On June 5, 2020, President Trump signed the Paycheck Protection Program Flexibility Act (the Flexibility Act) into law. The original Payment Protection Program (PPP) was criticized for imposing requirements that were too rigid to benefit many businesses.
The original loan forgiveness application has been revised to give borrowers greater flexibility in using loan funds and obtaining loan forgiveness. Here are some updates on the new Flexibility Act’s loan forgiveness process:
1. The original loan forgiveness application has been simplified.
The revised application is five pages and eliminates much of the complex accounting instructions while providing additional guidance to help borrowers complete the application. Some parts, such as the required PPP Schedule A Worksheet, remain unchanged.
2. You may be eligible to use a new streamlined loan forgiveness application.
The new PPP Loan Forgiveness Application Form 3508EZ streamlines the application process by further reducing the calculations and documentation. Form 3508EZ is three pages, and borrowers are eligible to use the application if they meet one of the following criteria:
A. They are self-employed and have no additional employees.
B. They did not reduce the number of employees in their workforce or the hours their employees work, and they did not reduce employee salaries or wages by more than 25 percent.
C . They experienced a reduction in the level of their business activity due to COVID-19 restrictions or health directives, and they did not reduce employee salaries or wages by more than 25 percent.
If your business does not meet any of these criteria, you must use the full application to apply for a PPP loan. However, as noted above, that application has also been revised to make it easier for borrowers to complete.
3. Failure to spend 60 percent of your loan on payroll expenses does not disqualify you from partial loan forgiveness.
The text of the Flexibility Act led experts to believe that a borrower would forfeit the ability to access any loan forgiveness if the borrower did not spend 60 percent of the loan proceeds on payroll. New SBA interim final rules correct that misinterpretation by clarifying that the Flexibility Act allows business owners that use less than 60 percent for payroll costs to remain eligible for partial loan forgiveness.
4. Loan Forgiveness Provisions Are Different Regarding Owner Compensation.
Businesses that file Schedule C (Profit of Loss from Business) or Schedule F (Profit or Loss from Farming) returns have different rules than the rules for employees.
The loan forgiveness calculation for owner compensation is based on:
A. 2019 compensation for the owner
B. 8 weeks for 2019 compensation up to $15,385, or
C. 5 months of 2019 compensation up to $20,833
Certain other limitations apply based on the nature of your business (e.g., partnership, S-Corp).
For example, for C-Corporation owner-employees, employer retirement and health insurance contributions paid on the owner-employee’s behalf should be added to cash compensation to arrive at total 2019 compensation.
More guidance on the new rules are available at: https://www.sba.gov/sites/default/files/2020-06/PPP–IFR–Revisions-to-Loan-Forgiveness-Interim-Final-Rule-and-SBA-Loan-Review-Procedures-Interim-Final-Rule-508.pdf
You can also find Forms 3508 and 3508EZ by entering a Google search for SBA Form 3508 or SBA Form 3508EZ.
By: Chris Ha, Attorney at Law