We’ve all heard the saying “Be careful what you wish for.” This saying could be very applicable to the various forms of guidance, rules, and forms the U.S. Small Business Administration (SBA) has released in connection with the Paycheck Protection Program (PPP) during the first three weeks of January. During that time, the SBA has issued:
- Three interim final rules (IFR)
- Two new or updated sets of frequently asked questions (FAQ)
- Six new or revised borrower forms
- Two new Procedural Guidance Notices
As noted, a few of the items were consolidations, updates, or revisions to prior guidance and forms, but there was a significant amount of new and useful information, especially related to the second draw PPP loans (PPP 2 loans). In this BKD Thoughtware® article, we’ll review and analyze a number of the significant provisions contained in the recently issued SBA guidance and instructions.
During the evening of January 6, the SBA kicked off the information release by issuing two IFRs. The first, “Paycheck Protection Program as Amended,” was an 82-page document that consolidated and restated 19 previously issued IFRs and incorporated changes made to the original PPP program (PPP 1) by the 2021 Consolidated Appropriations Act (CAA). Some of the key provisions and clarifications in the IFR are as follows:
- Eligible borrowers who already received a PPP 1 loan aren’t eligible for another PPP 1 loan. Any borrower who received a PPP loan in 2020 is considered to have received a PPP 1 loan for this purpose.
- Any Economic Injury Disaster Loan (EIDL) advance amount previously deducted from a borrower’s PPP 1 forgiveness amount will be remitted to the lender, along with interest through the remittance date, and the lender will then refund to the borrower.
- SBA will issue additional guidance on the process to reapply or request a loan increase under provisions in the CAA for borrowers who:
- Returned all of a PPP 1 loan but are now eligible to reapply.
- Returned part of a PPP 1 loan but are now eligible to apply for an amount equal to the difference between the amount retained and the amount previously approved.
- Didn’t accept the full amount of a PPP 1 loan for which they were approved but are now eligible to request an increase in the loan up to the amount previously approved.
- SBA also will issue additional guidance on the process for partnerships to request a loan increase to include partner compensation that was omitted on the initial application, which will be done by the lender submitting a request through the SBA’s E-Tran servicing site on or before March 31, 2021, even if the lender’s first Form 1502 was previously submitted.
The second IFR issued on January 6, “Paycheck Protection Program Second Draw Loans,” provided instructions and information regarding the new PPP 2 loan program. The guidance provided in this IFR, while anxiously awaited, didn’t have any surprising provisions. Most of the guidance and instruction followed the text of the provisions contained in the CAA. We reviewed this IFR in detail in a January 11 Thoughtware article.
A third IFR was issued on January 19. Titled “Paycheck Protection Program – Loan Forgiveness Requirements and Loan Review Procedures as Amended by Economic Aid Act,” the IFR is almost entirely a consolidation and restatement of five prior IFRs and portions of two others. The IFR did, however, extend certain existing provisions to new PPP loans received after December 27, 2020. These provisions include:
- Existing loan forgiveness rules contain two full-time equivalent (FTE) safe harbors to avoid a possible reduction in the forgiveness amount. One is for the inability to rehire needed employees by December 31, 2020. The second safe harbor relates to a borrower being unable to return to historical business activity levels due to compliance with certain COVID-19-related government regulations issued between March 1, 2020, and December 31, 2020. For PPP loans funded on or after December 27, 2020, the IFR extended the December 31, 2020, measurement date in both safe harbors to the end of the covered period for the loan.
- For purposes of determining if an employee had a 25 percent or more reduction in annualized salary or hourly wage rate, the reference period has been modified from the first quarter of 2020 to the most recent full quarter the employee was employed prior to the start of the covered period (generally the deposit date of the PPP loan proceeds) of the PPP loan.
- For loans made on or after December 27, 2020, the applicable date by which the elimination of any salary or wage rate reduction or FTE reduction must be made in order to avoid a loan forgiveness reduction is extended to the end of the covered period.
- Any loan that’s $50,000 or less is exempt from any reduction to the loan forgiveness amount based on reductions in FTEs or salary or wage rates. This exemption doesn’t apply if the borrower and its affiliates have PPP 1 loans totaling $2 million or more or PPP 2 loans totaling $2 million or more.
- If a covered individual has a controlling interest in the borrower, Form 3508D must be submitted no later than January 26, 2021 (if the forgiveness application was submitted before December 27, 2020), or, for forgiveness applications submitted after December 27, 2020, no later than 30 days after submission of the forgiveness application. No Form 3508D is required if no controlling interest is owned by a covered individual. See later discussion of new Form 3508D.
As much as the guidance of IFRs is appreciated, perhaps more practical are the FAQ releases by the SBA. There have been two recent FAQ releases as follows:
- January 17, 2021 (modifying a FAQ issued on June 26, 2020) “How to Calculate Maximum Loan Amount for First Draw PPP Loans and What Documentation to Provide – By Business Type.” This was largely a modification of the prior FAQ. Here are a few items that related to the reopening of the PPP 1 loan program:
- Allows the use of calendar-year 2020 payroll to be used in calculating the PPP 1 loan amount in addition to calendar-year 2019 payroll
- If a borrower is using its 2020 payroll in determining the loan amount and certain IRS forms are required to be submitted, the borrower may submit pro forma forms if they haven’t been completed and filed at the time of the application
- Updated for the new rule that self-employed farmers and ranchers filing Schedule F can use gross income (reduced by any other payroll costs) as the basis for calculating the loan amount
- January 19, 2021, “Second Draw PPP Loans: How to Calculate Revenue Reduction and Maximum Loan Amounts Including What Documents to Provide”:
- Loan amount is calculated in the same manner as PPP 1 loans—2.5 times the average monthly payroll (3.5 times for NAICS code 72 entities) for calendar-year 2019 or 2020
- Maximum PPP 2 loan is $2 million
- Corporate group maximum for PPP 2 loans is $4 million (was $20 million for PPP 1 loans). The detail definition of a corporate group hasn’t been provided. The general definition is “businesses are part of a single corporate group if they are majority owned, directly or indirectly, but a common parent”
- Provided guidance for the determination of gross receipts for the purpose of determination of eligibility for PPP 2 loans. In general, unless certain conditions or alternatives apply, the applicant must demonstrate that gross receipts in any calendar quarter of 2020 were at least 25 percent lower than the same quarter of 2019:
- For a for-profit business, this generally includes all revenue in whatever form received and from whatever source received. Determination is made using the method of accounting used by the borrower. The FAQ does reference several items that are excludable
- Must include receipts of all affiliates (unless exempt from the affiliation rules under the normal exemption rules) in the determination of a more than 25 percent reduction in gross receipts. Receipts between affiliates are excluded
- For a nonprofit organization, gross receipts are defined by reference to Section 6033 and regulation 1.6033-2(g)(4). It’s all inclusive, including gifts and grants and gross income from asset sales (no reduction for cost of asset sold)
- PPP loan forgiveness and EIDL advances forgiven are excluded from gross receipts; however, there’s no explicit provision for exclusion of any other Coronavirus Aid, Relief, and Economic Security Act funding from gross receipts
- Special rule if the borrower acquired an affiliate or was acquired as an affiliate during 2020. Gross receipts include the receipts of the acquired or acquiring affiliate for the entire measurement period (calendar quarters) including the time period prior to the affiliation event
- Special rules exist in determination of the 25 percent or more reduction for entities not in existence during all or a portion of 2019
- An optional simplified rule is available for borrowers who can show a greater than 25 percent decline in annual gross receipts for 2020 compared to 2019:
- Only required to submit copies of the 2019 and 2020 income tax returns (Forms Schedule C, Schedule F, Form 1065, Form 1120, Form 1120S, or the 990 series)
- If a borrower is a fiscal year filer, it can only use this method if the income tax return covers all of the second, third, and fourth quarters—only January 31, 2021, February 28, 2021, and March 31, 2021, fiscal year filers are eligible for this method
- Potential planning opportunity for pass-through entities. FAQ 5 contains specific line items from the income tax return to include in the calculation of gross receipts. This calculation doesn’t consider gross receipts that were included in the general definition of gross receipts above but are reported on Schedule K of the income tax return (interest and dividends, royalties, etc.)
- If this method is elected and the borrower’s 2020 income tax return isn’t completed, the FAQs allow a procedure for use of relevant gross receipt amounts and an attestation by the borrower that the amounts used will be the same as what will be reported on the income tax return when filed
- For PPP 2 loans of $150,000 or less, documentation substantiating the reduction in gross receipts is due on or before the borrower files for forgiveness; it’s not due with the application for the PPP 2 loan
- The FAQ provides many relevant examples of calculation of the PPP 2 loan amounts, especially for sole proprietorships
The SBA has issued six new or revised borrower forms. Three of these forms, 3508, 3508EZ, and 2483 are simply updates to provide language related to PPP 2 loans and for the reopening of PPP 1 loan applications. Three other forms, however, either are new or had more significant modifications. Those forms are:
- Form 2483SD – This is the application form for a PPP 2 loan. It’s similar to Form 2483, the PPP 1 application form. Note Form 2483SD includes the certification of need that must be met to be qualified for a PPP 2 loan.
- Form 3508D – This is a new form titled “Paycheck Protection Program Borrower’s Disclosure of Certain Controlling Interests.” The disclosure required by this form was mandated due to a provision in the CAA. This form is required to be filed if a covered individual has a direct or indirect controlling interest in the borrower at the time of the PPP loan application. A covered individual refers to the president or vice president of the U.S., head of an executive department as defined in 5 USC §101, members of Congress, or a spouse of any of the foregoing. A controlling interest is 20 percent, by vote or value, of the outstanding equity interests of the borrower. The form isn’t required to be filed if no controlling interest is held by a covered individual.
- Form 3508S – This form is the simplified forgiveness application form. Prior to the release of this revision, it could only be used for forgiveness applications for loans of $50,000 or less. The revised form now allows for use with loans of $150,000 or less. There are a few items to note regarding the form. First, it has been modified to be used with both first draw and second draw PPP loans. As required by the CAA, only two dollar amounts are requested: the amount of the loan that was spent on payroll costs and the requested loan forgiveness amount. The amount entered as spent on payroll costs has taken on some additional significance due to the ability to claim Employee Retention Credits (ERC) in addition to the PPP. It’s important to note, however, that a borrower can’t use the same payroll costs for the ERC that were included and used on the PPP forgiveness application. See our recent Thoughtware article regarding the ERC and more on the revised Form 3508S. In spite of the simplicity of the revised Form 3508S, it’s important to remember the SBA reserves the right to disapprove an application for forgiveness even if it’s filed on the revised simplified Form 3508S. A statement to that effect is included as the last sentence prior to the borrower’s signature. Lastly, each lender will have their own process for submission of the form. We recommend that you check with your lender for specific filing guidance.