On the evening of May 15, 2020, the Small Business Administration (SBA) released Form 3508, Paycheck Protection Program Loan Forgiveness Application. The forgiveness application form, which includes instructions and worksheets, represents a significant advance in the official guidance on PPP loan forgiveness.
As we continue to dig in to the details, here are some high-level observations:
- 75% Rule: Based on the wording of prior guidance, some had speculated that the 75% rule could result in no (i.e. $0) PPP loan forgiveness, if less than 75% of a borrower’s loan proceeds were used to pay forgivable payroll costs during the eight-week covered period. With the release of Form 3508 and its instructions, it is clear this will not be the case. The application document confirms that the 75% rule simply establishes a limitation on the amount of forgiveness based on forgivable payroll costs. Specifically, PPP loan forgiveness cannot exceed the quotient of x ÷ y, where x = forgivable payroll costs, and y = 75%.
- Alternative Payroll Covered Period: With Form 3508 comes flexibility on the start of the eight-week covered period for PPP loan forgiveness. Borrowers with a bi-weekly (or more frequent) payroll schedule may elect to align the start of their eight-week covered period with the first day of their first pay period following their loan disbursement date. This alternative eight-week period applies only to forgivable payroll costs and not to forgivable non-payroll costs.
- Definition of Full-Time Equivalent: One of the potential reductions to the amount of loan forgiveness that might otherwise be available to a PPP borrower is based on decreases in borrower headcount metrics, as measured by the average number of FTEs during specified periods. Form 3508 specifies how FTEs are to be calculated and offers a simplified method where employees who work 40 hours or more per week are assigned a value of 1.0, and employees who work fewer than 40 hours per week are assigned a value of 0.5.
- Special Rule for Business Owners: Form 3508 contains a noteworthy provision limiting increases in compensation to business owners during the eight-week covered period. “[A]mounts paid to owners (owner-employees, a self-employed individual, or general partners)” are capped at the lesser of $15,385 or “the eight-week equivalent of their applicable compensation in 2019.”
- Covered Rent Obligation: It is now clear based on the application that rent associated with personal property leases (i.e. not just real property leases) is included within the definition of forgivable non-payroll costs (provided the lease agreement was in force before February 15, 2020).
The guidance on PPP forgiveness won’t stop here. In its accompanying press release, the SBA indicated that more details are soon to come: “SBA will also soon issue regulations and guidance to further assist borrowers as they complete their applications, and to provide lenders with guidance on their responsibilities.”
If finding your way through the PPP loan forgiveness maze is giving you headaches or if you need assistance with forgiveness scenario modeling, we’re here to help. Contact us today at 301.231.6200 or visit the COVID-19 Advisory page on our website for more information.