PPP Update: Early Loan Forgiveness Applications & Owner Compensation

Applying Early for Loan Forgiveness

New Paycheck Protection Program (PPP) guidance released by the SBA on June 22, declares that PPP recipients can apply for loan forgiveness early, however, doing so could cost money.

The new interim final rule makes revisions to previous guidance to reflect the Paycheck Protection Program Flexibility Act of 2020, P.L. 116-142, which became law on June 5 and made significant changes to the PPP. Among the new material is the explanation of the process for applying early for loan forgiveness.

Many small businesses have inquired about whether they can apply for PPP loan forgiveness before their covered period expires. The new interim final rule says that if a borrower applies for loan forgiveness before the end of the covered period and has reduced any employees’ salaries or wages by more than the 25% allowed for full forgiveness, the borrower must account for the excess salary reduction for the full eight-week or 24-week covered period, whichever one applies to its loan.

Under that guidance, PPP borrowers that apply early for loan forgiveness forfeit a safe-harbor provision allowing them to restore salaries or wages by Dec. 31 and avoid reductions in the loan forgiveness they receive. For example, if a borrower has a 24-week period that ends in November but wants to apply in September, any wage reduction in excess of 25% as of September would be calculated for the entire 24-week period even if the borrower restores salaries by Dec. 31.

An example provided in the interim final rule shows how the calculations would work:

Example: A borrower is using a 24-week covered period. This borrower reduced a full-time employee’s weekly salary from $1,000 per week during the reference period to $700 per week during the covered period. The employee continued to work on a full-time basis during the covered period, with an FTE of 1.0. In this case, the first $250 (25% of $1,000) is exempted from the loan forgiveness reduction. The borrower seeking forgiveness would list $1,200 as the salary/hourly wage reduction for that employee (the extra $50 weekly reduction multiplied by 24 weeks). If the borrower applies for forgiveness before the end of the covered period, it must account for the salary reduction for the full 24-week covered period (totaling $1,200).

Expanded Limitations on Owner Compensation

The new guidance also addresses that the employer portion of retirement plan funding for owner-employees of S-Corporations and C-Corporations is now capped at 2.5 months’ worth of the 2019 contribution amount. In addition, healthcare costs paid on behalf of owner-employees of S-Corporations are not eligible for forgiveness.

Most of the changes implemented by the new interim final rule were covered in previous guidance and in the PPP loan forgiveness applications.

View the full interim final rule.

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