PPP Loan Recipients Receive New Guidance, Applications for Loan Forgiveness by Andrew Leonard, CPA
The SBA this week released another round of guidance relating to the Paycheck Protection Program, including two new applications borrowers must use when seeking forgiveness of loan amounts. These updates reflect borrower-friendly changes contained in the recently enacted PPP Flexibility Act of 2020.
New Applications for Loan Forgiveness
In addition to issuing a revised, long-form application for PPP loan forgiveness found here, the SBA also introduced a new EZ, short-form application requiring fewer calculations for those borrowers that meet any of the following criteria:
- They are self-employed individuals, independent contractors or sole proprietors that had no other employees at the of the PPP loan application; or
- They neither reduced employees’ salaries or wages by more than 25 percent during the eight- or 24-week covered period (or alternate covered period) nor did they reduce the number or hours of employees; or
- They experienced reductions in business activity due to COVID-19 but did not reduce employees’ salaries or wages by more than 25 percent during the eight- or 24-week covered period (or alternate covered period)
The EZ application form, found here, requires fewer calculations and less documentation for eligible borrowers. For example, borrowers qualifying to use the EZ application for PPP loan forgiveness do not need to complete the Schedule A worksheets or disclose information relating to any reductions they make to their full-time equivalent employees (FTEs) or payroll. Instead, borrowers must simply check a box to certify that they meet the criteria for using the shorter application form. However, applicants should maintain detailed records and other documentation to substantiate their claims in case the SBA ever tries to challenge the merits of their eligibility.
The SBA’s announcement this week also includes guidance concerning the relaxed rules introduced on June 5 under the PPP Flexibility Act of 2020, including:
- An extension of time for borrowers to spend loan proceeds, from eight weeks to 24 weeks, beginning of the date of loan origination and ending no later than Dec. 31, 2020, (borrowers with loans that originated before June 5, 2020, have the option to use the original 8-week, or 56-day, covered period);
- More time to make up for any reductions in payroll or full-time equivalent employees that would reduce forgivable amounts, from June 30 to Dec. 31, 2020;
- A reduction to the payroll spending rules, which now require loan recipients use at least 60 percent of loan proceeds on payroll costs rather than 75 percent. Partial loan forgiveness is still available to PPP borrowers who spend less than 60 percent of loan proceeds on payroll costs;
- An increase to the amount that borrowers may spend on “other” costs, including rent, mortgage interest and utilities, to 40 percent of loan proceeds, up from 25 percent;
- An increase in the loan repayment terms to five years from two years; and
- A change allowing borrowers to defer payroll tax when they receive loan forgiveness, meaning that that borrowers can defer payments of Social Security and Medicare tax for the 2020 tax year and instead be required to pay 50 percent those tax liabilities in 2021 and the remaining 50 percent in 2022.
Under the most recent guidance issued on June 16, owner compensation during the 24-week period does not increase three-fold for purposes of calculating loan forgiveness as it does for employee compensation. Rather, during the 24-week period, also referred to as a 168-day covered period, owner compensation is limited to the 2.5-month equivalent that borrowers used to calculate these amounts on their initial PPP loan applications. Consequently, for purposed of loan forgiveness, owner compensation is limited to $20,833 for the 24-week covered period. Other employees who receive compensation exceeding $100,000 are limited to $46,154 for the 24-week covered period.
In addition, the guidance clarifies that for purposes of calculating loan forgiveness, employer health insurance contributions made on behalf of a self-employed individual, general partners or owner-employees of an S-corporation should not be included (this is stated as a limitation as those amounts should be included in their wages). Fringe benefits for some owners, such as health insurance, may be included in wages, but this is dependent on the total compensation they receive and their ownership. Questions related to this stipulation should be directed to professional accountants.
About the Author: Andrew Leonard, CPA, is a director with Berkowitz Pollack Brant’s International Tax Services practice, where he provides tax structuring, pre-immigration planning and a wide array of international tax and consulting services to international companies, entrepreneurs, families and foreign trusts. He can be reached at the CPA firm’s Boca Raton, Fla., office at (561) 361-2000 or firstname.lastname@example.org.