Updated PPP Forgiveness Application: What the New Guidance Means for You

On June 17, 2020 the government released an updated Paycheck Protection Program (PPP) loan forgiveness application form along with a new simplified application form for certain borrowers. These new forms are in response to the recently enacted Paycheck Protection Program Flexibility Act of 2020 that materially changed the PPP, including introducing a new 24-week covered period and requiring 60% of loan proceeds be used on eligible payroll expenses (rather than the previous 75% threshold). Here are some of the notable additions introduced in this new guidance.

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Eight-Week vs. 24-Week Covered Period
The new application states the covered period (the period a borrower uses to add up eligible expenditures that can give rise to forgiveness) is generally 24 weeks, except for borrowers receiving PPP loans before June 5, 2020. Those borrowers can elect to use the original eight-week covered period or stay with the 24-week period.
 
Additionally, expanding upon the alternative payroll covered period introduced in the previous forgiveness application, borrowers using the new 24-week covered period can choose to begin their covered period on first day of their first pay period following their PPP loan disbursement date.
 
Choosing the 24-week period apparently minimizes the effects of any forgiveness reductions attributable to reduced employee headcounts or salaries. As currently constructed, the forgiveness application asks a borrower to total their eligible expenditures for the covered period and then apply the various limiting factors relating to reduced employee headcounts and salaries. Using the 24-week covered period could result in a tripling of eligible expenditures as compared to the eight-week covered period (assuming expenditures remain constant). Any forgiveness reductions would go against the 24-week expenditure total and the result still may produce full forgiveness of the PPP loan, whereas use of the eight-week covered period with the same facts could result in a portion of the PPP loan not being forgiven.
 
One caveat—the government could promulgate a rule that total eligible expenditures cannot exceed the PPP loan amount, producing a forgiveness result that is the same under both the eight-week and 24-week covered period assuming all loan proceeds are used on eligible expenditures.   
 

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Eligible Payroll Expenses
The new accompanying instructions provide that an individual employee’s maximum cash compensation eligible for forgiveness may not exceed $46,154 for borrowers using the new 24-week covered period. Borrowers electing the existing eight-week covered period are subject to a per employee limit of $15,385.
 
In order to prevent what the government terms a “windfall,” special rules apply to owner-employees, self-employed individuals, and general partners (referred to as “owners” by the instructions):

• For borrowers using the 24-week covered period, the amount of eligible compensation for owners is capped at the lower of $20,833 or the 2.5-month equivalent of their 2019 compensation.
• For borrowers using the eight-week covered period, the amount is capped at the lower of $15,385 or the eight-week equivalent of their 2019 compensation.

Incidentally, the $20,833 cap under the 24-week covered period may result in automatic full forgiveness for self-employed individuals without employees.
 
In addition to salary payments, employers can generally include certain retirement and health benefits as part of the eligible payroll expenses paid to employees. However, according to the instructions, employer health insurance contributions made on behalf of self-employed individuals, general partners, or owner-employees of S corporations are not included in eligible payroll “because such payments are already included in their compensation.” Similar rules apply to employer retirement contributions made on behalf of self-employed individuals or general partners (but not S corporation owner employees).
 
New simplified EZ form for PPP loan forgiveness
Certain borrowers can make use of a new, simplified application. The primary advantage of this EZ form is that a borrower does not have to calculate any forgiveness reductions due to reduced employee counts or salary reductions. In order to be eligible to use the EZ form, a borrower must state that these reduction factors are not relevant.
 
Borrowers are only eligible to use the new EZ form for PPP loan forgiveness if they can meet one of the following categories.

• Self-employed individuals, independent contractors, or sole proprietors who had no employees at the time of the PPP loan application and did not include any employee salaries in their loan calculation.
• The borrower did not reduce annual salary or hourly wages of any employee by more than 25% during their covered period compared to the period between January 1, 2020, and March 31, 2020; and the borrower did not reduce the number of employees or the average paid hours of employees between January 1, 2020, and the end of the covered period, ignoring reductions that arose from an inability to rehire individuals who were employees on February 15, 2020, if the borrower was unable to hire similarly qualified employees for unfilled positions on or before December 31, 2020. Also, ignore reductions in an employee’s hours that the borrower offered to restore and the employee refused.
• The borrower did not reduce annual salary or hourly wages of any employee by more than 25% during their covered period compared to the period between January 1, 2020, and March 31, 2020; and the borrower was unable to operate during their covered period at the same level of business activity as before February 15, 2020, due to compliance with requirements established or guidance issued between March 1, 2020, and December 31, 2020, by the Secretary of Health and Human Services, the Director of the Centers for Disease Control and Prevention, or the Occupational Safety and Health Administration, related to the maintenance of standards of sanitation, social distancing, or any other work or customer safety requirement related to COVID-19.

For purposes of the second and third categories, the term “employees” means only those employees that did not receive, during any single period during 2019, wages or salary at an annualized rate of pay in an amount more than $100,000.
 
Also note that this EZ form and the normal application form now reflect the additional safe harbors for restoring employee headcount reductions.
 
Timing Considerations
For borrowers choosing the 24-week covered period, a common question is whether a borrower can apply for forgiveness before the end of the PPP program (December 31, 2020). For example, if a borrower’s 24-week covered period ends on November 2, can the borrower apply for forgiveness on that date? Certain statutory and regulatory language could be read to require a borrower with decreased employee headcounts or salaries to wait until December 31, 2020, to see if those cuts were restored in order to achieve full forgiveness.
 
Fortunately, it appears the new application only requires a borrower to have restored any previous cuts to employee headcounts or salaries by the time the forgiveness application is submitted in order to avoid any forgiveness reductions.  
 
How the Guidance Impacts Your Forgiveness Application
These new applications and accompanying instructions provide updated guidance and enough information for many borrowers to file their PPP forgiveness application when ready, even though there are undoubtedly open questions that will be answered by the government in the coming weeks and months. Planning and organization is still the key to achieving full forgiveness, so we encourage PPP borrowers beginning the PPP forgiveness stage to consult with a trusted business advisor.  

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