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SBA Releases Updates to Clarify PPP Loan Forgiveness

By John Haggarty, Gail Bradley and Dave Voris

With questions still lingering about the Paycheck Protection Program (PPP) Flexibility Act, the Small Business Administration (SBA) recently released revisions that clarify guidelines for loan forgiveness, payroll requirements, exemptions and other basic aspects of the program. For the record, this is the SBA’s 18th “interim final rules.”

Nonprofit organizations also should be aware that $129 billion of funds still remain available, although the deadline for the program was June 30. Legislators are expected to determine whether to extend the PPP application deadline as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, but some lenders have closed their portals.

The updates for the PPP Flexibility Act include:

Extended period for loan forgiveness: The loan forgiveness covered period — the timeframe for which the borrower needed the PPP loan proceeds as they tried to continue operations, was originally set for eight weeks. However, the SBA has extended the allowable covered period time frame to 24 weeks. In other words, organizations now have the flexibility to use the PPP loan proceeds with a specific 24-week time frame instead of an 8-week time frame.

A more flexible payroll requirement: Under the new guidelines, a minimum of 60 percent of the PPP loan proceeds must be utilized by payroll to be eligible for full forgiveness. The original PPP guidelines required that 75 percent of the PPP loan proceeds must be utilized for payroll expenses. The rest must be spent on rent, utilities, and other business-related expenses.

Safe Harbor provisions for loan forgiveness: The original CARES Act stated that the PPP loan proceeds had to be used to maintain employment and wages at the previous levels. However, the PPP Flexibility Act has added a Safe Harbor provision in case the organization was impacted by state or national restrictions and, as a result, was unable to return to normal economic activity, or was not able to re-hire previously furloughed employees or fill vacant positions despite efforts to do so.

Process for loan forgiveness: The borrower must complete and submit to the lender a form called the Loan Forgiveness Application. Two forms exist: SBA Form 3508 and SBA Form 3508EZ. These must be supported by documentation to substantiate the eligibility and utilization of the loan funds. Within 60 days, the lender must review the Loan Forgiveness Application and make a recommendation to the SBA about forgiveness and the forgiveness amount. Within 90 days, the SBA will provide the forgiveness amount to the lender.

It’s also important to know that as part of the general loan forgiveness process, the SBA will review the loan for compliance with:

  • the CARES Act
  • SBA rules or guidance applicable at the time of the borrower’s application
  • Terms of the borrower’s PPP loan application; e.g., borrower lacked an adequate basis for the certification made on its application

If the SBA determines that the borrower was ineligible for the PPP Loan, the loan will not be eligible for forgiveness.

The SBA also provides a specific calculation for the loan forgiveness amount, which equals payroll costs (details to be considered) plus non-payroll costs.

  • Details about payroll costs: For the employer, compensation must be paid to employees who principally reside in the United States. Compensation is defined as salary, cash tips, payment for vacation and parental, family, medical or sick leave. It also includes allowance for separation or dismissal payment for retirement benefits and payment of state or local taxes assessed for an employee’s compensation.
  • Non-payroll costs include interest payments, lease payments, and utility payments. The eligible non-payroll costs cannot exceed 40% of the total forgiveness amount.

Notwithstanding the Forgiveness Application, the nonprofit organization must be prepared to provide supporting documentation to the lender outlined as follows:

  • Payroll: Documentation of verifying eligible cash compensation and non-cash benefit payments for the covered or alternative covered period including data such as bank statements or other payroll reports. Such reports must document the amount of cash compensation paid to employees, payment receipts and the average number of FTE employees on payroll employed by borrower on Jan. 1, 2020 and the end of the covered period.
  • Non-payroll: The requirement for supporting documentation includes verifying the existence of the obligations/services prior to Feb. 15, 2020 and eligible payments from the covered period. Eligible non-payroll includes business mortgage interest payments, business rent or lease payments and business utility payments. Applicants may need to provide cancelled checks or online banking activity to prove payments.

Notwithstanding some recent news from the Small Business Administration, you should talk with your relationship bank for details about its specific processes. In addition, the SBA also provides readily accessible materials from the following URL: https://home.treasury.gov/policy-issues/cares/assistance-for-small-businesses

John Haggarty, vice president, Gail Bradley, vice president, and Dave Voris, region manager, Treasury Management, represent many years of experience in understanding the unique needs of nonprofit organizations. They focus on wrapping specially designed depository products, Treasury Management,
and Funds Management together to help each nonprofit organization manage their cash flows in the most economical way.

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