Posted on May 18 2020

Coronavirus Update 5/18/20 – SBA Releases Forgiveness Application for PPP Loans

EMERGENCY UPDATE — Monday, May 18 —

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The Small Business Administration has released the Paycheck Protection Program loan forgiveness application.
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To our clients: 

Last Friday evening, May 15, 2020, the Small Business Administration released Form 3508 – Paycheck Protection Program Loan Forgiveness Application. This is the form you will be required to complete if you want to request forgiveness of your Paycheck Protection Program (PPP) loan. You will submit the completed form to your lender, who is ultimately responsible for determining the amount of forgiveness, any time after the end of the eight-week period which began on the date you received the loan. Your lender will have 60 days to notify you of its determination.

Download the complete Form 3508 and related instructions at this link:

https://www.sba.gov/sites/default/files/2020-05/3245-0407%20SBA%20Form%203508%20PPP%20Forgiveness%20Application.pdf

It was our expectation that this form would address many, if not all, of the concerns that have been voiced about PPP loan forgiveness. While some such concerns have been addressed, others have not and, perhaps not surprisingly, there are some new questions and concerns.

Over the weekend, the AICPA issued a response stating “more guidance and flexibility needed to support critical small business relief process.” Of particular importance is the AICPA’s continued recommendation for either 1) a delay to the start of the critical eight-week period (to more closely coincide with the end of government-imposed shutdown orders) or 2) extending the period to more than eight weeks.

For a number of reasons, forgiveness for most recipients of PPP loans will be less 100%. Understanding the PPP loan forgiveness process is important, as proper planning, timing, and payment of payroll costs and eligible nonpayroll costs during the crucial eight-week period can increase your level of forgiveness. Remember, if at the end of the forgiveness process there remains a balance you have to pay back to the SBA, it’s not a bad thing. Any loan that remains after forgiveness is payable over a two-year period with interest at 1%, and there are no payments required for the first six months. These are very attractive terms for any business. 

Overview of Form 3508

When you visit the attached link, you will see that there is a total of 11 pages, of which seven are instructions. There are four pages that you will need to complete. In order of preparation, they are:

  1. PPP Schedule A Worksheet (page 9, instructions on pages 7 & 8)
  2. PPP Schedule A (page 6, instructions on page 5)
  3. PPP Loan Forgiveness Calculation Form (pages 3 & 4, instructions on pages 1 & 2)

Page 10 is a list of documents that you will be required to submit along with your PPP Loan Forgiveness Application. Page 11 is a PPP Borrower Demographic Information Form, which is optional. You are not required to complete page 11.

PPP Schedule A Worksheet

The instructions to the PPP Schedule A Worksheet are, for the most part, easy to follow. There are a few items, however, that warrant further explanation:

• This worksheet allows you to determine the amount of eligible compensation for each employee, excluding compensation paid to owners (i.e. shareholders in S-corporations, general partners in partnerships, and sole proprietorships).

• There are two tables (Table 1 and Table 2) included on this worksheet. The criteria for each are easy to follow. Note that, for any employee, the amount reported in the “cash compensation” column cannot exceed $15,385 (the maximum allowable annual compensation of $100,000 per employee prorated to 56 days).

• For purposes of these two tables, you have two options regarding the Covered Period – you can select a Covered Period of eight weeks, beginning on the date you received your loan or you can select the Alternative Payroll Covered Period, which is the eight-week period beginning on the first day of the first pay period following the date you received your loan. This method allows the covered period to align with the beginning of a pay period. See page 1 of the instructions for further information.

• You are required to determine and report “Average FTE.” While these calculations are explained on page 7 on the instructions, you may have questions. We recommend you call us to discuss your particular circumstances.

• You are also required to determine and report “Salary/Hourly Wage Reduction” which could reduce the amount of your loan forgiveness. Again, these calculations are explained on page 7 on the instructions, and you may have questions. We recommend you call us to discuss your particular circumstances. It should be noted that there is a safe harbor that will, if met, allow you to avoid a reduction of forgiveness in this regard. If there has been a reduction in salary during the covered period, and you restore such compensation to its February 15, 2020 amount (i.e. the level prior to COVID-19) by June 30, 2020, forgiveness will not be reduced as it relates to salary/hourly wage reductions. Note that the June 30, 2020 date applies even if it is after the end of your eight-week period.

• The last section of the worksheet is where you can determine if you meet an FTE Reduction Safe Harbor. This Step 4 is important. If you can restore your total FTE to the amount reported in step 2 (i.e. the amount of FTEs as of February 15, 2020 – the level prior to COVID-19) by June 30, 2020, forgiveness will not be reduced as it relates to FTE’s. Note that the June 30, 2020 date applies even if it is after the end of your eight-week period.

PPP Schedule A

Most of the information reported on Schedule A carries over from the PPP Schedule A Worksheet. You will have to determine the amounts to be entered on lines 6, 7, 8, and 9. As was the case for the Schedule A Worksheet, the instructions are easy to follow. Here are several items of which to be aware:

• The amounts to be entered for lines 6, 7, and 8 are for employees only. Do not include any of these amounts paid on behalf of owners (i.e. shareholders in S-corporations, general partners in partnerships, and sole proprietorships).

• To this point, no information has been reported for compensation paid to owners (i.e. shareholders in S-corporations, general partners in partnerships, and sole proprietors). Line 9 is where such information is reported. It is important to remember that the maximum amount that can be reported for each owner is $15,385 and that, unlike non-owner employees, this amount includes payments for health insurance and retirement plan funding. For owners, such payments are considered compensation, and any such payments that result in compensation in excess of $100,000 are not forgivable.

PPP Loan Forgiveness Calculation Form

The majority of this form consists of amounts transferred from Schedule A. The lines you are interested in are 8 through 11. Lines 8, 9, and 10 represent three potential forgiveness amounts, and all are the product of either the information provided on Schedule A or the loan amount. Line 11 is the forgiveness amount – the lowest of lines 8, 9, and 10.

For eligible nonpayroll costs, you will have to complete the following lines on this form:

• Line 2 – Business Mortgage Interest Payments – this amount represents the total interest you pay during the eight-week covered period on any loan secured by real or personal property for loans in place as of February 15, 2020. Loans secured by personal property would include equipment and vehicles. It is not known if interest paid on a line-of-credit which is secured by business assets can be included as a potentially forgivable cost.

• Line 3 – Business Rent or Lease Payments – this amount represents the total rent or lease payments you make during the eight-week covered period on any lease of real or personal property that was in force before February 15, 2020. This includes payments for real estate or equipment.

• Line 4 – Business Utility Payments – included here will be payments for electric, gas, water, transportation, telephone, and internet access. Transportation is defined as gas used when driving a business vehicle. It appears that utilities may include trash collection and security monitoring, but you should confirm these two items with your lender.

• Remember that eligible nonpayroll costs can only be forgiven to the extent that they do not, in total, exceed 25% of the total amount to be forgiven. Said another way, the maximum amount of nonpayroll costs that can be forgiven cannot exceed 1/3 of your payroll costs (line 1).

Final Thoughts

One final note regarding forgiveness. In our Update on April 19, 2020, we noted that PPP guidance at that time was unclear as to whether potentially forgivable costs had to be “incurred and paid” OR “incurred or paid.” The instructions to SBA Form 3508 provide the following clarification:

• Eligible payroll costs are those incurred or paid during the Covered Period or the Alternative Payroll Covered Period. “Payroll costs are considered paid on the day that paychecks are distributed or the Borrower originates an ACH credit transaction. Payroll costs are considered incurred on the day that the employee’s pay is earned. Payroll costs incurred but not paid during the Borrower’s last pay period of the Covered Period (or Alternative Payroll Covered Period) are eligible for forgiveness if paid on or before the next regular payroll date.”

• Eligible nonpayroll costs (interest, rent or lease, and utilities) are those costs “paid during the Covered Period or incurred during the Covered Period and paid on or before the next regular billing date, even if the billing date is after the Covered Period.”

• The end result is that certain costs incurred before the Covered Period and paid during the Covered Period will be eligible for forgiveness. Likewise, certain costs incurred during the Covered Period but not paid until after the Covered Period will also be eligible for forgiveness.

We anticipate continued clarification and guidance from the SABA regarding the issue of forgiveness. We are also waiting to learn if Congress will overturn IRS Notice 2020-32 (see Coronavirus Update 5/4/20 – IRS Rules Expenses Paid with PPP Loan Proceeds are Not Deductible). Please follow our website for continuing updates as more information becomes available.

MillerSearles LLC | Certified Public Accountants | Advisors