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Paycheck Protection Program: What’s Next for Borrowers?

SBA and U.S. Treasury Issue Additional Guidance for Businesses Applying for Loan Forgiveness


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Paycheck Protection Program: What’s Next for Borrowers?

For those who received loans as part of the Paycheck Protection Program (PPP), this past October and November marked the end of the 24-week covered period. Over the last several weeks, the Small Business Administration (SBA) along with the U.S. Treasury Department have issued additional guidance and clarification surrounding the forgiveness process and the forgiveness application. 

This update is intended to highlight key guidance areas issued recently to help borrowers with their forgiveness applications. As with other aspects of the PPP, guidance on the forgiveness portion of the PPP is constantly evolving and additional information may become available.

New Forgiveness Application for Loans Under $50,000: On October 8, 2020, the SBA announced that borrowers with loans under $50,000 may use Form 3508S, which is an alternative Loan Forgiveness Application. Borrowers who use this form are exempt from any reductions in the borrower's loan forgiveness amount based on reductions in full-time equivalent (FTE) or reductions in employee salary or wages that would otherwise apply.

Treatment of Owners: As set forth in previous articles, the SBA capped the forgiveness for owner-employees and self-employed individuals at $15,385 for those who used the eight-week covered period and $20,833 for those who used the 24-week forgiveness period. These caps may be lowered depending on 2019 compensation as set forth below. In all cases, the forgiveness is measured against the owner-employee's 2019 compensation.

The SBA has provided the following guidance:

  • C-Corporation owner-employees are capped by the amount of their 2019 employee cash compensation and employer retirement and health insurance contributions made on their behalf.
  • S-Corporation owner-employees are capped by the amount of their 2019 employee cash compensation and employer retirement contributions made on their behalf, but employer health insurance contributions made on their behalf cannot be separately added because those payments are already included in their employee cash compensation.
  • Schedule C or F filers are capped by the amount of their owner compensation replacement, calculated based on 2019 net profit.
  • General partners are capped by the amount of their 2019 net earnings from self-employment (reduced by claimed section 179 expense deduction, unreimbursed partnership expenses and depletion from oil and gas properties) multiplied by 0.9235.
  • For self-employed individuals, including Schedule C or F filers and general partners, retirement and health insurance contributions are included in their net self-employment income and therefore cannot be separately added to their payroll calculations.

Who Is an Owner? Any individual who owns 5 percent or more of a C- or S- corporation is an "owner-employee" for purposes of the PPP. Those individuals with less than a 5 percent ownership stake in a C- or S-Corporation are not subject to the owner-employee compensation rule. While the SBA has not issued clear guidance on members of an LLC, the SBA has stated that LLC owners must follow the instructions that apply to how their business was organized for tax filing purposes for tax year 2019, or if a new business, the expected tax filing situation for 2020. As such, if an LLC member owns 2 percent, but the LLC is taxed as a S-Corp., it would follow that the owner-employee compensation rules would not apply to such individual. However, if that LLC is taxed as a partnership, then the LLC member would be considered an owner.

When Should I Apply for Forgiveness? As long as a borrower submits its loan forgiveness application within 10 months of the completion of their covered period (eight or 24 weeks from the date such borrower received PPP funds), the borrower is not required to make any payments until the forgiveness amount is remitted to the lender by the SBA. If a borrower does not apply for loan forgiveness within 10 months after the last day of the borrower's loan forgiveness covered period, loan payments are no longer deferred, and the borrower must begin making payments on the loan. Once you have submitted your forgiveness application, the PPP Lender has 60 days to submit to the SBA, and the SBA has 90 days to review and approve or deny the request.

Clarification on "Transportation" as a Covered Utility Cost: Since the PPP was signed into law, there has been much debate about what "transportation utility costs" mean. Many speculated that this meant costs of a business associated with gas and vehicles leased by a business. The SBA has clarified that service for the distribution of transportation means transportation utility fees assessed by state and local governments.

What If I Want to Sell All or Part of My Business? The SBA has stated that a "change of ownership" will have occurred when: 

  • at least 20 percent of the common stock or other ownership interest of a PPP borrower is sold or otherwise transferred, whether in one or more transactions including to an affiliate or an existing owner of the entity; 
  • the PPP borrower sells or otherwise transfers at least 50 percent of its assets (measured by fair market value), whether in one or more transactions; or 
  • a PPP borrower is merged with or into another entity.

Prior to the closing of any change of ownership transaction, the PPP borrower must notify its PPP lender in writing of the contemplated transaction and provide the PPP lender with a copy of the proposed agreements or other documents that would effectuate the proposed transaction.

If the PPP note has been fully satisfied, and all amounts repaid (whether by the SBA through the forgiveness process or the PPP borrower), there is no restriction on the change in ownership.

In cases where the PPP note is not satisfied prior to closing and the change of ownership is structured as a sale or other transfer of common stock or other ownership interest or as a merger or the change of ownership structured as an asset sale, then the PPP lender may approve the change of ownership without SBA's prior approval if:

  • the sale or other transfer is 50 percent or less of the common stock or other ownership interest of the PPP borrower; or
  • the PPP borrower completes and submits a forgiveness application, together with any required supporting documentation, to the PPP lender, and an interest-bearing escrow account controlled by the PPP lender is established with funds equal to the outstanding balance of the PPP loan (which escrow may be released pending the completion of the forgiveness process).

In cases where the PPP note is not satisfied prior to closing and the conditions of the immediately preceding section cannot be met, then SBA approval is required, which involves submitting certain requested information to the SBA Loan Servicing Center (which will, in turn have 60 days to review such request). This includes; the reason why the PPP borrower cannot fully satisfy the PPP note, details of the proposed transaction, a copy of the PPP note, any letter of intent of purchase agreement setting forth the responsibilities of the PPP borrower, seller and buyer, disclosure of any buyer PPP loan and a list of all owners holding more that 20 percent of the purchasing entity. SBA approval of any change of ownership involving the sale of 50 percent or more of the assets (measured by fair market value) of a PPP borrower will be conditioned on the purchasing entity assuming all of the PPP borrower's obligations under the PPP loan, including responsibility for compliance with the PPP loan terms.

Note that in all cases involving a change of control of the PPP borrower, in addition to the new owners becoming liable, the prior owners will remain subject to all obligations under the PPP loan.

SBA Forms 3509 and 3510: The SBA has published two new forms applicable primarily to those borrowers (including affiliates) with loans over $2 million: SBA Form 3509 – Loan Necessity Questionnaire (For-Profit Borrowers) and SBA Form 3510  – Loan Necessity Questionnaire (Non-Profit Borrowers). These detailed questionnaires require information regarding the borrower's liquidity and business activity and are designed to collect supplemental information that can be used by the SBA to evaluate the borrower's good-faith certification made in its application that "[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant."

In the SBA's review of Form 3509 and 3510 in connection with a borrower's forgiveness application, FAQ #53 states that the “SBA may take into account the borrower's circumstances and actions both before and after the borrower's certification to the extent that doing so will assist SBA in determining whether the borrower made the statutorily required certification in good faith at the time of its loan application."

Borrowers must return the completed forms to their lenders within 10 business days of receipt for their lenders. If and to the extent the SBA request additional information, borrowers will have the opportunity to provide a narrative response to SBA explaining the circumstances that provided the basis for their good-faith loan necessity certification.

Borrowers who are asked to complete form 3509 or 3010 should consider consulting with their attorneys, accountants and advisors prior to filing their forgiveness applications.

For more information about these and other government loan programs, please contact your Much attorney.

Disclaimer: We are providing PPP-related information as a convenience. The application and related requirements may change and we are not responsible for updating this information. By providing this information, we are not giving legal or tax advice. For advice on your specific situation, please contact your advisors.