New Guidance on When to Apply for PPP Loan Forgiveness, Owner-Employees, and Excepted Employees

New guidance released on June 22, 2020, provides businesses with information on when they are able to apply for loan forgiveness, caps on employee-owner compensation, and some clarification on excepted employees in FTE calculations.

When to Apply for PPP Loan Forgiveness

Until now, guidance suggested that a business would need to wait for their entire covered period to end before applying for loan forgiveness; however, the SBA’s most recent release opens the door to allow businesses to apply for loan forgiveness at any time when the borrower used all of the loan proceeds for which the borrower is requesting forgiveness.

Borrowers applying for forgiveness before the end of the 24-week covered period who reduced any employee’s salary or wages in excess of 25% at any time during the covered period, must account for the excess salary reduction for the entire covered period for which they are applying for forgiveness (8 weeks or 24 weeks).

The guidance did not address FTE reductions when applying for forgiveness before a covered period has ended; we are waiting on further guidance.

Owner-Employee Updates

SBA guidance confirmed that owner-employees of S Corporations and C Corporations are capped at the lesser of the following amounts for loan forgiveness:

(1) 8 weeks or 24 weeks of the 2019 salary, depending on which covered period is used, or

(2) $15,385 of salary if using the 8-week covered period and $20,833 if using the 24-week covered period

This treatment is consistent with that of sole proprietors and partners in partnerships. Any pay in excess of these amounts will not count for PPP loan forgiveness purposes.

Excepted Employees

The SBA has issued information on the exclusion of certain employees from reduction calculations: employees who reduced hours and the employer offered to restore hours but the employee declined, inability to rehire former employees (notice must be made to the state unemployment office within 30 days of the former employee declining to return), and inability to hire similarly qualified individuals.

The PPP Flexibility Act also created an exception for businesses not able to rehire to their pre-COVID FTE employee levels due to limitations on business due to federal COVID-19 guidance or regulations. The SBA has stated borrowers must certify that they have documented, in good faith, that reduction in business activity during the covered period is due to H&HS, CDC, or OSHA COVID-19 guidance to use this exemption.   The guidance and regulations do not need to be primary; they can be state or local government orders that were shaped using H&HS, CDC, and/or OSHA guidance.  Such documentation must include copies of applicable COVID-19 Requirements or Guidance for each business location and relevant borrower financial records.