SBA Publishes PPP Flexibility Loan Forgiveness Interim Final Rule and Updated Applications

By Victor J. Roehm III, Jennifer R. Yee, Brett W. Johnson and Eric L. Kintner

On June 19, the Small Business Administration (SBA) published an update to its Interim Final Rules (New IFR) to reflect changes to the Paycheck Protection Program (PPP) put in place under the new Paycheck Protection Program Flexibility Act of 2020 (Flexibility Act). In addition, the SBA provided a new PPP Loan Forgiveness Application and Instructions as well as a new PPP “EZ” Loan Forgiveness Application and Instructions. Below are some key changes in the New IFR and the new PPP forgiveness applications:

1. New 24-week forgiveness period; existing borrowers can still elect eight-week forgiveness period

Consistent with the Flexibility Act, the New IFR notes that the forgiveness period for PPP loans has been extended from eight weeks to 24 weeks, while borrowers who received PPP loans before June 5, 2020 can elect to use the original eight-week forgiveness period. We anticipate that the SBA will provide guidance on how such existing borrowers will notify lenders of their forgiveness period election.                   

2. New PPP loans have five-year maturity period and longer covered period

Consistent with the Flexibility Act, the New IFR provides for a five-year minimum maturity period for new PPP loans made on or after June 5, 2020, and permits lenders and borrowers to extend the maturity date of PPP loans made before June 5, 2020 by mutual agreement.  In addition, the New IFR extends the original covered period (i.e. the time period when the PPP loans may be issued and used) from June 30, 2020 to December 31, 2020.

3. 75/25 rule changed to 60/40 rule

The first PPP Interim Final Rule added a requirement that at least 75 percent of the PPP loan amount for which forgiveness is sought must have been used to cover payroll costs and no more than 25 percent can be used for non-payroll costs. The third PPP Interim Final Rule stated that at least 75 percent of the PPP loan proceeds must be used for payroll costs.  The New IFR updates these earlier Interim Final Rules to reflect the reduction from 75 percent to 60 percent of these requirements under the Flexibility Act.

The Flexibility Act states that to receive forgiveness at least 60 percent of the “covered loan amount” must be spent on payroll costs, and up to 40 percent of such amount may be spent on non-payroll costs, although “covered loan amount” was not defined in the Flexibility Act. The New IFR Act notes that the Flexibility Act changed the requirements regarding forgiveness of PPP loans to reduce, from 75 percent to 60 percent, “the portion of PPP loan proceeds that must be used for payroll costs for the full amount of the PPP loan to be eligible for forgiveness” (emphasis added). The italicized language was not included in the third PPP Interim Final Rule regarding minimum amount of PPP loan proceeds to be used on payroll costs.  As a result, the New IFR could be read as narrowing the original PPP loan proceeds rule to only apply to those borrowers that seek forgiveness for the full amount of the PPP loan. 

4. Employee compensation cap for 24-week forgiveness period increased to $46,154; owner compensation cap limited to $20,833 for 24-week forgiveness period.

The CARES Act capped for forgiveness purposes employee cash compensation paid up to $100,000 on an annualized basis over the course of the forgiveness period. For the original eight-week forgiveness period, this employee compensation cap amount is $15,384.62. For the new 24-week forgiveness period, the New IFR confirms that the employee cash compensation cap amount will be $46,154.

The SBA previously issued a special rule on PPP loan proceeds used to pay owner compensation, which capped owner compensation for the eight-week forgiveness period as being limited to 8/52 of the borrower’s 2019 net profit, up to $15,385, period.  For the 24-week forgiveness period, the New IFR provides that the cap for ownership compensation is limited to 2.5/12 of the borrower’s 2019 net profit, up to $20,833.  The SBA determined that the ownership compensation cap should be limited to 2.5 months’ worth of 2019 net profits in order to prevent borrowers from firing all their employees and still being able to seek forgiveness for the full PPP loan amount used only to pay owner compensation.

5. Updated PPP forgiveness application and new “EZ” forgiveness application

To seek forgiveness, a PPP loan borrower may now either complete and submit the updated Form 3508 PPP Loan Forgiveness Application (Standard Application) or the new Form 3508EZ PPP Loan Forgiveness Application (EZ Application). The EZ Application requires fewer calculations than the Standard Application. Borrowers can use the EZ Application if they meet at least one of the following three requirements:

1. Borrower is self-employed and does not have any employees, and borrower did not include any employee salaries in its PPP loan application; or

2. Borrower did not reduce (a) the number of its employees or the average paid hours of employees between January 1, 2020 and the end of the applicable covered period (or employee reduction safe harbors were met related to the inability to re-hire employees or hire similarly qualified employees), and (b) any employee’s salary or wages by more than 25 percent during the applicable covered period when compared to the period from January 1, 2020 to March 31, 2020; or

3. Borrower did not reduce any employee salary or hourly wages by more than 25 percent during the applicable covered period when compared to the period from January 1, 2020 to March 31, 2020, and borrower was unable to operate at the same level of business activity as before February 15, 2020 during the applicable covered period due to compliance with applicable COVID-19 government requirements or guidance issued between March 1, 2020 and December 31, 2020 by CDC, OSHA or the Secretary of Health and Human Services.

The updated Standard Application is substantially similar to the SBA’s original PPP Forgiveness Application, although the updated Standard Application includes the new changes from the Flexibility Act, such as the expanded full-time equivalent employee safe harbors.