Joe Aquino, CPA, CVA
Director | Freed Maxick
The U.S. Small Business Administration (SBA), in consultation with Treasury, recently released a revised loan forgiveness application for the Paycheck Protection Program (PPP), along with unveiling a new EZ application for forgiveness of PPP loans.
In addition, the SBA also issued a new interim final rule providing guidance on how to calculate employee and owner compensation for loan forgiveness in the new 24-week covered period created by the Paycheck Protection Flexibility Act.
Some of the main changes in the act include an expansion of the “covered period” for loan forgiveness to 24 weeks from eight weeks, a reduction of the proportion of proceeds that must be spent on payroll costs to 60% from 75%, and the establishment of a safe harbor for businesses that have been unable to return to the level of business activity they had before the COVID-19 pandemic due to compliance with health and safety guidelines for slowing the spread of the virus.
The revised PPP Loan Forgiveness Application and instructions include a number of notable items. Among them are:
- Health insurance costs for S corporation owners cannot be included when calculating payroll costs; however, retirement costs for S corporation owners are eligible costs.
- Safe harbors for excluding salary and hourly wage reductions and reductions in the number of employees (full-time equivalents) from loan forgiveness reductions can be applied as of the date the loan forgiveness application is submitted. That means that borrowers don’t have to wait until Dec. 31 to apply for forgiveness using the safe harbors.
- Borrowers that received loans before June 5 can choose between using the original eight-week covered period or the new 24-week covered period.
New EZ application
The EZ PPP Loan Forgiveness Application requires fewer calculations and less documentation than the full application. The EZ application can be used by borrowers that:
- Are self-employed and have no employees;
- Did not reduce the salaries or wages of their employees by more than 25% and did not reduce the number or hours of their employees; or
- Experienced reductions in business activity as a result of health directives related to COVID-19 and did not reduce the salaries or wages of their employees by more than 25%.
New interim final rule
The SBA issued new rules for determining payroll costs and owner compensation in calculating PPP loan forgiveness under the new 24-week covered period.
The PPP allows loan forgiveness for payroll costs for up to $100,000 annualized per employee, or $15,385 per individual over the eight-week period. Under the new interim final rule, the 24-week maximum established for full loan forgiveness is $46,154 per individual.
Owner compensation calculations
While the employee compensation limit for the 24-week period is three times the eight-week limit, the interim final rule does not do the same with the owner compensation replacement for businesses that file Schedule C, Profit or Loss From Business, or Schedule F, Profit or Loss From Farming, tax returns. For those businesses, forgiveness for the owner compensation replacement is calculated for the eight-week period as 8 ÷ 52 × 2019 net profit, up to a maximum of $15,385. For the 24-week period, the forgiveness calculation is limited to 2.5 months’ worth (2.5 ÷ 12) of 2019 net profit, up to $20,833. The owner compensation replacement calculations are structured this way in order to prevent owners from benefiting from the PPP in ways that Congress did not intend, according to the interim final rule.
The interim final rule also modifies earlier guidance to account for changes included in the Payroll Protection Flexibility Act.
- The minimum term for PPP loans is raised to five years for all loans made on or after June 5. For loans made before June 5, the two-year minimum maturity remains in effect unless both the borrower and the lender agree to extend it to five years.
- The proportion of PPP funding that must be used on payroll costs to qualify for full forgiveness drops to 60% from 75%.
- The application deadline for PPP loans remains June 30.
The applications and instructions previously discussed are available in the links below:
- Revised PPP Loan Forgiveness Application and instructions
- EZ PPP Loan Forgiveness Application and instructions
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