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Government Streamlines Process for Some PPP Loan Forgiveness

Posted on June 18, 2020

A new application and instructions to apply for tax-free forgiveness of the new small business loans make the process much easier for borrowers, but some think the government could go even further.

The Form 3508EZ and instructions released June 17 allow borrowers that meet criteria to take advantage of the simplified forgiveness application process, which is a good start, Amal U. Dave of Arent Fox LLP said. The simplified version is helpful because it doesn’t require the complicated forgiveness reduction calculations that were previously required, he added.

But there’s still more to be done from a regulatory standpoint, Dave said. If the borrower can check at least one of three boxes on the application instructions, it can use the simplified application.

One box allows the borrower to use the form if it didn’t reduce annual salary or hourly wages of an employee by more than 25 percent during a specified period. Another requirement in that checkbox requires the borrower to state that it wasn’t able to operate at the same levels in place before February 15, 2020, because of compliance with requirements established or guidance issued between March 1, 2020, and December 31, 2020, by specified federal government health agencies, such as the Department of Health and Human Services or the Centers for Disease Control and Prevention.

“But for many borrowers, the restrictions on operations were due to compliance with state and local regulations,” Dave said.

Some state and local regulations are based on guidance from federal health agencies, but it would be helpful if the Small Business Administration removed that ambiguity, Dave said. It would be even more helpful if the SBA created a presumption that specific industries universally affected by COVID-19, such as restaurants, hotels, and gyms, meet the criteria, he added.

The Paycheck Protection Program, created by the Coronavirus Aid, Relief, and Economic Security (CARES) Act (P.L. 116-136), generally provides loans to businesses with fewer than 500 employees that are forgiven on a tax-free basis if a specified portion of the loans is spent on payroll costs over a covered period.

Initially, the SBA and Treasury said that for a loan to be forgiven tax free, at least 75 percent of it must be used on payroll costs. But Congress changed that by enacting the Paycheck Protection Program Flexibility Act of 2020 (P.L. 116-142), which extended the covered period from eight weeks to 24 weeks and reduced to 60 percent the amount required to be spent on payroll to qualify for loan forgiveness.

The government also updated the standard loan forgiveness application and instructions June 16 to incorporate changes made to the program by the recent legislation.

Bar Set Too High?

Eric J. Kodesch of Lane Powell PC said it's unclear how many borrowers will be able to use the new form because the requirement for no reduction in full-time equivalent employees during the applicable time frame is too high a bar for many businesses with employees.

“This basically means there were no COVID-19 impacts on staffing,” Kodesch said.

The streamlined application allows borrowers to ignore reductions in employees resulting from an inability to rehire individuals who were employees on February 15, 2020, if the borrower was unable to hire similarly qualified employees for unfilled positions by December 31, 2020.

Kodesch said that means borrowers must wait until December 31 to submit the application — at that point, the borrower could fill out the regular application and determine that the statutory reduction in forgiveness for a reduction in full-time equivalent employees has no impact because of the increase in forgivable costs.

“Most businesses want to submit the forgiveness application as soon as possible. To take advantage of the simplicity of the EZ application (just like using the restoration safe harbor), a business has to continue to wait,” Kodesch said.

Kodesch pointed out that the top right corner of the EZ and standard forgiveness application forms have an expiration date of October 31, 2020.

“However, the forms require certification of information not known until December 31, 2020,” Kodesch said. “I do not know why there is an expiration date and why it would not have been updated, especially since the [Paycheck Protection Program Flexibility Act] specifically contemplates forgiveness applications being filed within 10 months of the end of the 24-week covered period.”

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