On October 8, 2020, the Small Business Association (“SBA”) and United States Treasury Department took a smaller step toward simplification of the application process for Paycheck Protection Program (“PPP”) borrowers, and their lenders, on loans of $50,000 or less.
This streamlined process implements the new SBA Form 3508S and related Interim Final Rule (“IFR”) for borrowers with PPP loans of $50,000 or less, except those that, together with their associates, received $2 million or more in PPP loans, and will simplify the forgiveness process. The new procedure affects approximately 3.57 million PPP loans of $50,000 or less, representing nearly $62 billion.
The IFR incorporates the Form 3508S and revises formerly issued rules. Currently, a borrower who applies for forgiveness using Form 3508S “is exempt from any reductions in the borrower’s loan forgiveness amount based on reductions in full-time equivalent (FTE) employees (section 1106(d)(2) of the CARES Act) or reductions in employee salary or wages (section 1106(d)(3) of the CARES Act) that would otherwise apply.” The SBA rationalized its position by underscoring that around 1.71 million of the 3.57 million of sub-$50,000 PPP loans were made to businesses with zero or one employee who would not be affected by these exemptions anyhow. Therefore, the estimated impact of the streamlined forgiveness process is $49 billion worth of PPP loans. As to these, the SBA “believes” that most of these borrowers would not be impacted by the reduction requirements because these borrowers either did not reduce full-time equivalent employees, salary earnings or wages, or the borrower would meet the criteria for one of the existing exemptions from loan forgiveness reductions. The SBA concluded that when all of these borrowers are excluded, the impact of the change on the cumulative PPP funds would be too minor to merit consideration.
Although streamlined and simplified, Form 3508S still obliges the borrower to submit to its lender papers verifying payroll costs, proving the existence of pre-February 15, 2020 nonpayroll obligations and services, and payment of forgivable payroll and nonpayroll expenses of the covered period. The form otherwise relies primarily upon borrower certifications that the information is accurate, and verified, and meets the following criteria:
- The monetary amount for which forgiveness is requested cannot surpass the principal amount of the PPP loan and:
- was used to pay costs that are eligible for forgiveness (payroll costs to retain employees; business mortgage interest payments; business rent or lease payments; or business utility payments);
- includes payroll costs equal to at least 60% of the forgiveness amount;
- if a 24-week Covered Period applies, does not exceed 2.5 months’ worth of 2019 compensation for any owner-employee or self-employed individual/general partner, capped at $20,833 per individual; and
- if the Borrower has elected an eight-week Covered Period, does not exceed 8 weeks’ worth of 2019 compensation for any owner-employee or self-employed individual/general partner, capped at $15,385 per individual.
The Interim Final Rule underscores the importance of providing accurate calculations and ensuring that the information on the forgiveness application matches the information submitted to the IRS. Potentially, the lender may confirm the borrower’s calculations.
Please be advised that the borrower also remains subject to civil and/or criminal liabilities for fraud, unauthorized use of the program’s monies, and knowingly making false statements in a forgiveness application. Borrowers should preserve all documentation supporting their application and demonstrating compliance for six (6) years after forgiveness or repayment of the loan.
If you have questions about the PPP, please contact the legal professionals at HoganWillig at (716) 636-7600.