MARCH 15, 2021
On Friday, March 12, the SBA released an update to its document, “How to Calculate Maximum Loan Amounts for First Draw PPP Loans.” Among other updates, the document added the following question:
18. If I am a self-employed individual who is eligible to use gross income from both Schedule C and Schedule F to calculate loan amount, how do I calculate loan amount?
As this question was one of our most common questions from the last few months, we are pleased to see that the SBA has provided clarity and that, yes, a sole proprietor now has clearance to add gross income from a Schedule C and Schedule F when applying for a PPP loan.
A March 12 revision to the SBA’s Frequently Asked Questions (question #66) document outlines options for lender to assist Schedule C filers who already submitted a PPP loan application to use gross income (rather than net) to calculate their PPP loan amount. As with so many answers in PPP, the SBA says “it depends” on the status of the loan. The lender has options to assist the borrower in recalculation unless or until the loan has been disbursed.
On to two public policy issues of which you should be aware:
- Bipartisan bills were filed in both the House and Senate last week to extend the PPP until May 31, as well as provide an additional 30 days to process applications submitted prior to the deadline.
- As previously reported, PPP loan proceeds and qualifying expenses are not carved out of franchise tax calculations for borrowers. HB 1195, introduced in the Texas legislature will address that issue to benefit borrowers. IBAT is actively supporting that legislation.
MARCH 3, 2021
As we have been awaiting all week, the Small Business Administration has just released a number of documents addressing outstanding issues.
There is a new set of application forms, including first and second draw loans for borrowers that are Schedule C filers, using gross income. Those two application forms can be found here:
- Borrower Application Form for Schedule C Filers Using Gross Income (3/3/2021)
- Second Draw Borrower Application Form for Schedule C Filers Using Gross Income (3/3/2021)
Revised application forms for all other borrowers, which can be found here:
- Borrower Application Form (revised 3/3/2021)
- Second Draw Borrower Application Form (revised 3/3/2021)
Additionally, the Small Business Administration released updated FAQs which can be found here:
Finally, the long-awaited IFR on Revisions to Loan Amount Calculation and Eligibility was also released.
As always, our team has pulled out some key observations from the newly released information.
- FAQ #59 makes it clear a 1st round PPP borrower who subsequently filed bankruptcy IS eligible for forgiveness if funds were used according to the SBA guidance.
- FAQ#60 indicates the same borrower described above is NOT eligible for a 2nd Draw PPP loan.
- FAQ#61 clarifies that a borrower may certify, for purposes of a 2nd Draw PPP loan application, that it will have used all of its 1st round PPP Loan Proceeds for eligible expenses but should also understand that failure to use 60% for payroll expenses will affect loan forgiveness.
- FAQ#62 makes it clear a borrower who received partial forgiveness of its First Draw PPP Loan, IS eligible for a Second Draw PPP Loan as long as the borrower used the full amount of its First Draw PPP Loan only for eligible expenses outlined in subsection B.11.a.i.-xi of the consolidated interim final rule implementing updates to the PPP.
From the preamble of the IFR, “this interim final rule allows individuals who file an IRS Form 1040, Schedule C to calculate their maximum loan amount using gross income, removes the eligibility restriction that prevents businesses with owners who have non-financial fraud felony convictions in the last year from obtaining PPP loans, and removes the eligibility restriction that prevents businesses with owners who are delinquent or in default on their Federal student loans from obtaining PPP loans.”
FEBRUARY 23, 2021
FEBRUARY 22, 2021
This morning the Biden administration released plans to “pause” Paycheck Protection Program lending for all but the smallest employers (less than 20 employees). This change in the program will take place this Wednesday, February 24 and last until the evening of Tuesday, March 9.
Further, the administration will issue new methodology for calculating loan amounts for sole proprietors, independent contractors and self-employed individuals. This plan will allow those businesses to access more funds through the program.
Additionally, the changes will:
- Eliminate an exclusionary restriction that prevents small business owners with prior non-fraud felony convictions from obtaining relief through the Paycheck Protection Program.
- Eliminate an exclusionary restriction that prevents small business owners who are delinquent on their federal student loans from obtaining relief through the Paycheck Protection Program.
- Ensure access for non-citizen small business owners who are lawful U.S. residents by clarifying that they may use Individual Taxpayer Identification Numbers (ITINs) to apply for relief.
Finally, the SBA is launching a new initiative to deepen its relationships with lenders. This model will increase opportunity for lenders to provide recommendations and ask questions about the PPP and drive resolution of open questions and concerns in a more streamlined way.
While we originally planned on offering all additional PPP updates in tomorrow’s edition of IBAT’s Bottom Line newsletter, this communication affords us the opportunity to recap them here for now:
- According to the SBA, the new form 3508S is effective as of the date it was issued. SBA is allowing lenders 60 days (until March 5, 2021) to process the forgiveness request from borrowers that were in the pipeline prior to the issuance of the new forms. Any new forgiveness requests from the borrowers must be made by using the new forms.
- As of the end of last week, $125 billion of the $284 billion of funding has been utilized in this round of PPP.
- New Application Forms: Last week, the Small Business Administration released new application forms for first and second draw PPP loans. The new form moved the demographic questions to the top of the application, from their previous place at the bottom, where very few borrowers were completing them. While the demographic questions are still not required, the SBA expressed hope that the more prominent placement of the questions would encourage more borrowers to complete those sections. The new application forms are available on the Treasury Department website.
Recent Procedural Notice Raises Lender Liability Concerns: Just before the ice storm hit, the Small Business Administration released a procedural notice that would allow lenders to resolve various hold codes raised by validation errors within the PPP loan portal. This raised the question of whether lenders might be subjected to great liability if, in the SBA’s determination, a code was not sufficiently resolved to their standards.
In IBAT’s review of the question, we believe that the resolution of the hold codes is permitted for lenders under delegated authority provided to them by the Small Business Administration. The lender’s certification that is required for the resolution of these codes applies only to the resolution of these errors and, we believe, does not change the lender’s Hold Harmless elsewhere.
As with every step of this process, unless or until the SBA chooses to explicitly address this issue, the exact answer is unknown/unclear.
JANUARY 29, 2021
The Small Business Administration released three updates to its “Frequently Asked Questions” document this evening. The added questions (#54-56) address:
- The applicability of FinCEN’s April 2020 PPP FAQ to Second Draw loans;
- A Lender’s ability to rely on borrower information received for a first draw loan for purposes of BSA/AML, when processing an application for a second draw loan;
- How to handle the employee limitations for a second draw loan to a public broadcasting station operated by a college or university.
The full FAQ document is available here.
JANUARY 27, 2021
The SBA earlier today provided several documents to assist those lenders dealing with “hold code” and “unresolved issues” in the application proces:
- Resolving First Draw PPP Loan Hold Codes,
- How to Resolve First Draw PPP Loan “Unresolved Borrowers” and Hold Codes,
- Unresolved Borrower Resolution Process for Second Draw PPP Loans; and
- Procedural Notice 5000-20083 – Platform Procedures for Addressing Unresolved Issues on Borrower First Draw PPP Loans
While we will provide observations and analysis on the slide decks and documents included, we felt this information in its present form could prove helpful to those facing issues in this area.
JANUARY 21, 2021 (IRS Update)
As indicated several weeks ago, the “Economic Aid Act” passed just before Christmas reversed the previous requirement that banks send out 1099-MISC forms to those borrowers for whom the SBA made payments subsequent to the CARES Act. The IRS earlier this week issued guidance clarifying that these subsidies were not to be considered gross income to the recipient and thus do not require the issuance of 1099-MISC forms to these borrowers.
The guidance also addresses other forms of relief including PPP forgiveness, EIDL grants, various loan subsidies, etc. and reiterates that proceeds from these programs are not to be considered taxable income to the recipient.
Please note that lenders are requested to file and provide their borrowers 1098 forms to reflect mortgage interest paid on these SBA loans to ensure consistency with reporting and deductions taken by the borrower.
We encourage you to consult with your tax accountant and attorneys to ensure proper compliance, especially with the 1098 reporting issue. Special thanks to our friends at BKD, LLP as well as IBAT member Charles Comer at Bank of the West, Grapevine for their assistance and guidance as we worked through these issues.
JANUARY 20, 2021
Last evening the Small Business Administration issued new documents related to the forgiveness of First and Second Draw loans under the Paycheck Protection Program.
This release included the awaited edits to form 3508S to allow for simple forgiveness of loans of $150,000 and less. In an Interim Final Rule on Loan Forgiveness Requirements and Loan Review Procedures, it was once again affirmed that the borrower is not required to submit any documentation with their application for forgiveness on First Draw PPP loans of $150,000 or less. This rule also applies to Second Draw loans, with the exception of the requirement for documentation proving the 25 percent reduction in gross receipts, if that documentation has not been provided at the time of application.
Other loan forgiveness applications were also revised and reissued:
- PPP Loan Forgiveness Application Form 3508 (Revised 1/19/21)
- PPP Loan Forgiveness Application Form 3508EZ (Revised 1/19/21)
- PPP Loan Forgiveness Application Form 3508S (Revised 1/19/21)
First and Second Draw Loan Forgiveness
The Interim Final Rule on Loan Forgiveness Requirements and Loan Review Procedures was a restatement of many of the existing requirements and considerations for loan forgiveness (updated for changes in types of eligible expenses). It did, however, address the mechanics of how First and Second Draw loan forgiveness applications should be handled in relation to one another, stating:
"For Second Draw PPP Loans in excess of $150,000, the borrower must submit its loan forgiveness application for the First Draw PPP Loan before or simultaneously with the loan forgiveness application for the Second Draw PPP Loan, even if the calculated amount of forgiveness on the First Draw PPP Loan is zero."
As we read it, this is due to a requirement in the Interim Final Rule on Second Draw loans which states that “the borrower must have spent the full amount of its First Draw PPP Loan on eligible expenses under the PPP rules to be eligible for a Second Draw PPP Loan.” Under that requirement, it would be impossible for the lender to determine forgiveness eligibility on a Second Draw loan without first knowing the forgiveness status of the First Draw loan.
We believe this could create questions related to timing and the lender’s administrative requirements. While we hope the impact of this on IBAT members is minimal, we will seek further clarification on this issue from SBA and Treasury.
Disclosure of Controlling Interest
Finally, last night’s drop of information included a document for the disclosure of “controlling interest” by certain “Covered Individuals” including the President, the Vice President, the head of an Executive department as defined in 5 U.S.C. § 101, or a member of Congress, and (b) the Spouse, as determined under applicable common law, of a Government Official described in clause (a), determined as of the time the Borrower’s loan application was submitted to the PPP lender.
A controlling interest is defined as owning, controlling, or holding not less than 20 percent, by vote or value, of the outstanding amount of any class of equity interest in a borrower. Additionally, for purposes of this certification, the securities owned, controlled or held by an individual and their spouse shall be aggregated.
The form, Borrower’s Disclosure of Certain Controlling Interests, includes a requirement that, if a borrower submitted a loan forgiveness application to its lender before December 27, 2020, then the form must be completed and submitted to the lender not later than January 26, 2021. Further, if the lender has already submitted a forgiveness decision to SBA, the PPP lender must promptly transmit the completed SBA Form 3508D to SBA via email at firstname.lastname@example.org.
The law, the IFR and the instructions on the form all reference that the borrower has the obligation of completing the disclosure of certain controlling interests. Since this disclosure is limited to a very small group of borrowers (including congressmen and certain executive officers), they should all be aware of this provision in the Act. We do not believe that the lender has the requirement to send this form to all borrowers to solicit it from affected parties. However, you may choose to do so at your election and in an abundance of caution. As always, your IBAT team is standing by to answer questions on either PPP 2.0 loan applications or issues related to loan forgiveness. Please contact us any time at email@example.com.
JANUARY 19, 2021
This morning the Small Business Administration published additional information on the Paycheck Protection Program, focusing on the calculation and documentation of Second Draw Loans.
The document answers some of our most asked questions about Second Draw Loans, including:
- What are “gross receipts” for the purposes of determining eligibility for a Second Draw Loan?
- Do “gross receipts” include First Draw PPP Loan proceeds?
- What reference periods can be used to determine whether an applicant can demonstrate a 25 percent gross receipts reduction in order to qualify for a second loan?
- What documentation must be provided to corroborate that an entity sustained at least a 25 percent reduction in gross receipts?
A few takeaways from the IBAT team:
Use of Calendar Quarters for Gross Receipt Comparison
The document affirms that a reduction in gross receipts must be documented in a 2020 calendar quarter, versus the same calendar quarter from the year before. We have been asked if the borrower could compare any three-month period in 2020 versus the same three-month period in 2019. However, entities that use a fiscal year to file taxes may document a reduction in gross receipts with income tax returns only if their fiscal year contains all of the second, third and fourth quarters of the calendar year.
Payroll Period for Second Draw Loan Calculation
The document further clarifies what payroll costs to use when calculating a Second Draw Loan (section 12). This depends on whether a borrower used a precise 12-month period to calculate their First Draw PPP Loan amount, or whether they used calendar year 2019. A borrower that used payroll costs from the prior 12 months when computing its First Draw PPP Loan amount can calculate the amount for its Second Draw PPP Loan amount using calendar year 2019 or calendar year 2020 payroll costs. A borrower that used calendar year 2019 may continue to do so.
Our team is standing by to answer your questions today at firstname.lastname@example.org.
JANUARY 18, 2021
This holiday weekend has seen the release of several small updates from the Small Business Administration on the Paycheck Protection Program.
The updates come in the form of procedural notices to address the following:
- Resubmissions of loan forgiveness applications using 3508S, lender notice responsibilities to PPP borrowers, and offset of remittances to lenders for lender debts. Click here to download the notice.
- Paycheck Protection Program Excess Loan Amount Errors. Click here to download the notice.
Further, last evening the SBA issued a document that outlines loan calculation and documentation needs for various business types. Click here to download this document.
As always, if you have additional questions please email your IBAT team at email@example.com.
JANUARY 13, 2021
As anticipated and reported during today’s “Ask IBAT Anything” webinar, the SBA late this afternoon issued a press release announcing that lenders with $1 billion or less in assets will have access to the PPP loan portal on Friday, January 15 at 8:00 a.m. CST. Applications for both the first and second draw loan programs will be accepted by SBA at that time. The portal will be open for all other participating PPP lenders on Tuesday, January 19.
While no new guidance or other information was included as is often the case, IBAT has compiled a collection of resources to assist you with this process. This page includes links to all the guidance and our summary documents and templates.
We are advised by SBA that additional guidance is forthcoming on a variety of issues that we and others have raised. As always, feel free to email us at firstname.lastname@example.org with concerns, questions or comments. We will continue to update you as additional information becomes available, and thank you for your commitment to your customers and communities as we enter into this next round of PPP.
JANUARY 11, 2021
Yesterday, the Small Business Administration released much-needed information on how loan applications will be processed in the upcoming re-opening of the Paycheck Protection Program.
The good news is that lenders will use the forgiveness portal (forgiveness.sba.gov) to which you’ve become accustomed to process loan applications in the next round. The SBA has also provided an extensive user guide for the platform to assist you in logging in and processing loans.
The loan portal opens today for participating community financial institutions, which include Community Development Financial Institutions (CDFIs), Minority Depository Institutions (MDIs), Certified Development Companies (CDCs) and Microloan Intermediaries. As we have previously reported (see January 9 information below), insured depository institutions, including community banks of all sizes, are expected to have access to the portal later this week.
JANUARY 9, 2021
Last evening the Small Business Administration released additional information and documents related to the Paycheck Protection Program. This includes new application forms for first and second draw loans and a procedural notice on the handling of EIDL advances going forward (more on this below).
Updated First Draw Forms
- Form 2483 – First Draw Borrower Application (Updated 1/8/21)
- Form 2484 – First Draw Lender Guaranty Application (Updated 1/8/21)
Second Draw Forms
- Form 2483-SD – Second Draw Borrower Application (Released 1/8/21)
- Form 2484-SD – Second Draw Lender Guaranty Application (Released 1/8/21)
A Note on PPP 2.0 Opening
Please note that information we have first-hand from SBA indicates that “community financial institutions” will have exclusive access to the portal beginning Monday, January 11. Community financial institutions are defined in statute as: a community development financial institution; a minority depository institution, as defined in section 308 of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (12 U.S.C. 1463 note); a development company that is certified under title V of the Small Business Investment Act of 1958 (15 U.S.C. 695 et seq.); and, an intermediary, as defined in subsection (m)(11). While timing is not certain at this juncture, we believe that other lenders, including community banks (unless qualified as a minority depository institution, in which case they will have early access), will be able to begin the applications process at some point next week, and likely as early as Wednesday. There has been some confusion on this issue, and we wish to make certain that our members are not spending the weekend attempting to piece this process together. You have some time to prepare.
Next Steps on EIDL Advance Issue
As you know, recent changes in legislation removed a requirement that EIDL advances be deducted from the forgiveness amount of any PPP loan. While the forgiveness portal has been updated to cease deducting EIDL amounts going forward, we have been awaiting guidance from the SBA on how they would handle those instances where forgiveness had already been processed. In a procedural notice, the SBA has indicated that:
For those loans where SBA remitted a forgiveness payment to a PPP lender that was reduced by an EIDL Advance, SBA will automatically remit a reconciliation payment to the PPP lender for the previously-deducted EIDL Advance amount, plus interest through the remittance date. PPP lenders are not required to request remittance of the reconciliation payment.
We hope that this will end a frustrating chapter (for borrowers and lenders alike) in this process. The full procedural notice is available here:
- Procedural Notice - SBA Procedural Notice on Repeal of EIDL Advance Deduction Requirement (Released 1/8/21)
One Last Note: 1099s for SBA 7(a) and 504 Borrowers
A somewhat overlooked provision of the recently passed “Economic Aid Act” is a significant win for community banks and their SBA borrowers, and one upon which we have expressed significant concerns. Payments made by the SBA (under Section 1122 of the CARES Act) on existing SBA 7(a) and 504 loans in your portfolios are no longer considered taxable income with changes made in the recently passed bill. This means that the earlier Treasury directive to furnish your SBA borrowers with 1099s will be rescinded. The statutory language is very clear, and we have corroborated this with a leading accounting firm. While we have been advised that final guidance is forthcoming, we recommend that you put any processing or distribution of such 1099s on hold until there is clarity from Treasury on this issue.
Your IBAT team will continue to provide updates as they are released. For those of you who may have missed our special edition of “Ask IBAT Anything” yesterday, you can access the recording here. While there, you can also register for upcoming editions of Ask IBAT Anything.
JANUARY 7, 2021
Late on Wednesday, January 6, the Treasury Department and Small Business Administration released two interim final rules related to the administration of the Paycheck Protection Program, in light of changes made in the recent COVID-19 economic stimulus package.
The re-launched program (PPP 2.0) will allow companies (including sole proprietors) to receive a first time PPP loan with some revisions to the original program. Companies that received a first PPP loan and meet certain criteria may obtain a second draw loan. Each of these must be used to cover payroll and other eligible expenses.
Key differences between first and second draw loan rules are:
- The maximum loan amount for first draw loans is $10MM, versus a maximum loan amount of $2MM for second draw loans.
- Companies applying for a second draw loan must provide documentation of a 25% reduction in gross receipts in any quarter of 2020, in comparison with the same quarter of 2019. First draw PPP loans are not subject to the same requirement.
Additionally, for those who have (or will) process loans for farmers and ranchers, there are new provisions for both first and second draw loans, which allow for loan calculations to be based on gross income, rather than net. These changes allow for banks to recalculate the maximum loan amount of a loan to a farmer/rancher on any loan made before December 27, 2020 and grant an increase in the loan, provided it is not already forgiven.
PPP 2.0 also includes changes in entities that are eligible for participation in the Paycheck Protection Program and expansion of applicable uses.