PPP Loan Forgiveness – SBA Issues New Interim Final Rule
On Tuesday, June 16, 2020, the U.S. Small Business Administration (SBA) issued a new Interim Final Rule concerning the Paycheck Protection Program (PPP) and loan forgiveness, to bring its guidance in-line with the Paycheck Protection Program Flexibility Act, which was signed into law by President Trump on June 5, 2020. The Act is retroactive to March 27, 2020 – the date the CARES Act, which created the PPP, was signed into law.
This Interim Final Rule revises the previous third and sixth Interim Final Rules published on April 14, 2020, and April 28, 2020, respectively, and specifically addresses the amount of employee compensation which may be forgiven under the extended 24-week covered period. While forgivable employee compensation was previously capped at $15,385 per individual, based on the annual covered salary cap of $100,000 and an 8-week covered period, the cap under the new 24-week covered period is $46,154 per individual employee. The annual covered salary cap remains at $100,000 per employee.
However, owner compensation is specifically excluded from the $46,154 cap, although the forgivable figure does rise from the previous $15,385 cap under an 8-week covered period to $20,833 (a multiplier of 2.5 months is used for 24-week covered periods).
The Interim Final Rule justifies this limit by noting that maximum PPP loan amounts are based upon a 2.5 multiplier of a business’ average monthly payroll during the one-year period preceding the loan.
“For example, a borrower with one other employee would receive a maximum loan amount equal to five months of payroll (2.5 months of payroll for the owner plus 2.5 months of payroll for the employee). If the owner laid off the employee and availed itself of the safe harbor in the Flexibility Act from reductions in loan forgiveness for a borrower that is unable to return to the same level of business activity the business was operating at before February 15, 2020, the owner could treat the entire amount of the PPP loan as payroll, with the entire loan being forgiven. This would not only result in a windfall for the owner, by providing the owner with five months of payroll instead of 2.5 months, but also defeat the purpose of the CARES Act of protecting the paycheck of the employee.”
For sole-proprietorships with no employees, income replacement would now be equal to the amount of the loan, which would be $20,833.
Notably, this new Rule does not address or revise the Interim Final Rule issued on May 23, 2020, concerning the treatment under the PPP of owner-employees and their compensation.
We expect guidance on owner-employee compensation in the coming days – be very sure we will keep you posted.
For loans disbursed prior to June 5, 2020, the 2-year maturity date remains in effect, unless the borrower and lender agree to an extension, which can be up to a 5-year maturity date. For loans made after June 5, 2020, maturity is set at 5 years.
To read the new Interim Final Rule, click here.
It is worth noting that some $120 billion in PPP loan funds have not yet been distributed – it is not too late to apply, if you qualify. The deadline to apply for a PPP loan is June 30, 2020.
It is our recommendation to PPP borrowers that you track your covered expenses and time periods meticulously, and that you gather and maintain documentation verifying the number of full-time equivalent employees and their pay rates (there are several dates for which this one task must be performed), as well as your payments of eligible payroll costs, eligible mortgage and interest payments, rent, and utilities.
Stay tuned for further developments, which we all know will be forthcoming!
If you have questions on the PPP, please click here to email us directly – we are here to help.
Until next Wednesday –