The Small Business Administration (SBA) released an interim final rule overnight on 6.22 that provides guidance on several very important forgiveness related topics. It appears to be more good news for borrowers. Let’s take a look at what they said.
Headcount Reduction Exemptions
The CARES Act established reductions to loan forgiveness amounts based on borrower reductions in headcount. It also included a headcount reduction exemption. The PPP Flexibility Act added two more exemptions. Let’s take a look at the issue and the three exemption opportunities.
Issue: Borrower reduces FTE employees during the covered period as compared to a base period selected by the borrower, which requires a reduction in loan forgiveness amounts.
Exemption 1: Borrower eliminates the reduction in FTE employees by December 31
Exemption 2: Borrower is able to document (i) an inability to rehire individuals who were employees of the borrower on February 15, 2020; and (ii) an inability to hire similarly qualified employees for unfilled positions on or before December 31, 2020
Exemption 3: Borrower is able to document an inability to return to the same level of business activity as such business was operating at before February 15, 2020, due to compliance with requirements established or guidance issued by federal agencies beginning on March 1, 2020, and ending on December 31, 2020.
They go on to say Exemption 3 is to include both direct and indirect compliance with COVID Requirements and Guidance because a significant amount of the reduction in business activity stemming from COVID Requirements or Guidance is the result of state and local government shutdown orders that are based in part on guidance from the three federal agencies.
They added an example for clarity, which is extremely helpful. The business sells beauty products online and at its physical store. During the covered period, the local government shut down the store based in part on COVID-19 guidance issued by the CDC in March 2020. Because the borrowers’ business activity during the covered period was reduced compared to its activity before February 15, 2020, due to compliance with COVID Requirements and Guidance, the borrower satisfies the Flexibility Act’s exemption and the borrower will not have its forgiveness amount reduced because of a reduction in FTEs during the covered period.
This clarification is extremely important as it also helps clarify one of the eligibility criteria for the EZ application form. Borrowers that didn’t reduce annual salary or hourly wages of any employee by more than 25% during the covered period AND were unable to operate during the covered period at the same level of business activity as before February 15, 2020 are eligible to use the EZ application form. As discussed previously, the EZ form is two pages long and is much simpler to complete.
Owner Cash Compensation
There have been many questions related to owner compensation calculations and limits based on the different ways a business can be structured from a tax perspective. This interim final rule helps to define the limits, as well as what non-cash compensation items can be included in the forgiveness calculations.
We’ve known for some time now that the maximum forgiveness potential was going to be determined based on your choice of the 8-week covered period (for loans made before June 5) or the 24-week covered period. The calculations for each are below:
Further, owner compensation calculations based on taxable entity type are summarized below. Keep in mind the caps in the table above apply. a
When can you apply for forgiveness?
A borrower may submit a loan forgiveness application any time on or before the maturity date of the loan – including before the end of the covered period – if the borrower has used all of the loan proceeds for which the borrower is requesting forgiveness.
If the borrower applies for forgiveness before the end of the covered period and has reduced any employee’s salaries or wages in excess of 25 percent, the borrower must account for the excess salary reduction for the full 8-week or 24-week covered period.