October 15, 2020
Most borrowers who have received Paycheck Protection Program (“PPP”) loans of $50,000 or less may now apply for forgiveness using a truncated application, unless, together with their affiliates,1 they received loans totaling $2 million or greater. The Small Business Administration (“SBA”) and the U.S. Department of Treasury issued the new application, SBA Form 3508S, to streamline the complicated forgiveness process for eligible businesses that have borrowed smaller amounts of money under the PPP. SBA Form 3508S is available here.
The application, and the accompanying Interim Final Rule on Additional Revisions to Loan Forgiveness and Loan Review Procedures (“Small Loan IFR”), provide a number of important exceptions to borrowers using this new application. Under prior guidance, a borrower’s loan forgiveness amount can be reduced if the borrower fails to restore salaries or its workforce to pre-COVID-19 levels, unless an exception applies. (For exceptions, see our alert, Changes to Law Ease Restrictions on Use of PPP Funds). Eligible borrowers will now be exempt “from any reductions in the borrower’s loan forgiveness amount based on reductions in full-time equivalent (FTE) employees (citation omitted) or reductions in employee salary or wages (citation omitted) that would otherwise apply.” This change effectively removes many of the complicated calculations to which borrowers with loans of greater than $50,000 are subject.
According to the SBA and Treasury, the exemptions will only effect a de minimis number of borrowers and, therefore, the added exemptions are within the agencies’ power to effectuate. According to the agencies, approximately 3.57 million outstanding PPP loans are for $50,000 or less, totaling roughly $62 billion of the total $525 billion worth of PPP loans distributed since the Program began in April of 2020. Of those, roughly $49 billion, or 9% of the overall PPP loans went to businesses that employ at least one employee other than the owner. According to the SBA, most of these borrowers would not be affected by the exemptions because they (1) did not reduce FTE employees, salary or wages; or (2) would qualify for one of the existing exemptions from loan forgiveness amount reductions. After excluding these borrowers, the agencies reasoned, the number of loans affected by the new rule relative to the total PPP loan amounts distributed is de minimis.
The Small Loan IFR also eases lender’s obligations for reviewing SBA Form 3508S. To meet the proper loan forgiveness review criteria, a lender must:
i. Confirm receipt of the borrower certifications contained in the SBA Form 3508S or lender’s equivalent form.
ii. 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.
The Small Loan IFR introduces the second amendment to the PPP forgiveness process and available forms. The first came in June of 2020, after the passage of the PPP Flexibility Act, which introduced SBA Forms 3508, an 11-page detailed application, and 3508-EZ, another truncated form. In the SBA press release, Secretary of the Treasury Stephen T. Mnuchin stated that the application demonstrates the SBA’s and Treasury’s commitment “to making the PPP forgiveness process as simple as possible while also protecting against fraud and misuse of funds.” Notably, Secretary Mnuchin also stated, “We continue to favor additional legislation to further simplify the forgiveness process.”
Please contact Kimberly Klein at (212) 554-7853 or email@example.com and Benjamin Danieli at (212) 554-7848 or firstname.lastname@example.org, if you have any questions regarding the most recent changes.
Please see below for our other alerts on the PPP Program:
June 16, 2020, New PPP Guidance Provides for Partial Loan Forgiveness.
May 26, 2020, The SBA Issues PPP Loan Forgiveness Rules.
May 20, 2020, PPP Updates: Loan Forgiveness and Foreign Affiliates.
May 6, 2020, IRS Issues Notice Denying Deductions for Expenses Paid with PPP Loans.
May 1, 2020, Small Business Administration and New York City Loan Programs.
April 29, 2020, A Curveball by the SBA Unsettles the Application Process for the PPP Program.
April 9, 2020, CARES Act Enacted.
This article is current as of October 13, 2020 and reflects the state of the relevant laws, regulations, and guidance to that point. Any subsequently issued legislation, rules, and guidance by Congress, the United States Treasury, the Small Business Administration and other various government agencies may change the information contained herein. While this article is meant as a useful resource concerning matters arising under the Paycheck Protection Program, it should not be considered legal advice for any specific situation.
1 13 C.F.R. §121.301(f) defines affiliates for purposes of the PPP. The federal regulation states, in pertinent part, “Concerns and entities are affiliates of each other when one controls or has the power to control the other, or a third party or parties controls or has the power to control both. It does not matter whether control is exercised, so long as the power to control exists.” Affiliation can further, and among other things, be based on equity ownership or management powers, and can arise under certain stock options, convertible securities, and agreements to merge, as well as in situations creating an “identical or substantially identical business or economic interest” between entities.