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Authored by Paul Dillon, Michelle Hobbs and Michael Wronsky

This week, the Small Business Administration (SBA) and Department of Treasury released several items of guidance on Paycheck Protection Program (PPP) loans:

  •  An updated interim final rule on loan forgiveness, to account for changes to the PPP made by the Consolidated Appropriations Act, 2021 (CAA)
  • Two sets of frequently asked questions (FAQ) about how to calculate the maximum loans available under the first- and second-draw programs, how to calculate the 25% revenue reduction required for eligibility for the latter, and what documentation is needed to be submitted with the loan applications
  • Updated loan forgiveness applications:
    Form 3508S (for use by borrowers of loans of $150,000 or less)
    Form 3508EZ (for use by borrowers who maintained specified levels of employee salaries and headcounts)
    Form 3508 (for use by borrowers ineligible to use the above forms)

Links to the documents are included above and a summary of their contents follows below. We will continue to analyze this guidance and issue additional communications as appropriate.

We encourage you to reach out to your Baker Tilly advisor regarding how the above may impact your situation.

Interim final rule (IFR) on loan forgiveness:

  • Consolidates previously issued IFRs on loan forgiveness and makes necessary updates to conform to the CAA’s amendments to the program,
  • Provides that for second-draw loans in excess of $150,000, the borrower must submit its loan forgiveness application for their first-draw loan (even if the requested amount is $0) either before or simultaneously with the second-draw forgiveness application, and on separate applications,
  • Clarifies the limit on forgiveness for owner compensation must be prorated based on the length during which the compensation is paid or incurred. For example, if a covered period of 10 weeks is chosen by the borrower, the maximum amount of owner compensation eligible for forgiveness is calculated as $100,000 divided by 52 weeks multiplied by 10 weeks ($19,231). The $20,833 maximum limit previously in effect applies to covered periods exceeding 2.5 months.   

FAQ:

Provide detailed instructions for how self-employed individuals with and without employees, farmers, ranchers, partnerships, S and C corporations, eligible not-for-profit organizations, eligible not-for-profit religious institutions, veterans organizations and tribal businesses calculate their maximum first- and second-draw loan amounts

Outline the following primary sets of documentation that must be submitted with the second-draw loan application (or forgiveness application, if the loan is $150,000 or less) to support a 25% gross receipts reduction:

  • Quarterly financial statements (if not audited, the first page must be signed and dated by the applicant attesting to their accuracy),
  • Quarterly or monthly bank statements showing deposits from the relevant quarters,
  • Annual IRS tax filings and further provides the amounts required to compute gross receipts by entity tax return type, including:
    – Self-employed individuals other than farmers and ranchers: Form 1040, Schedule C – sum of lines 4 and 7
    – Partnerships: Form 1065 – sum of lines 2 and 8, minus line 6
    – S corporations: Form 1120-S – sum of lines 2 and 6, minus line 4
    – C corporations: Form 1120 – sum of lines 2 and 11, minus the sum of lines 8 and 9
    – For not-for-profit organizations: Form 990: the sum of lines 6b(i), 6b(ii), 7b(i), 7b(ii), 8b, 9b, 10b and 12 from Column A of Part VIII
  • Note: these instructions require that for-profit entities exclude net gains or losses on business asset sales, in addition to capital asset sales. The exclusion of business asset sales appears to be in conflict with the definition of gross receipts provided within the FAQ (as well as the definition under Treas. Reg. section 1.448-1T(f)(2)(iv)(A)). It is unclear whether this is intentional or an oversight.

Provide that if payroll costs for the prior 12 months were used to compute a borrower’s first-draw loan amount, those same payroll costs cannot be used to compute that borrower’s second-draw amount.

Loan forgiveness applications:

  • Of particular interest is the loan amount threshold for determining eligibility to file the paired-down Form 3508S increased to $150,000 from $50,000. Applicants do not need to show the computation of their requested forgiveness amounts, but still must attest to the accuracy of the information reported and submit documentation to support the use of loan proceeds on eligible costs. Borrowers of loans of $50,000 or less do not need to reduce their forgiveness amount for any reduction in employee headcounts or salaries. 

For more information about this topic, please visit our comprehensive set of Payroll Protection Program Solutions.

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The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.

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