Since the enactment of the Paycheck Protection Program Flexibility Act (PPPFA) at the beginning of June, the Small Business Administration (SBA) has been issuing revised Interim Final Rules (IFRs) at a nearly-breakneck speed to address the Paycheck Protection Program (PPP) loans. In the latest iteration, the 20th IFR supplements the guidance in the instructions for the regular PPP loan forgiveness application and the instructions for the EZ PPP loan forgiveness application. At first blush, the biggest news appeared in the SBA’s statement as to when PPP borrowers can apply for forgiveness:
A borrower may submit a loan forgiveness application at 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. (Emphasis added).
Although the statement comes as welcome news to the many businesses that had hoped for flexibility around application timing, the SBA’s lack of guidance for submitting such an application significantly limits the scope of the statement. Indeed, it appears that only a tiny portion of PPP borrowers could take advantage of this statement, and, for everyone else, there are many open questions and significant risks from submitting a forgiveness application before the end of the covered period.
The key hurdles for submitting a forgiveness application before the end of the covered period are the reductions in forgiveness for reductions in compensation or reductions in full-time equivalent employees (FTEs) during the covered period (the Statutory Reductions). In completing the regular loan forgiveness application, a business must insert:
Given the favorable interpretations of the Statutory Reductions, discussed in this article, and the cushion resulting from the increases in forgivable costs from the extended 24-week covered period, discussed in this article, the Statutory Reductions have become irrelevant for most businesses because they often will not reduce the amount of forgiveness. Nonetheless, the regular forgiveness application requires information not known until the end of the covered period.
The SBA has provided guidance for calculating the impact of a reduction in compensation for a business submitting the forgiveness application before the end of the covered period in the 20th IFR:
Example: A borrower is using a 24-week covered period. This borrower reduced a full-time employee’s weekly salary from $1,000 per week during the reference period to $700 per week during the covered period. The employee continued to work on a full-time basis during the covered period, with an FTE of 1.0. In this case, the first $250 (25 percent of $1,000) is exempted from the loan forgiveness reduction. The borrower seeking forgiveness would list $1,200 as the salary/hourly wage reduction for that employee (the extra $50 weekly reduction multiplied by 24 weeks). If the borrower applies for forgiveness before the end of the covered period, it must account for the salary reduction for the full 24-week covered period (totaling $1,200). (Emphasis added.)
This example is flawed and provides limited guidance:
Even if a business can use this example, the SBA has not provided any guidance for calculating the FTE ratio and whether that ratio should be applied to the forgivable costs as of the date of the early application or the forgivable costs the business would have if it had waited the full 24 weeks and presumably continued to incur additional covered costs. Nor is there any indication that a business could re-compute its forgiveness application, taking into account a full 24 weeks of covered expenses if the SBA were to challenge the amount of forgivable costs or statutory reductions reflected on the early forgiveness application. Accordingly, a business that submits an early application would have to be one that either has no reduction in FTEs, or is confident that it qualifies for either of the two FTE reduction safe harbors.
The instructions to the loan forgiveness application outline those safe harbors:
In the 20th IFR, the SBA explains that it interprets the first safe harbor broadly and provides an example:
“The Administrator, in consultation with the Secretary, is interpreting the above statutory exemption to include both direct and indirect compliance with COVID Requirements or 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.
Example: A PPP borrower is in the business of selling beauty products both online and at its physical store. During the covered period, the local government where the borrower’s store is located orders all non-essential businesses, including the borrower’s business, to shut down their stores, based in part on COVID-19 guidance issued by the CDC in March 2020. Because the borrower’s business activity during the covered period was reduced compared to its activity before February 15, 2020, due to compliance with COVID Requirements or Guidance, the borrower satisfies the Flexibility Act’s exemption and will not have its forgiveness amount reduced because of a reduction in FTEs during the covered 24 period, if the borrower in good faith maintains records regarding the reduction in business activity and the local government’s shutdown orders that reference a COVID Requirement or Guidance as described above.”
Unfortunately, the scope of this safe harbor remains unclear. A business must be “unable to operate between February 15, 2020, and the end of the Covered Period at the same level of business activity as before February 15, 2020.” Normally we would rely upon the ordinary meaning of these words, but we are reluctant to do so here because the language is similar to the eligibility requirement for the employee retention credit, discussed in this article, that the operations of a business were fully or partially suspended by government order due to COVID-19. As we discussed in this article, the IRS adopted a very narrow interpretation pursuant to which there is no suspension in operations:
The SBA is not the IRS and the SBA can adopt (and may well have intended to adopt) a broader view of the safe harbor. Nonetheless, we find it concerning that the example discusses a non-essential business that generally would qualify for the employee retention credit.
We appreciate the SBA explicitly stating that businesses can apply for forgiveness before the end of the covered period. However, we would have preferred that the SBA allow businesses to choose a covered period between eight and 24 weeks so that businesses could submit the application at the end of their covered period. Otherwise, without additional guidance about the mechanics of how a business completes the application, this statement primarily applies to businesses that can submit the EZ forgiveness application — that is, businesses to which the Statutory Reductions do not apply. In addition, businesses with no FTE reduction, but with a compensation reduction like the one in the SBA example described above, also can submit an early application. Based on our experience, we believe that this constitutes a tiny portion of PPP borrowers. For everyone else, we worry that there are too many open questions and risks with attempting to submit a forgiveness application before the end of the 24-week covered period.
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