On August 11, when we last wrote about the Personal Paycheck Flexibility Act, the window for PPP loan forgiveness applications had just started to open. But, as we indicated at the time, businesses were being advised not to jump in too quickly due to several unanswered questions. Foremost in the minds of business owners and their accountants were questions on how and when their loans would be forgiven. Some of those questions have been answered through new guidance released from the Small Business Administration on October 13.
Less Red Tape for PPP Loans Up To $50,000
Generally, the SBAs new guidance has reduced the amount of red tape normally associated with forgiveness processes, clearing the way for forgiveness for nearly 70% of all PPP loans. The SBA is easing the application process for loans under $50,000 so that these businesses are only required to complete a one-page document for approval. For the lender's part, the rule relaxes the scrutiny requirements for documentation on how the PPP money was spent.
Going forward, borrowers with PPP loans up to $50,000 can submit the easier SBA Form 3508S or 3508EZ to their lenders, who then have 60 days to review it and issue a decision. For loans greater than $50,000, businesses must submit Form 3508 or 3508EZ.
The new process is simplified by reducing the amount of documentation required, though the SBA can request additional documentation for up to six years following loan forgiveness. Generally, if a business can attest that it has abided by all program rules, it can qualify for full forgiveness. Businesses still need to submit documents showing payroll expenses paid during the covered period and non-payroll expenses eligible for forgiveness. However, under the new guidance, businesses are not required to show calculations for determining the amount of their loan forgiveness.
More importantly, if a business submitting 3508S had to reduce the number or wages of full-time employees, it can still qualify for full forgiveness. Borrowers with loans up to $50,000 are no longer subject to the full-time equivalent or wage reduction penalties.
The guidance also clarifies the forgiveness status of sole-operators with no employees who can now have most or all their loan forgiven. The SBA has exempted owner-employees with less than a 5% ownership stake in a C- or S-corporation from the cap on owner-employees compensation.
New Application Deadline
Finally, the SBA clarified the timeline for the loan forgiveness application process, allowing borrowers to submit an application any time before the loan's maturity date – either two or five years from loan origination. Previously, the application deadline was October 31, 2020. However, if a business does not apply for forgiveness within ten months of the end of their covered period, it must start making loan pfayments.
As always, we expect the SBA to issue additional guidance, but these clarifications should be enough to businesses to plan their path to forgiveness. We also expect to see additional legislation that may impact PPP borrowing and loan forgiveness in the next stimulus package. We will provide updates as they occur.
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