SBA Issues New PPP Loan Guidance: What You Need To Know And FAQs



With the June 30, 2020, deadline for applying for a Paycheck Protection Program (PPP) loan fast approaching, and $130 billion still available, on June 22 the tiny Business Administration (SBA) issued new Interim Final Rules (IFR) on the recently passed Paycheck Protection Program Flexibility Act (PPPFA), clarifying some issues and attempting to form complete loan forgiveness attainable for many borrowers.

Signed into law on June 5, 2020, the PPPFA tried to handle the 2 issues most vexing to small business owners when Congress passed the CARES Act and created the PPP loan program. Notably, the PPPFA reduced the quantity of the loan needed for payroll from 75% to 60%, with 40% of the loan for expenses like rent, mortgage payments, utilities, and loan interest, up from 25%. Additionally, it extended the covered period for loan forgiveness from eight weeks to 24 weeks.

Business owners complained that paying workers while they were stop working by government mandate made little sense while other expenses mounted, and having such a brief amount of your time to use the funds also tied their hands. While hoping for an expansion on the expenses covered for forgiveness, and an easing on tax consequences, which didn't happen, the PPPFA largely addressed the primary two concerns. it's widely believed that uncertainty around PPP and therefore the fear of audits, or not receiving complete forgiveness, stopped many businesses from applying for the loans.

While it remains to be seen whether the new guidance will increase loan applications coming down the house stretch, the new guidance and future regulations certain to come still create as many questions as they seek to answer. Here are a number of the foremost commonly asked questions on the PPP loans and forgiveness:

1. When am i able to apply for PPP loan forgiveness?

The biggest question springing up about the new rules is whether or not a borrower must favor to apply after eight weeks or should look ahead to 24 weeks—in other words, “either or.” The rule made clear that a borrower could apply anytime between eight and 24 weeks, stating as follows:

A borrower may submit a loan forgiveness application any time on or before the date of the loan—including before the top of the covered period—if the borrower has used all of the loan proceeds that the borrower is requesting forgiveness.

The rule continues to clarify that borrowers who received loans before June 5 can elect eight weeks because the covered period before applying for forgiveness, and borrowers have 10 months from after the covered period ends to use for forgiveness.

Of course, there's a caveat to the present rule, which is that if a borrower has reduced salaries or wages of employees by quite the 25% allowed under PPP, they need to use that reduction for the complete duration of the loan period, either eight weeks or 24 weeks, and not as of the date they apply for forgiveness. Here is an example provided within the IFR, which is complicated:

“A borrower is employing 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 worker continued to figure on a full-time basis during the covered period, with an FTE of 1.0. during this case, the primary $250 (25 percent of $1,000) is exempted from the loan forgiveness reduction. The borrower seeking forgiveness would list $1,200 because 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 tip of the covered period, it must account for the salary reduction for the total 24-week covered period (totaling $1,200).”

This scenario will be minimized, or avoided altogether, by not reducing salaries above 25% and using all PPP funds before seeking loan forgiveness. Remember, the PPPFA extends the closing date for borrowers to rehire workers until New Year's Eve, 2020. So, there should be many time to rehire and pay workers the wages they're due supported the application amounts and to receive full forgiveness. After the forgiveness application is submitted, the business are going to be liberal to make decisions on head count and salaries.

2. what's the method for applying for PPP loan forgiveness?

Thankfully, one among the key changes following the PPPFA was a neater form. the first Form 3508 was so complicated, business owners would definitely need an accountant or lawyer to decipher it. there's now Form 3508EZ, and lenders also are allowed to provide their own form.

Once the applying is submitted, the lender will have 60 days to create a “good faith” review, raise additional information or documentation, and approve forgiveness in whole or partially. “Good faith” review is described as watching a payroll report from a third-party provider, like ADP, together with records of payments for authorized expenses. Most borrowers, therefore, should receive complete loan forgiveness by using all the funds on payroll and presenting a payroll report together with the applying forms. like the application on the face, most third-party payroll providers are creating reports specifically for PPP loan forgiveness.

Once the lender has conducted its review, it'll submit the applying and documentation to the SBA for its review. The SBA will have 90 days to conduct a review. It can either approve the forgiveness, evoke more information, or approve a little of the loan for forgiveness. If it doesn't approve all or a part of the loan for forgiveness, the PPPFA now allows borrowers five years (up from two years) to repay the loan at 1% interest. If a borrower received the loan before June 5, 2020, they need to barter the five-year term with their lender.

3. what's the most amount owner-operators, self-employed, and independent contractors can have forgiven on their PPP loan?

The previous guidance, for reasons difficult to work out, capped the number of forgiveness at $15,385 for sole proprietors, employee owners, and independent contractors. For those using $100,000 of salary to calculate the loan amount, they might have received $20,833, leaving a niche of roughly $5,000 to use on authorized expenses. for several during this category, engaging from home or with minimal expenses left open the likelihood that some of the loan would be unforgiven. The new rules change the cap on forgiveness received by self-employed individuals to $20,833. Now with a 24-week time horizon, these borrowers can simply run enough payrolls to totally spend these funds and receive full forgiveness.

4. Should I still be worried about an audit on my PPP loan?

The new guidance failed to provide any specific safe harbors for an audit. The SBA already provides a secure harbor whereby loans under $2 million are considered made in honestness supported economic uncertainty, so there'll not be much reason to audit these loans. With government mandated shutdowns, ongoing cases of COVID-19, and a rocky reopening of the economy, economic uncertainty remains for all businesses.

Many business groups still are lobbying for complete “safe harbors” for loans under $1 million, meaning the SBA will presume they were all applied for in honesty, because of “economic uncertainty” and lack of sufficient “credit elsewhere,” and can approve forgiveness simply supported use of funds. there's an opportunity of this porcupine provision in future legislation, but likely for loans between $250,000 and $500,000. The overwhelming number of loans issued by the SBA be this category.

The SBA continues to say it'll audit every loan over $2 million, and reserves the correct to review all loans to see eligibility and proper use of funds. While criminal and civil penalties are waived, aside from outright fraud, borrowers could face loan repayment. The SBA also continues to want that borrowers keep all records for PPP loans for 6 years, leaving open the chance of an audit years into the longer term. With 4.7 million PPP loans already processed, it remains hard to believe the SBA will audit many loans, even those over $2 million.

The main concern with audits of loans over $2 million will remain the problem of the “credit elsewhere” test and also the liquidity of the borrower. Unlike traditional SBA loans, business owners didn’t must prove a scarcity of credit elsewhere, and only assert they didn’t have sufficient credit to weather this storm. Several large companies, just like the l. a. Lakers, Ruth’s Chris Steak House, and Sweetgreen, that received PPP loans were caught in an exceedingly PR backlash and returned funds. The SBA then created a “safe harbor” where firms could return PPP funds without questions or penalties. At now, it appears wanting venture funding available or access to public capital markets by virtue of a securities market listing, most companies that are audited will likely be able to reasonably claim a scarcity of adequate credit elsewhere, even with traditional lines of credit.

5. What am i able to expect next for any easing of restrictions on PPP loans?

The main issue still remaining within the program is around taxes. PPP loans do create adverse tax consequences, mainly that expenses, including federal payroll taxes paid by the employer with PPP funds, aren't deductible. So, while PPP funds that are forgiven aren't taxable, businesses will lose these deductions.

Business groups are lobbying furiously to create changes to PPP, especially on the payroll tax issue, in what’s being called Phase 4 legislation. The new law could also offer new funds or allow companies a second PPP loan. Negotiations for the new law are scheduled to start after Fourth of July, and will take several weeks leading up to the Congressional August recess.

Conclusion

Once again, if you haven’t applied for a PPP loan, you ought to do so before the June 30 deadline. Your best bet at this late hour is to use through local banks or fintech companies, like Intuit, Square, PayPal or Kabbage. the most takeaway is that overall, the new guidelines make total PPP loan forgiveness easier to attain for many companies. The extended fundamental measure of 24 weeks should make spending the whole loan on payroll and expenses entirely feasible. That being said, good record keeping and tracking the ever-changing regulations are critical.