On Jan. 19, 2021, the Small Business Administration (SBA) released a Paycheck Protection Program (PPP) Interim Final Rule (IFR) covering PPP loan forgiveness requirements and loan review procedures as amended by the Economic Aid Act (EAA). The EAA was enacted on Dec. 27, 2020, in order to extend the authority to make PPP loans through March 31, 2021, which subsequently allowed what is known as second-draw PPP loans for certain qualified borrowers. The purpose of the 62-page IFR is to consolidate prior rules for PPP loan forgiveness and loan review procedures as well as address certain changes to the forgiveness rules as a result of the EAA; the IFR also applies to PPP loans for which no loan forgiveness payment had been provided by the SBA as of Dec. 27, 2020. Along with the issuance of the IFR, the SBA issued revised loan forgiveness application forms and instructions for Forms 3508S, 3508EZ and 3508.
For the covered period of the PPP loan, costs that may be eligible for forgiveness still include payroll costs, interest payments on mortgage obligations, rent and business utility payments. The amendments to the EAA now allow eligible costs for forgiveness to include operations expenditures for certain software and cloud computing services, property damage costs due to vandalism or looting that occurred during the 2020 disturbances, supplier costs that are essential to the operation of the business and worker protection expenditures for capital improvements and employee protective equipment expenditures meeting specific requirements.
Borrowers who have received a forgiveness decision from the SBA prior to Dec. 27, 2020, are unable to use these new costs towards forgiveness. Eligible nonpayroll costs are still subject to the previous cap and cannot exceed 40 percent of the forgiveness amount. As with previous guidance, payroll costs must have been paid or incurred during the determined covered period to be eligible for forgiveness.
The concept of the alternative payroll covered period has been removed from the guidance. Borrowers have flexibility in determining the covered period as a date that begins on the date the PPP loan is disbursed and ending on a date selected by the borrower occurring during the eight-week and 24-week period after the date of disbursement.
Covered periods for first-draw and second-draw PPP loans may not overlap, and borrowers must use all proceeds from a first-draw PPP loan, including any increase on such first draw PPP loan, before disbursement of the second-draw PPP loan. Similar to payroll costs, nonpayroll costs are eligible for forgiveness if they were paid or incurred during the covered period.
Reductions to Loan Forgiveness Amount
The updated forgiveness guidance continues to include exemptions to required reductions in a borrower’s loan forgiveness amount based on reductions in full-time equivalent employees or employee salary and wages. These exemptions continue to include borrowers who:
- Have eliminated the wage or hour reduction on or before Dec. 31, 2020, or no later than the last day of the loan’s covered period if it was made after Dec. 27, 2020.
- Offered to rehire the employee or restore employee hours at same salary and wages but were rejected by the employee.
- Terminated an employee, or have an employee voluntarily resign or request a reduction in work hours.
- Have a PPP loan of $50,000 or less.
- Document an inability to return to the same level of business activity at which the borrower was operating before Feb. 15, 2020, due to compliance with certain government-agency COVID-19 regulations or guidance.
- Document an inability to rehire individuals who were employed as of Feb. 15, 2020, and the inability to rehire similarly qualified individuals on or before December 31, 2020 (or for PPP loans made after Dec. 27, 2020, the end of the loans covered period). To use this exception, the borrower must still report the rejection of rehire to the applicable state unemployment agency within 30 days of the rejection.
Forgiveness Process for Borrowers
For both first-draw and second-draw PPP loans, borrowers must submit a completed Loan Forgiveness Application (SBA Form 3508, 3508EZ, 3508S or lender equivalent) to the lender servicing the loan. Borrowers applying for forgiveness of second-draw loans over $150,000 must submit their forgiveness application for the first-draw loan before or at the same time as the forgiveness application for the second-draw loan, even if the calculated amount of forgiveness for the first-draw loan is zero.
Previously established timelines for lender and SBA review and approval of loan forgiveness decisions remains unchanged. Lenders have 60 days to issue a decision to the SBA regarding loan forgiveness once the completed application is received. If the lender determines the borrower is entitled to forgiveness, they will alert the SBA, which will then have no more than 90 days to remit the appropriate forgiveness amount to the lender.
Advances received on Economic Injury Disaster Loans (EIDL) will no longer reduce the amount of forgiveness to which the borrower is entitled and will not be deducted from the forgiveness payment made from the SBA to the lender.
Borrowers who do not apply for loan forgiveness within 10 months after the last day of the maximum covered period of 24 weeks must begin making payments on the PPP loan. The EAA is silent on what covered period applies for borrowers who do not ask for forgiveness, so the SBA interpreted the payment provision as the maximum covered period of 24 weeks, which is the longest period available.
Lender responsibilities remain relatively unchanged regarding the level of diligence required when reviewing a borrower forgiveness application. Once a borrower submits the appropriate Loan Forgiveness Application., the lender must confirm receipt of borrower certifications in the form as well as any documentation provided by the borrower to certify payroll and nonpayroll costs. Lenders should conduct a good-faith review of the borrower’s calculations and documentation to determine the amount eligible for loan forgiveness. If any errors are identified by the lender regarding the borrower’s calculation, lenders are to remedy the issue with the borrower.
DHG is prepared to answer your questions regarding the new IFR as well as any topics related to PPP loans and forgiveness requirements. For more information, reach out to us at SBAQuestions@dhg.com.