New SBA Interim Final Rule Addresses Early Applications for PPP Loan Forgiveness

The Small Business Administration (SBA), in conjunction with the Treasury, issued a new Interim Final Rule Monday night that provided more details around the loan forgiveness aspect of the Paycheck Protection Program (PPP).

The 34-page document addressed a number of topics, but one area in particular is sure to be of interest to the many borrowers who have inquired whether they can apply for PPP forgiveness before the end of their covered period.

According to the SBA's new guidance, a borrower may apply for loan forgiveness before the end of their covered period. However, there is a catch. If a borrower applies for loan forgiveness before the end of the covered period, and they have reduced any employees' salaries or wages by more than the 25 percent allowed for full forgiveness, the borrower must account for the excess salary reduction for the entire covered period (either eight weeks or 24 weeks, depending on which applies to the borrower's loan).

This means that borrowers applying for loan forgiveness early will forfeit the safe harbor provision that allows them to restore salaries or wages by December 31, 2020 and avoid reductions in the amount of loan forgiveness.

For example, let's assume a borrower has a 24-week covered period that ends in November, but the borrower decides they would like to apply for loan forgiveness in September. Any reduction of employees' salaries or wages by more than 25 percent as of the September loan forgiveness application date would be required to be calculated for the entire 24-week period (i.e., through November) - even if the borrower restores those salaries by December 31, 2020.

Monday's Interim Final Rule also reinforced that the borrower is responsible for providing an accurate calculation of the loan forgiveness amount. Lenders are responsible for performing a good faith review of that calculation within a reasonable amount of time. Lenders are not responsible for verifying' the borrower's reported information so long as the borrower supplies adequate supporting documentation and attests that they have accurately verified the payments for eligible costs.

The Interim Final Rule also reinforced several other key areas of previous guidance, including:

• Changes prompted by the June 5 Paycheck Protection Program Flexibility Act of 2020, including an expansion of the covered period from 8 weeks to 24 weeks, a reduction of the amount that must be used on payroll costs from 75 percent to 60 percent, and an expansion of the loan term to 5 years from 2 years.
• Economic Injury Disaster Loan (EIDL) advance payments will be deducted from PPP loan forgiveness amounts.
• For S-Corporations, employer health insurance contributions for the S-Corp's owners may not be included when calculating payroll costs. However, employer retirement contributions for owners are eligible.
• For owner-employees and self-employed individuals, forgiveness for owner compensation for an 8-week covered is calculated as 8 ÷ 52 x 2019 compensation, up to a maximum of $15,385. For a 24-week covered period, the forgiveness calculation is limited to 2.5 months of 2019 compensation, up to $20,833.