Loan forgiveness for first-and second-draw PPP loans: What's new?

Update: SBA announced in a July 28 news release and corresponding IFR that they were launching a portal “to allow borrowers with Paycheck Protection Program (PPP) loans $150,000 or less through participating lenders to apply for forgiveness directly through the SBA.” The SBA PPP Direct Forgiveness Portal can be found at directforgiveness.sba.gov, which also provides a user guide for the platform.

In the same IFR, SBA also announced the creation of a “COVID Revenue Reduction Score” for use in processing certain second-draw loan forgiveness applications, which could reduce documentation requirements for certain borrowers. More guidance is forthcoming, and we will provide information as it becomes available.

While many of the forgiveness rules released with the second wave of Paycheck Protection Program (PPP) loans are the same as they were for the first round, there are some key differences to be aware of when planning spending and forgiveness for your first- or second-draw loan.

In this video, CohnReznick PPP specialists Stephanie O’Rourk and Jeff Bobrosky break down what’s new and what hasn’t changed with regard to: 

• Forgiveness forms
• Types of forgivable costs
• Limits on spending on payroll vs. non-payroll costs
• The “covered period”
• Owner compensation
• Safe harbors from reductions in loan forgiveness

Read on for a text overview and additional detail on these points. For more information, or for help with your particular case, contact our PPP Loan Forgiveness Assistance team. 

FORGIVENESS APPLICATION FORMS

SBA has released updated versions of the three forms that can be used in applying for forgiveness:

• Form 3508
• Form 3508EZ, a simplified form available to borrowers that meet certain defined conditions related to employee numbers, salaries, and hours, and/or reduced business activity
• Form 3508S; this further simplified form was previously available only for loans under $50,000, but can now be used for loans $150,000 or less

Borrowers that receive both 1) a first-draw loan and 2) a second-draw loan in excess of $150,000 must submit their first-draw forgiveness application before or at the same time as their second-draw forgiveness application.

PERMISSABLE EXPENSES

The types of costs on which borrowers can spend their PPP loans and receive forgiveness have been expanded – from the defined payroll costs (see our Round 2 guide, plus the “Additional considerations” section below) and qualified rent, utilities, mortgage interest, and other interest payments – to also include:

• Covered operations expenditures: “Payments for any business software or cloud computing service that facilitates business operations, product or service delivery, the processing, payment, or tracking of payroll expenses, human resources, sales and billing functions, or accounting or tracking of supplies, inventory, records and expenses”
• Covered property damage costs: Costs related to “property damage and vandalism or looting due to public disturbances that occurred during 2020 that was not covered by insurance or other compensation”
• Covered supplier costs: Payments made to suppliers of goods pursuant to contracts, orders, or purchase orders in effect before the covered period (or, for perishable goods, in effect before or during the covered period), for the supply of goods that “are essential to the operations of the borrower at the time at which the expenditure is made”
• Covered worker protection expenditures: Expenditures made to help the business comply with federal, state, or local requirements or guidelines related to worker and customer safety amid COVID-19, such as the purchase of PPE or facility modifications such as ventilation and filtration systems, physical barriers, and screening capabilities; see Page 50 of the IFR for additional details and examples
• Certain employer-provided group insurance payments: “Costs related to the continuation of group health care, life, disability, vision, or dental benefits during periods of paid sick, medical, or family leave, and group health care, life, disability, vision, or dental insurance premiums”
• Refinancing of SBA Economic Injury Disaster Loans (EIDLs) made between Jan. 31 and April 3 of 2020

Note that borrowers that received PPP loans before, on, or after the date the Economic Aid Act was enacted – Dec. 27, 2020 – are allowed to use the expanded permissible expenses, unless their loans were already forgiven.

Additional documentation will be required for each of the new types.

The “60/40 split” is still in effect: To receive maximum loan forgiveness, borrowers must spend at least 60% of their loan on eligible payroll costs, and no more than 40% on eligible non-payroll costs.

SBA wrote in an interim final rule:

 “At least 60% of the PPP loan proceeds shall be used for payroll costs. For purposes of determining the percentage of use of proceeds for payroll costs, the amount of any EIDL refinanced will be included. For purposes of loan forgiveness, however, the borrower will have to document the proceeds used for payroll costs in order to determine the amount of forgiveness.”

COVERED PERIOD

Previously, borrowers could choose between using an eight-week or 24-week “covered period” for incurring/paying costs eligible for forgiveness, beginning on the date their loan is disbursed. Now they can choose any length between eight and 24 weeks.

Note that a borrower’s first-draw and second-draw covered period cannot overlap.

OWNER COMPENSATION

Regarding forgiveness for payroll amounts for owner-employees or self-employed individuals, the same general limitations apply as in the first round, just adjusted to accommodate the new definition of “covered period.”

Owner compensation is capped for each individual, in total across all businesses, at the lesser of:

• 2.5 months’ worth of the individual’s 2019 or 2020 compensation
  • What is included in determining this amount is defined differently for C or S corporation owner-employees, general partners, or self-employed individuals; find details on pages 22-25 of this SBA Interim Final Rule
•  The 2.5-month equivalent of $100,000 on an annualized basis ($20,833 per individual in total across all businesses)

Either amount must be prorated according to the chosen covered period. For example, a borrower with an eight-week covered period would have a limit of eight weeks’ worth of 2019 or 2020 compensation or $15,385 per individual, whichever is less, in total across all businesses; for a borrower that elects to use a 10-week covered period, the cap is the lesser of 10 weeks’ worth of 2019 or 2020 compensation or $19,231 per individual.

SAFE HARBORS AND EXCEPTIONS

Employers remain subject to a reduction in their PPP loan forgiveness amount if there were reductions in their average number of full-time equivalent employees (or in employee salary and wages) during the covered period of Feb. 15 to April 26, 2020, unless they eliminate that reduction – i.e., rehire those employees.

Borrowers whose PPP loans were made before Dec. 27, 2020, still must have met the safe harbor condition by Dec. 31, 2020, but for these newer loans they have been extended so that they apply for borrowers that… 

• Restore full-time equivalent employee numbers or wages by the last day of their covered period
• Can document in good faith that they were unable to return by the end of the covered period to the same level of business activity as such recipient was operating at before Feb. 15, 2020, due to compliance with federal COVID-19-related requirements and guidelines issued during the period beginning on March 1, 2020, and ending on the last day of the covered period

The “exceptions” establishing certain employees that can be excluded from the reduction calculation remain the same, with extended dates:

• Any positions for which the borrower made a good-faith, written offer to rehire an employee who was employed on Feb. 15, 2020, and was unable to hire similarly qualified employees for unfilled positions on or before the last day of their covered period
• Any positions for which the borrower made a good-faith, written offer to restore any reduction in hours, at the same salary or wages, during the covered period and the employee rejected the offer 
• Any employees who during the covered period were fired for cause, voluntarily resigned, or voluntarily requested and received a reduction of their hours.

ADDITIONAL CONSIDERATIONS

• Loan proceeds cannot be used for lobbying activities or expenditures.
• Payroll costs that are qualified wages taken into account in determining the CARES Act’s Employee Retention Credit (ERC) are not eligible for forgiveness.
  • For forgiveness applications submitted on or after March 11, 2021, this has been expanded to include:
    • “(a) Qualified wages taken into account in determining (i) the Employee Retention Credit under Section 2301 of the CARES Act, as amended by section 206 of the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (Relief Act) (CARES Act Employee Retention Credit), (ii) the Employee Retention Credit under Section 3134 of the Internal Revenue Code of 1986 (ARP Employee Retention Credit), or (iii) the disaster credit under Section 303 of the Relief Act (Disaster Credit), and
    • “(b) Premiums for COBRA continuation coverage taken into account in determining the credit under section 6432 of the Internal Revenue Code of 1986 (COBRA Continuation Coverage).”
• Borrowers that also received EIDL Advances do not need to subtract such advances from their PPP forgiveness, and SBA will not deduct those amounts from the forgiveness payment remitted to the PPP lender.
• Borrowers that are found to have used PPP funds for unauthorized purposes not only will have to repay those amounts, but may also be subject to additional liability such as charges for fraud. Shareholders, members, and partners can face SBA recourse for any unauthorized use they commit.

For more information or for help navigating the forgiveness process and its various calculations for your particular case, contact our PPP Loan Forgiveness Assistance team. Full details and updated application materials are available on the Small Business Administration (SBA's) PPP Loan Forgiveness page.

 

_{This has been prepared for information purposes and general guidance only and does not constitute legal or professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its partners, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.}