21 January 2021

Small Business Administration (SBA) Issues Consolidated Rule on Forgiveness of Paycheck Protection Program (PPP) Loans and Updated PPP Loan Forgiveness Applications

On January 19, 2021, the U.S. Small Business Administration (SBA), in consultation with the Treasury Department, issued a consolidated and updated interim final rule (IFR) on Paycheck Protection Program (PPP) Loan Forgiveness Requirements and Loan Review Procedures.  In addition, SBA posted three updated forms of PPP loan forgiveness applications: (1) Form 3508; (2) Form 3508EZ; and (3) Form 3508S.  Each of these updated documents reflects required changes and conforming revisions based on the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (the Economic Aid Act) enacted into law on December 27, 2020.

As noted in prior Miller Johnson alerts, SBA previously issued updated, consolidated IFRs relating to the PPP loan application process and eligibility considerations for “first draw” and “second draw” loans shortly before reopening the PPP during the week of January 11, 2021.  At the time of this writing, SBA has not yet updated its Frequently Asked Questions (FAQs) to reflect those PPP developments related to the Economic Aid Act and corresponding SBA and Treasury rulemaking.  The FAQ updates, once available, should round out the most important borrower-facing updates to the PPP resulting from the Economic Aid Act.  Miller Johnson will host a webinar after the release of the updated FAQs to take stock of the most important recent PPP developments.

The latest IFR pertaining to loan forgiveness requirements and loan review procedures does not materially change the landscape relative to pre-existing SBA guidance and rulemaking.  However, the new IFR helpfully consolidates SBA’s and Treasury’s earlier guidance and rules, which had been scattered across numerous IFRs and procedural notices, so that it is now organized in a more user-friendly format and reflects the latest developments under the Economic Aid Act.  That said, there are several aspects of the latest IFR worth noting:

  • Summarizes the categories of forgivable expenditures under the PPP, including the four new categories of forgivable expenses authorized by the Economic Aid Act: covered operations expenditures, covered property damage costs, covered supplier costs and covered worker protection expenditures. However, the IFR does not provide any meaningful new insight into specific examples of expenses that may qualify in these four new categories of forgivable expenses.
  • Affirms that “[p]ayroll costs that are qualified wages taken into account in determining the Employer Retention Credit are not eligible for loan forgiveness.” Further guidance – ideally joint guidance – is needed from SBA, Treasury and the Internal Revenue Service on how to ensure compliance with this exclusion in light of the retroactive availability of the Employer Retention Credit to certain PPP borrowers under the Economic Aid Act.  On this front, the American Institute of CPAs is seeking clarity from the relevant government agencies to facilitate program compliance by PPP borrower taxpayers.  Miller Johnson has similarly received a number of client inquiries on this topic, and we likewise would welcome coordinated guidance from relevant government agencies to provide more clarity to clients.
  • Does not provide any new insight into how SBA will evaluate PPP borrowers’ “need” certifications.
  • Confirms that “second draw” PPP loan forgiveness applications must be submitted either after or simultaneously with the submission of a “first draw” PPP loan forgiveness application (that is, not before), even if the calculated forgiveness amount on the “first draw” loan is zero ($0). A separate forgiveness application is required for each loan.
  • Summarizes loan review procedures and requirements and affirms that SBA’s prior rulemaking relating to the process for appealing adverse loan forgiveness determinations remains in effect. If you receive notification from your lender or SBA that all or part of your PPP loan will not be forgiven, we recommend you contact legal counsel and any other advisors (e.g., accountants) immediately, since the timeframe to file an appeal is limited and you may need to provide extensive information to support your appeal.
  • Details (together with the instructions to the updated loan forgiveness application forms) the required documentation submission and retention requirements for borrowers seeking PPP loan forgiveness.
  • Confirms that PPP borrowers with loans of $50,000 or less (on a combined basis with “affiliates”) should use the new, simplified Form 3508S loan forgiveness application. These borrowers are also exempt from any reductions in forgiveness based on reductions in their full-time equivalent (FTE) employee levels or salaries/wages during their covered periods.
  • Confirms that SBA retains the right to review any PPP loan at any time in its discretion (i.e., not just those with a principal amount greater than, say, $150,000 or $2 million). These reviews may cover borrower eligibility, loan amount received, use of funds, loan forgiveness calculations, veracity of certifications and other aspects of the PPP loan origination, expenditure and forgiveness process.

As has been the case since the PPP first became law in March 2020, it is critical for each PPP borrower (regardless of size) to develop and retain records of its eligibility for its PPP loan(s), use of funds, FTE employee levels, compensation and wages and related information in the event SBA or any other government body scrutinizes its PPP loan(s).

Miller Johnson has worked with many PPP borrowers to organize necessary records (including creating separate files for privileged and non-privileged materials) to facilitate the ability to respond quickly and accurately to any potential audit or review of a PPP loan.  Please reach out to us if you have questions or would like assistance in complying with the PPP’s documentation requirements and preparing for the loan forgiveness process.  Thank you.