Article by: Jeff Skolnick, CPA, M.S. Taxation

On Thursday October 8th, the Treasury and the SBA issued an Interim Final Rule which provides simplified rules of forgiveness for Payroll Protection Program (PPP) loans of $50,000 or less.

Additionally, the SBA has issued a new Form 3508S, for borrowers with PPP loan balances of $50,000 or less to apply for forgiveness.

Simplified Forgiveness Rules

Eligibility

“A borrower of a PPP loan of $50,000 or less, other than any borrower that together with affiliates received loans totaling $2 million or greater, may use SBA Form 3508S (or lender’s equivalent form) to apply for loan forgiveness.”

Exemption from reductions to forgiveness based on reductions to Full time equivalent employees (FTE) or reduction in employee salary or wages

In order to receive full forgiveness, PPP borrowers were subject to the rules I discuss in the next few paragraphs. These are the specific rules that borrowers of $50,000 or less are now exempt from pursuant to this newest interim rule.

To receive full forgiveness small business owners were required to maintain the same number of full-time equivalent (FTE) employees as before PPP proceeds were received. A simplified method was introduced which allows workers to be classified as full-time that work 40 or more hours (1.0 FTE) in the calculation and anyone else to count as 0.5 (FTE). If small business owners prefer, they may calculate FTE by taking the average number of hours each employee worked and dividing by 40. This calculation will obviously be much more difficult (unless the owner uses a payroll service that can easily provide such a report) but may be used if it is more beneficial to the loan recipient.

There is also a reduction that can occur if pay rates decline. This could happen if a small business owner replaces employees with less expensive employees.

This is a very brief overview of loan reduction based on a reduction of FTEs or compensation rate. This one area is tedious. I did want everyone to realize that if you have a reduction in your workforce or compensation rate, then you will have a reduction in the amount of loan forgiveness.

There are rules in place which allow employers who have a reduction in FTEs to restore these FTEs by December 31, 2020 (even if this is outside their covered payroll period).

Additionally, provisions have been put in place to eliminate individuals that were offered their jobs back and turned them down from reducing the loan forgiveness amount. A borrower may exclude any reduction in full-time equivalent employee headcount if:

i. the borrower made a good faith, written offer to rehire such employee (or, if applicable, restore the reduced hours of such employee) during the covered period or the alternative payroll covered period;

ii. the offer was for the same salary or wages and same number of hours as earned by such employee in the last pay period prior to the separation or reduction in hours;

iii. the offer was rejected by such employee;

iv. the borrower has maintained records documenting the offer and its rejection; and

v. the borrower informed the applicable state unemployment insurance office of such employee’s rejected offer of reemployment within 30 days of the employee’s rejection of the offer

Keep in mind borrowers of PPP loans of $50,000 or less are subject to ALL other documentation rules of forgiveness.

PPP Forgiveness Update

Based on the latest interim rule here is an update on my stance for Loan forgiveness.

At this point almost all lenders have been emailing customers indicating their PPP loan forgiveness applications are ready. I am advising my clients not to run toward forgiveness at this time. The introduction of Form 3508S will require lenders changing their forgiveness applications. Below I have updated my reasons for not rushing toward forgiveness.

There are a number of reasons why I believe small business owners should wait on PPP forgiveness.

• As with the rollout of the PPP, nobody has ever been involved in this program before. If you remember the CARES Act was passed on March 27, 2020 and the PPP started the following week, April 3rd. Many lenders were not ready on day 1 and the process was complicated and confusing during the first 6 or 7 weeks while rules were constantly changing, and lenders and the SBA were still figuring it all out. If you applied for a PPP loan before approximately May 15th and after May 15th you had far different experiences. This interim rule moves the process along, however, lenders still have no experience with the process and I would like them to have some before I advise clients to apply for forgiveness.
• I doubt that this will be the only clarification issued. There was a forgiveness form released. Before the form was even used it was replaced by 2 more forms (an EZ short form and a more simplified long form). Now we have a third, and hopefully, final form. Once again, even if no changes are made few of these forms have been processed to date.
• I believe that almost all borrowers should utilize the 24-week, compared to the 8-week covered period for forgiveness. This allows for greater forgiveness of owners’ compensation and also it allows businesses that may not have been able to restore their full payroll to use payroll for up to 24 weeks. It also allows nonpayroll costs (rent, utilities, or mortgage interest) to be used for 24 weeks, instead of 8 weeks. Most borrowers have either just reached or have not reached the end of a 24-week covered period. Forgiveness applications are not considered late until 10 months after the covered period ends.
• There is no benefit to being forgiven in October vs. being forgiven in November, December or even January. The only thing that happens if borrowers wait and have a portion of the loan not forgiven is that interest has accrued at the rate of 1% over that time period. It is my feeling that the Payroll Protection Program Flexibility Act passed on June 5th allows almost all businesses to achieve total forgiveness which makes the interest a moot point. Even if there is a portion not forgiven, it should be exceedingly small and 1% interest for a few months will be negligible.

I will conclude by stating that we are moving closer to the time when I will start advising borrowers to apply for forgiveness.  Once again, I want lenders to gain some experience over the next month or two.

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Hang in there and stay safe,

Jeff Skolnick, CPA, M.S. Taxation