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Simplified PPP Loan Forgiveness Form Exempts Certain Borrowers from Reductions

(Parker Tax Publishing October 2020)

The Small Business Administration (SBA) updated the Paycheck Protection Program (PPP) FAQs and issued a new interim final rule in conjunction with the issuance of new simplified loan forgiveness application, Form 3508S, for borrowers that received a PPP loan of $50,000 or less. The new form exempts borrowers from reductions in loan forgiveness amounts based on reductions in full-time equivalent employees or reductions in employee salaries or wages. Form 3508S; Instructions to Form 3508S; SBA-2020-0052; PPP FAQs (October 13, 2020).


On March 27, 2020, The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was signed into law. The CARES Act established the Paycheck Protection Program (PPP), which authorized the Small Business Administration (SBA) to guarantee billions in loans to eligible businesses and nonprofits affected by the coronavirus pandemic. In addition to carrying a 1 percent interest rate and not requiring any collateral, if certain criteria are met, a PPP loan is eligible for tax-free forgiveness.

On May 15, the SBA released the Paycheck Protection Program (PPP) Loan Forgiveness Application, Form 3508, along with detailed instructions for the application. As the AICPA and many practitioners observed, that PPP Loan Forgiveness Application was extremely complicated and quite time-consuming for any practitioner to complete for a client. The SBA subsequently revised that loan forgiveness application to make it less onerous and issued a new EZ version of the application, Form 3508EZ.

On June 5, 2020, the Paycheck Protection Program Flexibility Act was signed into law. The PPP Flexibility Act extended the "covered period" - i.e., the period during which a PPP loan recipient can use loan proceeds and still be eligible for loan forgiveness - from 8 to 24 weeks. The PPP Flexibility Act also raised the percentage of non-payroll expenses for which such loans could be used, extended the timeframe for rehiring employees, and created a new exemption for situations in which such rehires were not possible.

Generally, PPP loan forgiveness is available if proceeds of the loan are only spent during the covered period on specified expenses such as payroll, mortgages, rent, utilities, and interest. The amount of loan forgiveness is reduced where an employer reduces full-time equivalent (FTE) employees and/or reduces employee salaries and wages by more than 25 percent during the covered period, subject to certain exemptions.

The SBA has posted numerous interim final rules relating to the PPP. These interim final rules provide guidance on the various criteria that must be met to receive a PPP loan, the procedures to be followed in obtaining a PPP loan and in receiving tax-free forgiveness of such loans. The SBA also maintains a list of PPP Frequently Asked Questions (PPP FAQs), which it periodically updates.

The SBA began approving PPP loan forgiveness applications and remitting forgiveness payments to PPP lenders for PPP borrowers on October 2, 2020. While many businesses have applied for PPP loans and used the proceeds to float their business operations until the pandemic winds down and operations return to normal, the amount of paperwork and procedures that must be followed to obtain forgiveness of PPP loans can be cumbersome and time-consuming. For some businesses, the paperwork and calculations involved in the PPP process and the expense of hiring accountants and other professionals to navigate the compliance issues involved in obtaining loans, as well as the subsequent forgiveness of such loans, has been daunting.

On October 8, in order to help businesses mitigate some of these issues, the SBA issued Interim Final Rule SBA-2020-0052. The purpose of this interim final rule is to simplify further (1) the forgiveness and loan review processes for PPP loans of $50,000 or less, and (2) lender responsibilities with respect to the review of borrower documentation of eligible costs for forgiveness in excess of a borrower's PPP loan amount.

In connection with the issuance of this rule, the SBA issued an alternative Loan Forgiveness Application, SBA Form 3508S, for use by PPP borrowers applying for loan forgiveness on PPP loans with a total loan amount of $50,000 or less, except for those borrowers that together with their affiliates received loans totaling $2 million or greater.

Form 3508S Limits Reductions to Loan Forgiveness Amount

A borrower that applies for PPP loan forgiveness on SBA Form 3508S (or a lender's equivalent form) is exempt from any reductions in the borrower's loan forgiveness amount based on reductions in full-time equivalent (FTE) employees (Section 1106(d)(2) of the CARES Act) or reductions in employee salary or wages (Section 1106(d)(3) of the CARES Act) that would otherwise apply.

The Small Business Administrator and Treasury Secretary determined that these exemptions are an appropriate exercise of their joint rulemaking authority to grant de minimis exemptions under Section 1106(d)(6) of the CARES Act and are consistent with the purposes of the CARES Act including to provide much-needed financial assistance to a broad range of small businesses, and provide borrowers appropriate flexibility in the current economic climate. According to the SBA, there are approximately 3.57 million outstanding PPP loans of $50,000 or less, totaling approximately $62 billion of the $525 billion in PPP loans. To the extent that these businesses have no employees other than the owner, they are not affected by these exemptions.

As a result, the SBA and Treasury Department estimate that the outstanding PPP loans of the relevant set of potentially affected borrowers (businesses with at least one employee other than the owner) total approximately $49 billion, or 9 percent of the overall PPP loan amount. Within this population of potentially affected loans, the SBA said that most borrowers would not be affected by the loan forgiveness reduction requirements because (1) the borrowers did not reduce FTE employees or reduce employee salaries or wages, or (2) the borrowers would qualify for one of the existing exemptions from loan forgiveness amount reductions. Excluding such borrowers, the SBA said, the aggregate dollar amount of PPP funds affected by these exemptions relative to the aggregate dollar amount of all PPP funds is de minimis.

Changes to Loan Review Rules

The SBA noted that, because it is issuing another alternative Loan Forgiveness Application, SBA Form 3508S, revisions to the loan review rules are also appropriate to incorporate the addition of new Form 3508S. Accordingly, SBA-2020-0052 provides that, when a borrower submits SBA Form 3508S or a lender's equivalent form, the lender must:

(1) confirm receipt of the borrower certifications contained in the SBA Form 3508S or lender's equivalent form; and

(2) confirm receipt of the documentation the borrower must submit to aid in verifying payroll and nonpayroll costs, as specified in the instructions to the SBA Form 3508S or lender's equivalent form.

Providing an accurate calculation of the loan forgiveness amount is the responsibility of the borrower, and the borrower must attest to the accuracy of the reported information and calculations on the Loan Forgiveness Application. The borrower cannot receive forgiveness without submitting all required documentation to the lender.

Citing SBA-2020-0015, the SBA stated that lenders may rely on borrower representations. The lender does not need to independently verify the borrower's reported information if the borrower submits documentation supporting its request for loan forgiveness and attests that it accurately verified the payments for eligible costs.

The SBA also noted that, in some cases, a borrower may submit to a lender documentation of eligible payroll and nonpayroll costs that exceed the amount of the borrower's PPP loan. To address this situation, the SBA stated that the amount of loan forgiveness that a borrower may receive cannot exceed the principal amount of the PPP loan. Whether a borrower submits SBA Form 3508, Form 3508EZ, Form 3508S, or a lender's equivalent form, a lender must confirm receipt of the documentation the borrower is required to submit to aid in verifying payroll and nonpayroll costs, and, if applicable (for SBA Form 3508, 3508EZ, or a lender's equivalent form), confirm the borrower's calculations on the borrower's Loan Forgiveness Application, up to the amount required to reach the requested forgiveness amount.

Updated PPP FAQs

The SBA also updated the PPP frequently asked questions (FAQs) to deal with inquiries as to why the loan forgiveness application forms (3508, 3508EZ, and 3508S) display an expiration date of 10/31/20 in the upper-right corner. Some asked if that was a deadline for borrowers to apply for loan forgiveness.

In FAQ 4 under the General Loan Forgiveness FAQs, the SBA responded that the 10/31/20 date is not a deadline for applying for loan forgiveness. Borrowers may submit a loan forgiveness application any time before the maturity date of the loan, which is either two or five years from loan origination. However, if a borrower does not apply for loan forgiveness within 10 months after the last day of the borrower's loan forgiveness covered period, loan payments are no longer deferred and the borrower must begin making payments on the loan. For example, a borrower whose covered period ends on October 30, 2020 has until August 30, 2021 to apply for forgiveness before loan repayment begins.

The expiration date in the upper-right corner of the posted PPP loan forgiveness application forms, the SBA said, is displayed for purposes of SBA's compliance with the Paperwork Reduction Act, and reflects the temporary expiration date for approved use of the forms. This date will be extended, and when approved, the same forms with the new expiration date will be posted.

For a discussion of PPP loan criteria and PPP forgiveness rules, see prior Parker Federal Tax Bulletins PFTB 2020-04-07, PFTB 2020-05-20, PFTB 2020-06-03, PFTB 2020-06-30, and PFTB 2020-09-08.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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