On October 8, 2020, the Small Business Administration (SBA) released a new Form 3508S application and instructions intended to simplify the forgiveness process for borrowers with Paycheck Protection Program (PPP) loans of $50,000 or less. However, a borrower with affiliates (as defined in the SBA rules) may not use this form if the borrower, together with its affiliates, received PPP loans totaling $2 million or more.
The Form 3508S application "requires fewer calculations and less documentation for eligible borrowers." It does not require borrowers to show the calculations supporting the requested loan forgiveness amount, though the SBA reserves the right to request information to validate the borrower's calculations.
As set forth in the Form 3508S instructions and an accompanying Interim Final Rule (IFR), borrowers that are eligible to use the 3508S application are exempt from reductions to the loan forgiveness amount based on reductions to Full Time Employee (FTE) headcount or salaries and wages. According to the IFR, the SBA and Treasury Department consider these de minimis exceptions, which are "consistent with the purposes of the CARES Act, including to provide much-needed financial assistance to a broad range of small businesses, and provide borrowers appropriate flexibility in the current economic climate."
The IFR explained that 3.57 million outstanding PPP loans are for amounts of $50,000 or less (totaling approximately $62 billion of the $525 billion PPP loans). About half of these smaller loans (approximately 1.71 million) were made to businesses that had one or no employees (other than the business owner). Based on this, the SBA estimates that the potentially affected loans "total approximately $49 billion, or 9 percent of the overall PPP loan amount," and that most of these borrowers "would not be affected by the loan forgiveness reduction requirements because (1) the borrowers did not reduce FTE employees or reduce employee salaries or wages, or (2) the borrowers would qualify for one of the existing exemptions from loan forgiveness amount reductions."
Borrowers using the 3508S application, like those using the standard application or the Form EZ, must submit documentation to verify the cash compensation and non-cash benefit payments (e.g., bank account statements or payroll reports, payroll tax filings, account statements documenting employer contributions to health insurance and retirement plans). They also must submit documentation to verify nonpayroll expenses (e.g., mortgage amortization schedules, lease agreements, utility invoices, and cancelled checks showing payments of these expenses). And borrowers must retain, for six years, all documents supporting their PPP loan application (including documents that support the certifications made), their forgiveness application, and their compliance with PPP requirements.
Guidance on Borrower Submission of Excess Costs
Also included in the October 8, 2020 IFR is guidance to lenders regarding situations when borrowers submit documentation of costs that exceed a borrower's PPP loan amount. The IFR instructs lenders to confirm receipt of the borrower's payroll and nonpayroll documentation (whether the borrower is using the standard application, the Form EZ, or the new 3508S application) and to confirm the borrower's calculation "up to the amount required to reach the requested Forgiveness Amount." The IFR makes clear that the "amount of loan forgiveness that a borrower may receive cannot exceed the principal amount of the PPP loan."
Guidance on Deferral of Loan Payments and Notice to Borrowers
On October 7, 2020, the SBA issued FAQ No. 52, which addressed whether lenders must modify promissory notes to reflect the extended deferral period implemented by the Paycheck Program Flexibility Act of 2020 (PPPFA), which extended the deferral period for payments of principal, interest, and fees to (a) the date that the SBA remits the borrower's loan forgiveness amount to the lender or (b) if the borrower declines to apply for forgiveness, 10 months after the end of the borrower's loan forgiveness covered period. Previously, SBA noted, "the deferral period could end after 6 months."
The IFR confirmed that the PPPFA's deferral rule "automatically applies to all PPP loans" and that lenders must "give immediate effect to the statutory extension and should notify borrowers of the change to the deferral period," though a formal modification of the promissory note is not necessary.