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Should I Apply for PPP Loan Forgiveness?

Posted by : on : October 6, 2020 | 9:59 pm

Key Takeaways


  • No formal deadline on forgiveness application
  • Most borrowers will apply within the few months following the end of their “covered period”, whether that is 8 weeks, 24 weeks, or something in between
  • The 24-week extended ability to spend PPP loan proceeds on qualified expenditures may be advantageous to some borrowers and will impact application timing
  • Forthcoming guidance and future legislation may persuade borrowers to delay their application
  • If a borrower anticipates changes to its business model, including structural, equity, or other business transactions, the borrower should consider filing for forgiveness as soon as possible and must notify the lender
  • Loans for which a forgiveness application is not filed within ten months after the end of the Covered Period will become due and payable


When do I have to apply?


Most borrowers will want to apply within the five (5) to six (6) month period after they have spent the loan proceeds. Pursuant to the Paycheck Protection Program Flexibility Act (“PPPFA”), if an eligible recipient fails to apply for forgiveness within 10 months after the last day of the end of the “Covered Period”, as defined by the SBA, such an eligible recipient shall begin to make payments of principal, interest, and fees on the loan. However, borrowers will also want to track pending legislation. For example, there are nearly identical bills in the House and Senate that would require borrowers with loans under $150,000 simply to sign an attestation as opposed to submitting an application form and documentation in the forgiveness application process. Consultation with advisors monitoring the PPP landscape will be critical.


Where do things stand with respect to the forgiveness process today?


The Small Business Administration (“SBA”) has released two forms to date: Forms 3508 and 3508EZ. Form 3508 requires detailed analysis and completion of support schedules, including Schedule A and Schedule A Worksheet. The Form 3508EZ constitutes a simpler form for those borrowers who qualify to use. A borrower can qualify to use the Form 3508EZ if it meets one of the following three “tests”:


  • Borrower is a self-employed individual, independent contractor, OR sole proprietor who had NO employees at the time of the application for the PPP loan AND did not include any employee salaries in the computation of the loan amount request on SBA Form 2483.
  • Borrower did NOT reduce the NUMBER of employees or the average paid hours of employees between January 1, 2020 and the end of the Covered Period AND did not reduce the annual salary or hour wage of ANY employee by more than 25 percent during the Covered Period as compared to the period of January 1, 2020 and March 31, 2020, i.e., Q1 of 2020.
  • Borrower was unable to operate during the Covered Period at the same level of business activity as before February 15, 2020 due to compliance with government regulations (form identifies federal agencies, but SBA has confirmed that state and local regulations impacting business activity would also apply) AND did not reduce the annual salary or hour wage of ANY employee by more than 25 percent during the Covered Period as compared to the period of January 1, 2020 and March 31, 2020, i.e., Q1 of 2020.


The use of the concept of number of employees in the second test, as opposed to full-time equivalents (“FTEs”) used elsewhere in the application, provides another nuance that borrowers need to consider. The SBA has not provided guidance. While the instructions provided state that a borrower may ignore reductions that arose from an inability to rehire personnel or similar personnel, the instructions do not provide for the application of any of the other FTE exceptions, e.g., voluntary resignation, termination for cause, etc. This could well mean that if, for example, a borrower has an employee quit voluntarily, that borrower would have to use Form 3508 even though the employee is considered an exempted employee. However, one could also interpret the SBA’s wording based on whether the reduction was based on the borrower’s or employee’s action. For example, if an employee voluntarily resigned, the borrower did not reduce the number of employees. Rather, it was an employee action. Conversely, a termination for cause would be a borrower action. Borrowers would be advised to consult their advisors when determining whether they can use the Form 3580EZ.


Neither form has been updated since the SBA provided the updated forms on June 16, 2020, despite some changes to the program. As mentioned above, there are legislative proposals that would eliminate the need for the forms for borrowers with loans of less than $150,000. These facts could influence whether a borrower decides to apply for forgiveness today or later.


Beyond the forms themselves, the SBA opened its forgiveness portal on August 13, 2020.  As of October 2, 2020, the SBA had reported receiving 96,000 forgiveness applications but has not yet approved any. Additionally, many lenders did not have their own portals open by August 13th, but many have now opened their portals. Some lenders have decided to use their own “lender equivalent form”, reflecting changes to the program not found in the SBA’s forms. Still other lenders have prepared their own forgiveness portals which may or may not be open yet. Finally, some lenders are only accepting forgiveness applications based on the ending date of the Covered Period (or at the least, forcing borrowers to make certifications as of the ending date of the Covered Period). Again, such lender-related matters can impact a borrower’s ability to apply for forgiveness.


Should I wait until the end of 24 weeks?


By statute, Congress extended the Covered Period from its initial 8 weeks to 24 weeks; it did this pursuant to the PPPFA signed into law on June 5, 2020. Thus, for any borrower who received proceeds before June 5th, the borrower gets to elect whether to use an extended 24-week Covered Period or its original 8-week Covered Period. Electing the longer 24-week period may give a borrower additional breathing room in which to spend the proceeds on qualified expenditures, particularly in the case of self-employed and owner-employees, whose payroll amounts are capped at 2.5 times the average monthly profit.


For all borrowers, the SBA has made clear that a borrower may submit a forgiveness application before the end of its Covered Period. Although not explicitly stated in SBA guidance, it appears that a borrower accounts for, and bases its certifications regarding employee salary and headcount reductions at the time of the filing of the application. The SBA has warned that for any borrower submitting a forgiveness application before the end of its Covered Period that has also reduced any employee’s salaries or wages in excess of 25 percent, the borrower must account for the excess salary reduction for the full covered period. Thus, decisions as to whether salary/wage reduction will be made by a borrower should not impact the decision as to when to file for forgiveness. While the SBA has not provided guidance as to the FTE reduction analysis if a reduction occurs after submission of the loan forgiveness application but still during the 24-week Covered Period, i.e., submit in Week 18, borrowers would be advised to avoid any such reduction until the end of the 24-week Covered Period. This could be critical for those borrowers who do not meet the Safe Harbor #2 in the FTE analysis, which does use the FTE number as of the earlier of the forgiveness loan application or December 31, 2020.


If a borrower’s loan, or any part of it, ultimately is determined to be unforgiven, waiting to apply for forgiveness could have the effect of increasing the interest cost on the loan.


Should I wait for more Guidance?


In addition to the aforementioned legislation that would eliminate the need for Forms 3508 or 3508EZ in certain instances, we expect the SBA will continue to provide new guidance as borrowers proceed through the loan process. For example, the SBA offered additional guidance in late-August relating to owner compensation and eligibility of certain nonpayroll costs such as self-rent. This guidance could have a profound impact on a borrower’s eligibility for forgiveness. Waiting for such additional specific guidance may eliminate uncertainty but comes at a cost. Once guidance is issued addressing a previously gray area, a borrower may not be able to make certain interpretations that it could prior to such guidance.


As the SBA continues to offer additional guidance, we have seen some borrowers with loan documents containing restrictions and covenants that are not aligned with current SBA guidance. In such instances, it seems imperative that a borrower and lender work together to amend such agreements. If a borrower submits its forgiveness application using current SBA guidance, which application conflicts with a loan provision (e.g., using a 24-week Covered Period where the loan document calls for an 8-week period), such borrower may be falsely certifying that it has complied with the terms of its loan. Historically, the SBA has not been kind to “foot faults” of this nature. What is more, breaching its current PPP loan agreement could make a borrower in default on other important contracts (e.g., a cross default provision in a large vendor contract).


Are there instances in Which I would want to apply early?


Beyond the general discussion herein, we have seen a few specific instances in which a borrower may want to apply for forgiveness at the earliest date.


  • Structural Changes to Your Business. If the pandemic has created a continuing need to change a borrower’s overall business structure, whether it be a reduction in workforce, elimination of a division, or any other change, it might be beneficial to apply for forgiveness early. As alluded to earlier, the FTE Reduction (Safe Harbor #2) is keyed off the forgiveness application date, not the end of the Covered Period. That said, if part of the structural change includes wage/salary reductions for employees making less than $100,000 per year, a borrower must consider the impact of the wage reduction rule and the fact the SBA has clearly stated any excess salary reduction must be taken into account pro rata across the entire Covered Period.
  • Ownership Changes. This issue has come up frequently and becomes quite complicated. Nearly every loan document we have seen for the PPP loan program (whether it be the SBA form loan agreement or a particular lender’s form) contains restrictions on a borrower’s ability to undergo a change in ownership. And while the SBA’s general “7(a) loan” guidance (of which a PPP loan is a subject) provides limited relief for very small ownership changes no earlier than 12 months after disbursement, a borrower should assume that any change in control, no matter how de minimis, will require SBA and/or lender approval. Ignoring such approval could result in automatic default. A complete discussion is beyond the scope of this writing, but it has been our observation that when the issue arises, early and frequent communication with the lender is the best course of action. When a change in ownership is contemplated, in addition to communicating with the lender, the borrower should consider applying for forgiveness as early as possible, with an eye towards forgiveness being obtained prior to any change in ownership. And these observations and guidance were confirmed in SBA guidance released on Friday, October 2, 2020.
  • M&A Transactions. In addition to changes in the equity structure of a borrower, there are other business transactions that could impact a borrower’s decision as to when it should submit its forgiveness application. Though not directly related to the SBA’s “7(a) loan” program, there are similar instances in which the SBA makes clear that it will treat asset transactions identically to equity transactions. Regardless of the form of a business transaction, a borrower should consider the impact of SBA and/or lender approval on a particular transaction. Applying early or deferring the proposed transaction could mitigate this concern, but even in those instances in which approval is sought and obtained (usually a two-month process), a borrower needs to consider the impact of an outstanding PPP loan on the overall transaction. The SBA guidance released on Friday, October 2, 2020 provides for the ability for transactions to move forward without SBA approval, however, specific elements must be established. Moreover, in the situations we have seen, the parties to a transaction will carve out specific representations and warranties with respect to an existing PPP loan. In some instances, a borrower might anticipate the PPP loan amount being escrowed as part of the transaction. Even the forgiveness process itself can be a negotiating point.


Several variables can affect the decision as to when a borrower should file a PPP loan application. Keep in mind this decision is but one of many that borrowers will face in the coming months. As borrowers await future legislation, further guidance, and determination of financial results and the tax consequences therefrom of the pandemic, FGMK is available to help navigate through.


David H. Benz


Managing Director





The summary information in this document is being provided for education purposes only. Recipients may not rely  on this summary other than for the purpose intended, and the contents should not be construed as accounting, tax, investment, or legal advice. We encourage any recipients to contact the authors for any inquiries regarding the contents. FGMK (and its related entities and partners) shall not be responsible for any loss incurred by any person that relies on this publication.


About FGMK


FGMK is a leading professional services firm providing assurance, tax and advisory services to privately held businesses, global public companies, entrepreneurs, high-net-worth individuals and not-for-profit organizations. FGMK is among the largest accounting firms in Chicago and one of the top ranked accounting firms in the United States. For over 50 years, FGMK has recommended strategies that give our clients a competitive edge. Our value proposition is to offer clients a hands-on operating model, with our most senior professionals actively involved in client service delivery.