporation owner-employees are capped at 2019 cash compensation and employee retirement and health insurance contributions, S-corporation owner-employees may not include health insurance contributions (because they are already included in cash compensation).  Schedule F filers were added Schedule C filers as capped at 2019 net profit.   

The new Rule reflects two new exemptions on the reduction of loan forgiveness based on employee availability and business activity set forth in the Flexibility Act.  The exemption for employees whose hours were reduced and who declined an offer of restoration was not addressed in the Flexibility Act, and so prior rules are retained, but prior rules regarding employees who refuse and offer to be rehired is superseded by the new rules, which relate to both an inability to rehire employees or hire replacement employees, as well as a reduction in business activity resulting from compliance with requirements for sanitation, social distancing or other worker or customer safety requirements issued by the Secretary of Health and Human Services, the Centers for Disease Control and Prevention, or the Occupational Safety and Health Administration.  While the rules specify these three federal agencies, they also provide for a reduction of business activity based on indirect compliance and provide as an example of this a local government order for business shutdowns based on CDC guidance issued in March 2020.  

To obtain forgiveness based on the business activity exemption, applicants must document in good faith the reduction in activity and must include copies of applicable COVID requirements or guidance for each business location and relevant financial records evidencing the decline in business activity.  To document the indirect effect of government requirements, an applicant must include a copy of a local government shutdown order that expressly references an applicable federal agency requirement of guidelines.  

SBA Review  
With respect to SBA review of loan forgiveness applications, the prior rules granted a borrower whose loan forgiveness application was denied by the lender the right to have the SBA review the decision.  The new rules provide that the SBA may decline to review the denial but provides no standards by which the SBA makes that decision.  Additionally, if a lender receives notice of an SBA review of a PPP loan before it receives the loan forgiveness application, the new rules require that the borrower submit all of the applicable documentation that the loan forgiveness instructions otherwise require the borrower to maintain but not submit.  

Link to new Interim Final Rule: