The SBA and Treasury recently released Form 3508, the long-awaited Paycheck Protection Program (PPP) Loan Forgiveness Application. Here’s an overview.
Form 3508 has four parts: a forgiveness-calculation form, a Schedule A, a worksheet for Schedule A, and a borrower-demographic form. You’ll need to submit the first two parts to your lender, along with verifying documentation. The Form identifies an October 31, 2020 “Expiration Date,” which implies a Halloween deadline. Keep the Schedule A worksheet on file. The borrower-demographic form is optional.
Each of the four parts has detailed instructions. Some instructions may be familiar. Others aren’t. For example, the instructions identify the “Covered Period” as the 56-day (8-week) period after receipt of PPP funds. But the instructions also define an “Alternative Payroll Covered Period,” which begins on “the first day of their first pay period” after loan disbursement. A borrower with a “biweekly (or more frequent) payroll schedule” may elect to use the Alternative Payroll Covered Period to make its Covered Period coincide with its pay period, for certain purposes.
Form 3508 addresses some unresolved questions, including the incurred/paid question. By way of background, the CARES Act says that borrowers are eligible for forgiveness in an amount equal to specific “costs incurred and payments made” during the covered period. It was unclear whether forgiveness‑eligible costs were required to be either paid or incurred, or both paid and incurred, during the covered period to qualify for forgiveness. Form 3508 settles the question. Borrowers are “generally eligible for forgiveness for the payroll costs paid and payroll costs incurred” during the covered Period (or Alternative Payroll Covered Period). Payroll costs are “paid” when paychecks go out or an ACH transaction originates. Payroll costs are “incurred” when pay is earned. Payroll costs incurred at the tail end of the covered period, but paid after it ends, are forgiveness-eligible “if paid on or before the next regular payroll date.” A similar analysis applies to nonpayroll costs. “An eligible nonpayroll cost must be paid during the Covered Period or incurred during the Covered Period and paid on or before the next regular billing date, even if the billing date is after the Covered Period.”
The Form also resolves the full-time-equivalent employee calculation. “For each employee, enter the average number of hours paid per week, divide by 40, and round the total to the nearest tenth. The maximum for each employee is capped at 1.0.” “A simplified method that assigns a 1.0 for employees who work 40 hours or more per week and 0.5 for employees who work fewer hours may be used at the election of the Borrower.”
Form 3508 also fixes the wage-reduction problem. Confusingly, the CARES Act reduces forgiveness by the amount that an employee’s “total salary or wages” during the 8 weeks after PPP, when compared total salary or wages during “the most recent full quarter” before PPP, have been reduced by more than 25 percent. But when total wages over 8 weeks are compared to total wages over 3 months, forgiveness reduction would always occur if hours and rates held steady. Form 3508 uses “average annual salary or hourly wage” over the two periods as a fix.
Form 3508 also adds no less than seven more certifications. These certifications include, in part, that the amount for which forgiveness is sought was used to pay forgiveness-eligible costs, that payments for eligible costs have been “accurately verified,” and that all information in the application and supporting documents “is true and correct in all material respects.” The certifications confirm a limit on the forgiveness of owner payroll costs. An earlier Interim Final Rule limited forgiveness to a “proportionate eight-week share of 2019 net profit, as reflected in the individual’s 2019 Form 1040 Schedule C.” Now, in filling out Form 3508, every borrower must certify that the forgiveness amount “does not exceed eight weeks’ worth of 2019 compensation for any owner-employee or self-employed individual/general partner, capped at $15,385 per individual.” This 8/52 forgiveness limitation is new for owners that take W2 wages. In addition, Schedule A contains a separate line for owner compensation, and owners are not included as employees on the Schedule A Worksheet.
Form 3508 also imposes a substantial documentation obligation. There is a list of documents that you’ll need to submit to your lender with the forgiveness application. These include records supporting payroll costs (such as payroll tax filings, typically Form 941), records containing employee-count information (such as unemployment insurance tax filings), and records supporting nonpayroll costs (such as lender amortization schedules, lease agreements, or utilities invoices, along with cancelled checks).
Borrowers must keep other documents on file. These documents include, in part:
• “Documentation regarding any employee job offers and refusals, firings for cause, voluntary resignations, and written requests by any employee for reductions in work schedule.”
• “All records relating to the Borrower’s PPP loan,” including documentation “supporting the Borrower’s certifications as to the necessity of the loan request and its eligibility for a PPP loan.”
“The Borrower must retain all such documentation in its files for six years after the date the loan is forgiven or repaid in full, and permit authorized representatives of SBA, including representatives of its Office of Inspector General, to access such files upon request.” Check page 10 for more details.
More guidance and instructions are forthcoming. For legal advice specific to the operation of your Minnesota business, please contact us at Dunlap & Seeger, P.A.