by Megan Roberts, Extension educator
Effective
October 8, 2020, Paycheck Protection Program (PPP) borrowers receiving forgivable loans of $50,000 or less can
use a streamlined forgiveness application. Borrowers have 10 months after the
end of the covered period to submit for forgiveness. Based on the timing of the
first PPP loans, no PPP borrower has an eminent forgiveness application
deadline in 2020. Further, this is the third major change to the forgiveness applications
for PPP loans, and given the history of changes, borrowers should be aware this
might not be the last update this year to the program.
3508S
For borrowers $50,000 or under, you may now use the 3508S or lender equivalent (i.e. the short form). You will not need to submit calculations on your 3508S forgiveness application, but you do still need to initial that you’ve “accurately calculated the forgiveness amount requested” and met all the stipulations for forgiveness. The stipulations include, for example, that the forgiven loan was used for only PPP eligible expenses, was at least 60% payroll and/or owner’s compensation replacement, and does not exceed 2.5 months or 8 weeks for any owner’s compensation depending on covered period of the loan.
The 3508S
further requires the borrower certify that they have verified PPP payments,
provided all documentation to their lender as requested, and will retain all
documentation related to PPP for six years. At the bottom of the form, the
borrower adds a signature and date to complete the certification process. An
important note for borrowers receiving an EIDL advance is the interaction
between EIDL advances and PPP forgiveness still remains. SBA reduces PPP
forgiveness by the amount of the EIDL advance of up to $10,000. Furthermore,
expenses used for PPP forgiveness cannot be used as deductible expenses for tax
purposes in the year of forgiveness based on Notice 2020-32 of the IRS [see note]. The
new 3508S form does not change this current IRS interpretation on expense
deductions.
The 3508S instructions document contains more detailed information about the 3508S
requirements.
3508EZ
For
borrowers over $50,000, you may use the 3508EZ or lender equivalent, if a)
there was no reduction of salary or wages of employees by more than 25% and no
reduction of employees or average paid hours, OR b) there was no reduction of
salary or wages of employees by more than 25% and inability to operate at same
level of business activity due to compliance with COVID-19 requirements. The
form requires the borrower enter their forgiveness calculations on the form in
specific lines. If a borrower was unable to meet
the 60% threshold for payroll or owner’s compensation expenses, the 3508EZ form
allows for a proportionate reduction in forgiveness, therefore the 3508EZ may possibly be preferable
to the 3508S in cases where payroll is less than 60% of eligible expenses.
3508 Long Form
Finally, for
borrowers that do not meet the qualifications for the 3508S or 3508EZ, the 3508
or lender equivalent (i.e. the long form) remains. For PPP loans over $2
million or for borrower’s whose loans together with its affiliates add to
greater than $2 million, SBA will review and audit forgiveness.
Summary
Earlier this summer, Rob Holcomb and I prepared example PPP forgiveness forms (available here and here). The examples in the posts are now somewhat out-of-date in that the fictitious borrowers could use the simpler 3508S form based on having smaller sized loans. However, if you are looking for additional details on how to make PPP forgiveness calculations, the posts remain available for review. While the 3508S does not require you to submit calculations, you still must initial on the application that all PPP-related forgiveness calculations were made and all documentation retained.
Finally, it bears repeating, PPP has undergone many changes since it was first authorized by the CARES Act in March 2020. This may not be the last change we see.
Caution: This blog is offered as educational information. It does not constitute legal or financial advice. Please contact your lender or tax professional with questions. PPP guidance has changed frequently.
Note. For sole proprietors without employees, selecting
the 24 week covered period enables full forgiveness of the PPP loan based on only owner’s compensation. Therefore, Notice 2020-32 would not apply to this group as non-payroll eligible
expenses would not be used for forgiveness calculations. Nonpayroll expenses
remain deductible when not used for forgiveness. While the SBA does not currently (at the time this
writing) require a sole proprietor owner without a separate business structure
to write out a check in owner’s compensation, a de facto policy from some CPA
firms and lending institutions has emerged suggesting this practice. In the
absence of any governmental policy on this matter, it may still be advisable to
transfer funds for owner’s compensation in a documentable way.
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