06/21/20 – PPP Forgiveness Form 3508EZ and Owner-Employee Limitations

Within the last week, the SBA has issued a number of new documents regarding PPP Loan Forgiveness, including an “EZ” version of the forgiveness application and some of the clarifications we had been hoping for. We have summarized the main points below.

  • Owner-Employee: While the SBA still has not defined the term “owner-employee,” it did clarify what amounts paid to an S corporation owner-employee would be eligible for forgiveness–
    • Self-employed health insurance premiums that are added to Box 1 of the owner’s W-2
    • Employer contributions for retirement plans
    • Employer state and local unemployment taxes
    • Gross wages
      • Capped at the lower of $20,833 if using a 24-week Covered Period (2.5-month equivalent of $100,000 per year {100,000 divided by 12 times 2.5}) or 2.5 months of their 2019 wages (2019 wages divided by 12 times 2.5)
      • Capped at the lower of $15,385 if using an 8-week Covered Period (8-week equivalent of $100,000 per year {100,000 divided by 52 times 8}) or 8 weeks of their 2019 wages (2019 wages divided by 52 times 8)
  • Self-Employed Individuals and General Partners: The new guidance states that employer health insurance contributions and employer retirement contributions are NOT included in the forgiveness calculation. Owner compensation is limited to the lesser of
    • $20,833 if using a 24-week Covered Period (2.5-month equivalent of $100,000 per year {100,000 divided by 12 times 2.5}) or 2.5 months of their 2019 applicable compensation (2019 amount divided by 12 times 2.5) or
    • $15,385 if using an 8-week Covered Period (8-week equivalent of $100,000 per year {100,000 divided by 52 times 8}) or 8 weeks of their 2019 applicable compensation (2019 amount divided by 52 times 8).
  • Non-owner compensation: Total cash compensation for any non-owner is limited to $15,385 if using an 8-week covered period or $46,154 (100,000 divided by 52 times 24) if using a 24-week covered period.
  • Non-payroll costs: The application specifically states that borrowers are not required to report amounts that they do not want included in the forgiveness amount. This provision may be helpful if total non-payroll costs over the 8 or 24-week period exceed 40% of the total amount of PPP funds spent because it allows any expenses over that amount to be excluded.
    • It’s not clear from the application whether any payroll costs can be excluded since payroll costs are included on Line 1 of the first page of the application and the exception above specifically references Lines 2-4.

“EZ Application”

Along with updating its original forgiveness application, the SBA also issued an “EZ” Application. This shorter version is available to any borrower who meets at least 1 of the following criteria—

  1. The Borrower is a self-employed individual, independent contractor, or sole proprietor who had no employees at the time of the PPP loan application and did not include any employee salaries in the computation of average monthly payroll in the Borrower Application Form,
  2. The Borrower did not reduce annual salary or hourly wages of any employee who earned less than $100,00 in 2019 by more than 25% during the 8- or 24-week period compared to 1/1/2020 – 3/31/2020, AND the Borrower did not reduce the number of employees or the average paid hours of employees between 1/1/2020 and the end of the 8- or 24-week period. (Ignore reductions that arose 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 on or before December 31, 2020. Also ignore reductions in an employee’s hours that the Borrower offered to restore and the employee refused), or
  3. The Borrower did not reduce annual salary or hourly wages of any employee by more than 25% during the 8- or 24-week period compared to 1/1/2020 – 3/31/2020, AND the Borrower was unable to operate during the 8- or 24-week period at the same level of business activity as before 2/15/2020 due to compliance with requirements established or guidance issued between March 1, 2020 and December 31, 2020 by the Secretary of Health and Human Services, the Director of the Centers for Disease Control and Prevention, or the Occupational Safety and Health Administration, related to the maintenance of standards of sanitation, social distancing, or any other work or customer safety requirement related to COVID-19.

As always, please reach out with any questions you have.