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PPP Loan Forgiveness - The Next Chapter

06/22/2020

By Amy Lou Blunt, Executive Vice President and Chief Credit Officer

The rules for the Paycheck Protection Program (PPP) continue to be revised. Initially, the SBA posted an Interim Final Rule relating to the implementation of CARES Act on April 2, 2020. There has been nothing “final” about it! Subsequently, the SBA and Treasury issued additional Interim Final Rules, and then a series of revisions. While the intent of these revisions has been to make the program more accessible, and the relief granted through the loan proceeds more meaningful, the changes have created a great deal of confusion. 

We have received many questions on what terms are applicable to which loans, what period is used for calculating expenses, which expenses are covered now, and how the forgiveness process works. We'd like to share some information we received through the SBA and the U.S. Treasury Department on how the revisions to the Act affect PPP borrowers. This information is subject to change, so make sure you stay up to date via either the Small Business Administration at www.sba.gov, or the U.S. Treasury Department, at https://home.treasury.gov/policy-issues/cares/assistance-for-small-businesses.

A New Application is Released

The original Loan Forgiveness Application, SBA Form 3508, with instructions totaling 11 pages, seemed daunting, and there has been quite a bit of discussion and lobbying to simplify the process for the small business owner. On June 16, 2020, the form was revised to separate the instructions from the application form.

A second Loan Forgiveness Application Form 3508EZ has been released, which is three pages plus four pages of instructions. Which one should you use? Undoubtedly, everyone would opt for the EZ form, if possible. There are three questions to test whether or not you are eligible to use the EZ form; you only need to answer yes to one of the three. 

Covered Period is Extended

Under the provisions of the CARES Act, the PPP loan proceeds eligible for forgiveness were to be spent during the “covered period”. The covered period was originally defined as the period from February 15, 2020 to June 30, 2020, or during the eight-week period following the first disbursement of the loan. The Flexibility Act extended the “covered period” from eight weeks to 24 weeks, but no later than December 31, 2020. Borrowers that received PPP loans before June 5, 2020 may still elect to use the original 8-week covered period.

Use of PPP Loan Proceeds Clarified

This one applies to ALL PPP loans, regardless of when your loan was made.The Flexibility Act amended the requirements regarding forgiveness of PPP loans to reduce, from 75 percent to at least 60 percent, the portion of PPP loan proceeds that must be used for payroll costs, to be eligible for forgiveness. 

Amounts Eligible for Forgiveness

The amount of loan forgiveness can be up to the full principal amount of the loan plus accrued interest. The actual amount of loan forgiveness will depend, in part, on the total amount spent over the 24-week (or eight-week, if elected) period beginning on the date your PPP loan is disbursed on:

  • Payroll costs, including salary, wages and tips, up to $100,000 of annualized pay per employee, as well as covered benefits for employees (but not owners) including health care expenses, retirement contributions and state taxes on employee payroll paid by the employer
  • Owner compensation replacement, calculated on 2019 net profit.  For the eight-week covered period, this will be limited to 8/52 of 2019 profit, up to $15,385. For the 24-week covered period, this will be 2.5 months’ worth, 2.5/12 of 2019 net profit, up to $20,833.  This excludes any qualified sick leave equivalent claimed under the Families First Coronavirus Response Act
  • Payments of interest on mortgage obligations incurred before February 15, 2020, to the extent they are deductible on Form 1040 Schedule C
  • Rent payments on lease agreements in force before February 15, 2020, to the extent they are deductible on Form 1040 Schedule C
  • Utility payments under service agreements dated before February 15, 2020, to the extent they are deductible on Form 1040 Schedule C

Loan Maturity Timelines

This one gets a little tricky. For all PPP loans made on or after June 5, 2020, the loan maturity is 5 years. However, for all PPP loans made prior to June 5, 2020, the loan maturity remains two years, unless there is a mutual agreement between the Borrower and Lender to extend the loan for more than two years, not to exceed five years. This becomes relevant for any portion of the loan that is not forgiven, and you will need to repay.

The Forgiveness Process

It may be best to start with the PPP Loan Forgiveness Application Form 3508EZ Instructions for Borrowers. Read through the eligibility criteria to determine if you are able to utilize this short form. If you are able to check 1 of the 3 boxes, move forward with the balance of the instructions to complete Loan Forgiveness Application Form 3508EZ. On Page 4 of the Instructions, you will find two lists:

  1. Documents that you must submit with your Application form to your Lender
  2. Documents that you must maintain, but are not required to submit

If you are NOT eligible to apply using the EZ Form, you will need to prepare and submit the full Loan Forgiveness Application Form 3508 This application has the following components:

  1. PPP Loan Forgiveness Calculation Form
  2. PPP Schedule A
  3. PPP Schedule A Worksheet
  4. Optional Demographic Information Form

Follow the detailed instructions to complete the form and the required worksheets. On Page 6, you will again find two lists:

  1. Documents that you must submit with your Application form to your Lender
  2. Documents that you must maintain, but are not required to submit

Once you have completed and signed either Application Form, and compiled the supporting documents, submit to your Lender for review.  The Lender has been granted up to 60 days to process and recommend forgiveness amounts for applications that are complete, i.e., all required fields completed, certifications initialed, application signed, and required supporting documentation provided. 

NOTE:  Although the SBA and the Treasury have established the process for Borrowers to apply for forgiveness, the banks have not received formal guidance and are still awaiting forms, process and the vehicle (electronic portal) to submit to the SBA for approval.

Once the Lenders are able to fulfill their role in the process and submit to the SBA for approval, the SBA in turn has up to 90 days to approve the recommended forgiveness amount, and pay down (or payoff, as the case may be), the approved principal amount plus accrued interest to the date the funds are received. 

If you have any remaining loan balance at that time, the remaining principal will be amortized in a term loan at an interest rate of 1.00% over the remaining portion of the 2-year period or 5-year period (depending on when your loan was established), or some period in between, as agreed between the Borrower and the Lender.

Clear as Mud? 

I know there are a lot of moving parts, and the program does continue to change, albeit the changes have been to the Borrowers’ benefit. 

As we were at the beginning of this relief program, we at RBAZ remain aware of the strain felt by you and the impact on your businesses over the course of this pandemic. Our goal is to continue to be a conduit of information and provide support to you and our small business community to the best of our ability. We are all in this together!

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