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06.18.2020 | Legal Advisory

On June 16, 2020, the SBA released a revised form of Loan Forgiveness Application, which incorporates the changes provided in the PPP Flexibility Act that we previously discussed, as well as a new “EZ” form intended to respond to critics who believe that the standard form is unnecessarily complex. As a result, we have updated our Loan Forgiveness Calculator and below briefly describe the key changes to the updated forgiveness analysis.

Notable Changes and Clarifications

• Length of Covered Period – Pursuant to the terms of the PPP Flexibility Act, loans that were disbursed prior to June 5, 2020 may use a covered period of eight weeks or 24 weeks. Any loan disbursed on or after June 5, 2020 will not have the option of using an eight-week covered period. Borrowers simply need to notify the SBA and their lender at the time of applying for forgiveness by inserting the dates of the applicable covered period in their application. There is still no guidance that borrowers may use a covered period greater than eight weeks but less than 24 weeks.
• Loan Forgiveness Cap – Payments to Employees – The cap on amounts payable to employees (excluding owner-employees) for which forgiveness is permitted has been increased to $46,154 (24/52 of a $100,000 annual salary), which should greatly increase the likelihood for many borrowers that they will meet the 60% payroll cost requirement.
• Loan Forgiveness Cap – Payments to Owners – This cap was also increased, but not at the same level as non-owner employees. Borrowers using the 24-week covered period may seek forgiveness for up to the lesser of (i) $20,833 (2.5 months of a $100,000 annual salary), or (ii) 2.5/12 multiplied by such owner’s 2019 applicable compensation. The rationale for this bifurcation is to avoid a potential windfall scenario for owners while trying to satisfy Congressional intent for these proceeds to be used for payments to employees.
• Safe Harbor Analysis for Restoration of Headcount or Wages – With respect to the safe harbors to restore forgiveness as a result of a reduction in headcount or a reduction in wages, the new application clarifies that the applicable comparison to February 15, 2020 levels is the earlier to occur of (i) the date of application, or (ii) December 31, 2020. As a result, a borrower cannot simply bring its headcount levels or wage levels up for one pay period and then cut back to satisfy the safe harbor. At a minimum, a borrower should maintain its headcount and wage levels through the date of application for forgiveness.
• Safe Harbor Analysis for Inability to Return to February Business Levels – No further guidance exists on what is required to satisfy this safe harbor. A borrower that seeks to avail itself of this safe harbor must check a box and self-certify. A borrower choosing this safe harbor must maintain (but is not required to submit) copies of applicable COVID-related safety requirements and relevant financial records without the benefit of any specific standards. We anticipate that borrowers that indicate that they qualify for this safe harbor are more likely to be subject to an audit by the SBA, so borrowers should maintain reasonably strong records of any applicable requirements, the steps taken to satisfy such requirements and the economic effect on the business during the covered period as a result of such compliance.

Form 3508EZ – The “Simpler” Form of PPP Loan Forgiveness

In the event a borrower meets any of the below criteria, the borrower may elect to submit a Form 3508EZ, which is a simplified version of the standard PPP forgiveness application.

• Borrower is a self-employed individual, independent contractor, or sole proprietor with no employees at the time of loan application and did not include the salaries of any employees when calculating its average monthly payroll;
• Borrower did not reduce salary or wages for the applicable employees by more than 25% during the covered period as compared with January 1, 2020 – March 31, 2020 AND borrower did not reduce full-time equivalents (FTEs) between January 1, 2020 and the end of the covered period; or
• Borrower did not reduce salary or wages for the applicable employees by more than 25% during the covered period as compared with January 1, 2020 – March 31, 2020 AND borrower was unable to return to February 2020 levels of business as a result of compliance with COVID-related safety regulations.

The Form 3508EZ is limited to just the forgiveness application and does not necessitate an individualized listing and analysis of employees. But borrowers should analyze whether they satisfy the criteria to apply through the Form 3508EZ, which will require some amount of FTE status and wage analysis. Furthermore, there is no reduction in the back-up documentation required, so borrowers will still need to collect all documentation evidencing the payments for which forgiveness is being sought, including, among other things, payroll records, lease agreements, utility bills, and loan agreements. While a simpler form on its face is a welcome surprise, borrowers should not assume that the forgiveness application process will be substantially streamlined.

What Questions Remain?

While many of our open questions from the PPP Flexibility Act have been answered in some respects, it is still unknown what will be sufficient to constitute compliance with the inability to return to February 2020 business levels. Tied to this, in part, is more information on what will be required in connection with any audit by the SBA. Understanding these issues will inform borrowers on their willingness to avail themselves of some of the safe harbors, so we anticipate that the SBA will soon provide more significant guidance. We will continue to update as necessary and can help businesses navigate the parameters of this program.

This advisory was prepared by Josh French, Kate Henry, Ellie Myers, and Shannon Zollo in Nutter’s Corporate and Transactions Department. For more information, please contact Josh, Kate, Ellie, Shannon, or your Nutter attorney at 617.439.2000.

This update is for information purposes only and should not be construed as legal advice on any specific facts or circumstances. Under the rules of the Supreme Judicial Court of Massachusetts, this material may be considered as advertising.