Business Loan Program Temporary Changes: The SBA and Treasury Provide New Guidance on Interim Final Rules to Clarify the Loan Forgiveness Application Timeline and Owner Compensation

On Monday, June 22, 2020, the U.S. Small Business Administration (SBA) and the Department of Treasury released new guidance about the Paycheck Protection Program (PPP), Revisions to Loan Forgiveness Interim Final Rule and SBA Loan Review Procedures Interim Final Rule.

This new guidance outlines two significant changes affecting PPP loan borrowers:

  • Application Timeline: When can a borrower apply for loan forgiveness? 

A borrower can apply for loan forgiveness at any time on or before the loan maturity date.  If; however, the borrower applies for forgiveness before the end of the covered period, and if any employee’s salaries or wages have been reduced by more than 25 percent, the borrower must account for the excess salary reduction for the full eight-week or 24-week covered period.

  • Owner Compensation: What are the expanded limitations on owner compensation? 

The release of Revisions to the Third and Sixth Interim Final Rules on June 17, 2020, increased the maximum compensation for all employees and owners. The new interim rules added that the employer portion of retirement plan funding for owner-employees of S-Corporations and C-Corporations is now capped at 2.5 months’ worth of the 2019 contribution amount. In addition, healthcare costs paid on behalf of owner-employees of S-Corporations are not eligible for forgiveness.

Additional minor revisions to existing guidance are also included in the new regulations. These updates address the extension of the covered period derived from the June 5, 2020 enactment of the Paycheck Protection Program Flexibility Act (H. R. 7010).

Tarlow is Here to Help – Please Contact Us with Questions 

Tarlow Partners and staff members are closely monitoring tax-related legislation and regulations, and new guidance from the SBA and the Department of Treasury. We will continue to send updates and communications about relevant news and changing guidelines.

We are readily available to assist business owners in submitting Loan Forgiveness applications. If you have any questions about interpreting these new requirements and maximizing PPP loan forgiveness, please contact your Tarlow advisor for assistance.

The Small Business Administration and the Treasury Department Announce Streamlined Paycheck Protection Program Loan Forgiveness Applications

On Wednesday, June 17, 2020, the Small Business Administration (SBA) and the Treasury Department unveiled a streamlined loan forgiveness application for the Paycheck Protection Program (PPP). The new five-page “borrower-friendly” application, which can be found here, provides more flexibility to small businesses to receive forgiveness on their SBA-backed loans. The original eleven-page application was released in mid-May.

The SBA and the Treasury also released a three-page EZ Version, which applies to borrowers who are self-employed or have no employees; did not reduce the salaries or wages of their employees more than 25 percent and did not reduce the number of hours of their employees; or experienced reductions in business activity as a result of the coronavirus pandemic and did not reduce the salaries or wages of their employees by more than 25 percent.

The PPP was included as part of the CARES Act, the $2.2 trillion program that included economic impact payments to individuals and aid to businesses in response to the novel coronavirus pandemic. The program was initially launched on April 3 with $349 billion in funding to help small businesses remain open and retain employees. The loans would be forgiven if businesses retained their employees for up to eight weeks. Many small businesses had problems accessing or applying for the loans and the funds were quickly depleted. The program resumed on April 27 and Congress provided another $320 billion; however, the rules, eligibility, and forgiveness criteria have constantly changed. The program does not run out until June 30 and as of Tuesday, more than 4.6 million loans worth close to $513 billion had been distributed through the program. Congress allocated about $610 billion to the PPP, leaving approximately $120 billion to $130 billion in the fund.

Earlier this month, Congress provided more flexibility by passing the PPP Forgiveness Act to encourage more businesses to sign-up and to alleviate concerns regarding the loan forgiveness.  This was helpful to businesses such restaurants and the hospitality industry.  It extends the covered period from eight to 24 weeks, amends the requirement that no more than 25 percent of the loan forgiveness amount be attributed to non-payroll costs, and allows up to 60 percent to be used for non-payroll costs. The bill also included several other changes, including extending the deferral of payments of loan principal, interest and fees, from the current six months, until the date when the SBA pays the forgiveness amount to the lender. The new loan forgiveness application from the SBA reflects these changes.

The EZ application requires fewer calculations and less documentation for eligible borrowers. Details about the applicability of the various provisions are available in the instructions accompanying the new EZ application form. Both applications give borrowers the option of using the original eight-week covered period, if their loan was made before June 5, 2020, or the extended 24-week covered period under the new law. According to the SBA and the Treasury, the changes will result in a more efficient process and ease the process for businesses to realize full forgiveness of their PPP loan.

Please view the following applications for more information:

The EZ Forgiveness Application

The Full Forgiveness Application

The SBA’s new Interim Final Rule revises the previous Third and Sixth Interim Final Rules, published on April 14, 2020, and April 28, 2020, respectively. It specifically addresses the amount of employee compensation that may be forgiven under the extended 24-week covered period. While forgivable employee compensation was previously capped at $15,385 per individual, based on the annual covered salary cap of $100,000 and an 8-week covered period, the cap under the new 24-week covered period is $46,154 per individual employee. The annual covered salary cap remains at $100,000 per employee. However, owner compensation is specifically excluded from the $46,154 cap, although the forgivable figure does rise from the previous $15,385 cap under an 8-week covered period to $20,833 (a multiplier of 2.5 months is used for 24-week covered periods).

Tarlow is Here to Help – Please Contact Us with Questions

Tarlow Partners and staff members are closely monitoring tax-related legislation and regulations, and new guidance from the SBA and the Department of Treasury. We will continue to send updates and communications about relevant news and changing guidelines.

We are readily available to assist business owners in submitting Loan Forgiveness applications. If you have any questions about interpreting these new requirements and maximizing PPP loan forgiveness, please contact your Tarlow advisor for assistance.

SBA Releases Final Rule on Loan Increases for Partnerships

On Wednesday, May 13, 2020, the Small Business Administration (SBA) released Interim Final Rule 9 (“IFR 9“), which provides important guidance for partnerships on loan increases.

As an update, partnerships that received a Paycheck Protection Program (PPP) loan and only included the partnership’s employees in the loan amount calculation are given the option of submitting a request to the SBA to increase the PPP loan amount to include partner compensation. The request would allow the lender to make an additional disbursement, although the previously issued Interim Final Rule on Disbursements (Interim Final Rule – Disbursements of PPP Proceeds) requires PPP loans to be disbursed in a single disbursement. Although an additional disbursement is allowed, the SBA clearly stated that maximum loan amounts still apply, including $10 million for an individual borrower or $20 million for a corporate group.

As background, on April 14, 2020, the SBA released an interim final rule (“IFR 2”) to provide guidance for individuals with self-employment income. The rule, “Guidance on SBA Loans for Self-Employed,” stated, “if you are a partner in a partnership, you may not submit a separate PPP loan application for yourself as a self-employed individual. Instead, the self-employment income of general active partners may be reported as a payroll cost, up to $100,000 annualized, on a PPP loan application filed by or on behalf of the partnership.”

On April 28, 2020, the Department of the Treasury posted an interim final rule (“IFR 4”) that provided an alternative criterion for calculating the maximum loan amount for PPP loans issued to seasonal employers.  It was expected that compensation to partners was not to be included in calculating the PPP loan amount.  With concerns of diminishing PPP funds, many partnerships filed their applications quickly, and without including partner compensation in their calculations.  The Interim Final Rule offers further options for ‘partnerships that received a PPP loan that did not include any compensation for its partners’ on their application.

Tarlow is Here to Help!

We are readily available to assist partnerships who applied for a PPP loan and did not include partner compensation as part of the loan amount calculation.

Please contact your Tarlow advisor for assistance and to discuss how to calculate partner income for the loan amount increase, or how to interpret and document spending requirements for PPP forgiveness.

Tarlow Update: SBA Announces Additional Guidance on the Paycheck Protection Program Certification Requirement

We would like to provide an update released today, May 13, 2020, by the Small Business Administration (SBA) regarding how the SBA will review borrowers’ required good-faith certification concerning the necessity of their loan request.

According to the SBA, “When submitting a Paycheck Protection Program (PPP) application, all borrowers must certify in good faith that ‘current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.’ SBA, in consultation with the Department of the Treasury, has determined that the following safe harbor will apply to SBA’s review of PPP loans with respect to this issue: Any borrower that, together with its affiliates, received PPP loans with an original principal amount of less than $2 million will be deemed to have made the required certification concerning the necessity of the loan request in good faith.”

Borrowers with loans greater than $2 million that do not satisfy this safe harbor may have an adequate basis for making the required good-faith certification, based on their individual circumstances. The SBA previously stated that all PPP loans in excess of $2 million will be subject to review by SBA for compliance with the program requirements as set forth in the PPP Interim Final Rules and in the Borrower Application Form. If, during the course of the SBA’s review, it is determined that a borrower lacked an adequate basis for the required certification regarding the necessity of the loan request, SBA will seek repayment of the outstanding PPP loan balance and will inform the lender that the borrower is not eligible for loan forgiveness.  If, after receiving notification from SBA, the borrower repays the loan, SBA will not pursue administrative enforcement with respect to the certification regarding the necessity of the loan request. In addition, SBA’s determination concerning the certification will not affect SBA’s loan guarantee.

Tarlow is here to help!

Our Partners and staff members are closely monitoring tax-related legislation and regulations and will continue to update you by sending communications about relevant news and changing guidelines. If you have any questions, please contact your Tarlow advisor.

COVID-19 Update: Paycheck Protection Program – Initial Guidance Issued

On Tuesday evening, March 31, 2020, the U.S. Treasury and Small Business Administration (“SBA”) released their initial Information Sheet (“Fact Sheet”) as well as the Application Form for the Paycheck Protection Program (the “PPP”).   As mentioned in previous email alerts, the PPP is part of The CARES Act, which appropriated $349 billion to enable eligible businesses to apply for loans from approved lenders, which are guaranteed by the SBA.  Proceeds from these loans are intended to be used to cover operational costs such as payroll, benefits, rent, utilities, and mortgage interest payments.

The Fact Sheet provides important guidance for the PPP, including the dates that applicants can begin to apply for PPP loans through participating SBA Lenders:

  • Business and sole proprietors as soon as April 3, 2020; and
  • Independent contractors and self-employed individuals as soon as April 10, 2020.

The guidance issued and the Fact Sheet are similar to the provisions in the CARES Act; however, there are some important differences to the initial guidance issued, which we have highlighted below.  We should note that it is still possible the SBA issues additional rules and regulations regarding the PPP, and we will keep you informed immediately if that occurs.

Maximum Loan Amount 

The CARES Act provides that the maximum PPP loan a borrower can receive is equal to the lesser of (i) 2.5x TTM average monthly payroll costs and (ii) $10 million.   The sample application indicates that (non-seasonal) business applicants will use the average monthly payroll for 2019 (rather than include January or February 2020 in the calculation).

Loan Forgiveness

The CARES Act provided that loans will be eligible for forgiveness in an amount not to exceed the sum of payments for permitted payroll costs, interest payments on mortgages, rent, and utilities paid within 8 weeks from the origination of the PPP Loan.  The Fact Sheet indicates that “due to likely high subscription, it is anticipated that not more than 25% of the forgiven amount may be for non-payroll costs.” This factor needs to be considered if you were planning on applying for PPP loans to cover non-approved costs as a portion of such costs may not be subject to loan forgiveness.

Payroll Costs

In addition to employee compensation, certain paid vacation and leave, cash tips, severance payments, group healthcare benefits, retirement benefits, and payroll taxes, the CARES Act also seemed to define “payroll costs” to include payments to independent contractors as noted in our previous correspondences.  The description of payroll costs in the Fact Sheet suggests that compensation to independent contractors will be considered “payroll costs” (i.e., for purposes of calculating PPP loan size and loan forgiveness amounts) if the applicant is the independent contractor.  This could imply that businesses that pay independent contractors will not be able to include such compensation in the calculation of payroll costs.  We will be reviewing this in-depth to get additional guidance for you.


Interest Rate, Maturity Date and Payment Deferral Provisions

Initial guidance was that the interest rate on the PPP loans would be set at 4% and have a 10-year term.  Additionally, it was widely believed there would be no payments on PPP loans due for one year from origination.  Based on the Fact sheet, the interest rate will be set at 0.5%, and the term of the loan will be 2 years from maturity. Additionally, payments will be deferred for six months from origination; however, interest will accrue during these six months.

Foreign Ownership

It was widely believed that foreign ownership would not be an issue for eligibility for a PPP loan.  The application form indicates that if any 20% or greater owner answers no to whether or not they are “a U.S. Citizen” OR “have Lawful Permanent Resident status, “the application will be denied indicating that businesses with foreign ownership may be ineligible for the PPP loan.” We are still reviewing this and will have additional guidance shortly.

The application also makes it clear that for businesses seeking PPP loans each greater than 20% owner will need to complete an application and make certain certifications including: (i) that current economic uncertainty makes the loan request necessary to support the ongoing operations of the applicant business; and (ii) that the loan proceeds will be used to retain workers and maintain payroll or make mortgage payments, lease payments, and utility payments.