On June 22, 2020, the Small Business Administration (SBA) and Treasury Department issued an interim final rule (IFR) which includes an explanation of the process for applying early for loan forgiveness.
Early Loan Forgiveness Applications
Many small businesses have inquired about whether they can apply for PPP loan forgiveness before their covered period expires. The new interim final rule does permit borrowers who have used all of the loan proceeds for which they are requesting forgiveness to submit a loan forgiveness application prior to the end of its covered period. However when doing so, PPP borrowers must be mindful that the date for restoring salaries or wages to meet the safe-harbor provision becomes the date the forgiveness application is filed instead of December 31, 2020. For example, if a borrower has a 24-week period that ends in November but wants to apply in September, any wage reduction in excess of 25% as of September would be calculated for the entire 24-week period even if the borrower restores salaries by Dec. 31.
An example provided in the interim final rule shows how the calculations would work:
Example: A borrower is using a 24-week covered period. This borrower reduced a full-time employee’s weekly salary from $1,000 per week during the reference period to $700 per week during the covered period. The employee continued to work on a full-time basis during the covered period, with an FTE of 1.0. In this case, the first $250 (25% of $1,000) is exempted from the loan forgiveness reduction. The borrower seeking forgiveness would list $1,200 as the salary/hourly wage reduction for that employee (the extra $50 weekly reduction multiplied by 24 weeks). If the borrower applies for forgiveness before the end of the covered period, it must account for the salary reduction for the full 24-week covered period (totaling $1,200).
Borrower Responsible for Loan Forgiveness Calculations
The interim final rule clarifies that it is the borrower’s responsibility to provide an accurate calculation of the loan forgiveness amount. Lenders are expected to perform a good-faith review, in a reasonable time, of the borrower’s calculations and supporting documents, but lenders do not have to independently verify the borrower’s reported information provided that the borrower:
- Supplies documentation supporting its request, and
- Attests that it has accurately verified the payments for eligible costs.
The IFR reinforces previous guidance that the SBA will deduct Economic Injury Disaster Loan (EIDL) Advance Amounts from PPP forgiveness amounts. It also reiterates previous guidance, including:
- Employer health insurance contributions for S corporation owners cannot be included when calculating payroll costs; however, employer retirement contributions for S corporation owners are eligible costs.
- For owner-employees and self-employed individuals, including those who file Schedule C, Profit or Loss From Business, or Schedule F, Profit or Loss From Farming, forgiveness for owner compensation is calculated for the eight-week period as 8 ÷ 52 × 2019 compensation, up to a maximum of $15,385, in total for all businesses. For the 24-week period, the forgiveness calculation is limited to 2.5 months’ worth (2.5 ÷ 12) of 2019 compensation, up to $20,833, also in total for all businesses.
While the new guidance is helpful, there are still many unanswered questions. We anticipate that SBA and Treasury will be issuing additional FAQs. We are closely monitoring their web page, and will be posting new articles as more guidance is released.
As we have been doing with all coronavirus legislation and SBA guidance during these past few months, we will be sure to update you with any additional insight as soon as possible. Continue to check back here for the most up to date tax information and changes in response to coronavirus. If you have questions about this or related topics contact an MCB Advisor at 703-218-3600 or click here.
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