On Jan. 17, 2021, the Small Business Administration (SBA) and the U.S. Department of the Treasury (Treasury) provided updated guidance in the form of frequently asked questions (FAQs) to help businesses calculate the maximum loan amount for first-draw Paycheck Protection Program (PPP) loans. The FAQs also identify the documentation required to support the maximum loan amount calculations. The guidance uses the calendar year 2019 as the reference period for payroll costs used to determine loan amounts, but borrowers may use payroll costs from either the 2019 or 2020 calendar year for their first-draw PPP loan amount calculation.
The FAQs included in the updated guidance provide example calculations for the following business types as they relate to first-draw PPP maximum loan amounts:
- Step-by-step methodology for calculating the maximum loan amount for the following borrower types:
- Borrowers who are self-employed and have no employees.
- Self-employed farmers or ranchers who report income on Form 1040 Schedule F, specifically what documentation to provide in place of Schedule C.
- Partnerships, including if partners' self-employed income should be included on the business entity level PPP loan application or on a separate PPP loan application for each partner.
- S-corporations and C-corporations.
- Nonprofit organizations, including eligible religious institutions, veterans’ organizations and tribal businesses.
- Owners of an LLC.
- Businesses who were in operation on Feb. 15, 2020, but not in operations between Feb. 15, 2019, and June 30, 2019.
- Specific documentation to be provided by the borrower in order to substantiate payrolls costs used to calculate the maximum loan amount. For example, S- and C-corporations are required to submit Form 941, state wage unemployment reporting, filed business tax returns and other documentation supporting noncash compensation. A payroll statement from a pay period that crosses Feb. 15, 2020, must also be provided to prove the business was in operation and had employees as of that date.
The guidance also states that businesses part of the same corporate group cannot receive first-draw PPP loans totaling more than $20 million; additionally, businesses are considered part of a single corporate group if they are directly or indirectly majority owned by a common parent organization.
In addition to the guidance within the updated FAQs, the SBA also issued two procedural notices on Jan. 15, 2020, covering certain loan forgiveness topics and excess loan amount errors. The first procedural notice covers loan forgiveness topics over certain duties lenders have toward borrowers, such as:
- Borrowers with a loan of less than $150,000 are eligible to use SBA Form 3508S to apply for loan forgiveness. Borrowers may resubmit loan forgiveness applications on Form 3508S in lieu of previously filed Forms 3508EZ or 3508 at any time until the SBA notifies the lender of its forgiveness decision. If a borrower resubmits using Form 3508S, the lender must withdraw previously filed forgiveness applications from the SBA and has 60 days to review the resubmitted application and render a decision to the SBA on the new forgiveness application.
- Lenders must make certain specific communications to borrowers at different points during the forgiveness application process to satisfy lender notification responsibilities. Specifically, borrowers must be informed by the lender within five days of certain key events:
- When the lender denies loan forgiveness in full.
- When the lender denies forgiveness in full, the borrower appeals to the SBA and the SBA declines the request for review.
- When the SBA completes a loan review and issues a decision, including decisions on full or partial forgiveness.
- When the SBA remits the loan forgiveness amount to the lender.
The first procedural notice also provides details regarding information that lenders must include in communications to borrowers.
The second procedural notice covers PPP excess loan amount errors, which is defined as “a borrower or lender error made in good faith that caused a borrower to receive a PPP loan amount that exceeds the borrower’s correct maximum loan amount under the CARES Act and the Economic Aid Act.” An intentional misstatement of the maximum loan amount is not considered an excess loan error.
The procedural notice gives two examples of a borrower error and one example of a lender error. Examples of borrower errors included mistakenly failing to subtract amounts paid to employees in excess of $100,000 or including independent contractors in the determination of the maximum loan amount. The example of an excess loan amount error for the lender included an excess loan amount issued due to a data entry error when approving the PPP loan.
Borrowers may not receive loan forgiveness on any amounts that exceed the correct maximum loan amount as permitted by the relevant statutes regardless of whether the excess loan amount arose through error or fraud. If the lender or borrower identify an error prior to a decision being submitted to the SBA, the lender will deny forgiveness for the excess loan amount. If a forgiveness decision has been issued to the SBA by the lender, the lender should withdraw the forgiveness application request, and a revised loan forgiveness application should be submitted requesting the correct loan forgiveness amount. If the SBA has already remitted payment to the lender pursuant to a final loan forgiveness decision, the lender must promptly notify the SBA.
The procedural notice also discusses the SBA’s guarantee on PPP loans, stating that an excess loan error made by the borrower would not invalidate the SBA’s guarantee to the lender. However, the lender must have performed a good-faith review of the borrower’s calculation with a reasonable period of time and not identified the error. Excessive unidentified excess loan amount errors made by the borrower after a good-faith review by the lender may indicate the lender is not fulfilling its responsibilities and could impact the SBA guarantee. As such, this type of lender error under PPP rules will invalidate the SBA guarantee on the excess loan amount.
If an excess loan amount error is identified, forgiveness will be denied for the excess loan amount, and the borrower must begin making payments on the amount of the remaining loan.
For more information on the updated guidance or for questions on how to calculate your business’s first-draw loan amount in 2021, reach out to us at CARESActQuestions@dhg.com.