On June 5, 2020, President Trump signed the Paycheck Protection Program Flexibility Act (the “Flexibility Act”), which amends the CARES Act and modifies the forgiveness provisions for Paycheck Protection Program (“PPP”) loans. Highlights of the Flexibility Act are included below; however, we encourage you to review the full Flexibility Act here and the recently issued SBA interim final rule implementing changes made by the Flexibility Act found here.
The Flexibility Act:
- Reduced percentage of loan proceeds required to be used for payroll costs to 60% and increased the percentage for non-payroll costs to 40%.
- Extended the loan deferment period.
- Extended the loan repayment date for loans originated on or after June 5, 2020.
- Extended the time period to use the loan funds.
- Deferred employer’s payroll taxes for Social Security.
- Provided additional Safe Harbor employee exemptions.
With the introduction of the Flexibility Act and additional guidelines released by the U.S. Treasury and SBA regarding the forgiveness of PPP loans, we continue to finalize our process for accepting and submitting PPP forgiveness applications.
Once we are able to begin accepting and processing forgiveness applications, we will notify borrowers who have received a PPP loan from South State. Until that time, please continue to check our website often for updates.
This information only offers guidance on what could be required as you prepare for the forgiveness process. We encourage borrowers to continue to consult with their legal and financial professionals regarding PPP loan forgiveness.
SBA Paycheck Protection Program Loan Forgiveness Preparedness
On Friday May 15, 2020, the SBA released the PPP Loan Forgiveness Application ( “Form 3508”) together with instructions on how to complete the Application. However, in light of the passage of the Flexibility Act on June 5, 2020, the SBA recently updated Form 3508 to reflect changes implemented by the Flexibility Act. You may review the updated Form 3508 and Instructions to gain a better understanding of what may be required.
In addition, the SBA recently released an “EZ” Paycheck Protection Program Loan Forgiveness Application (“Form 3508EZ”) with instructions, which is expected to simplify the forgiveness application process for borrowers who meet one of the following criteria:
- Applied for a PPP loan as self-employed, an independent contractor or a sole proprietor with no employees;
- Did not reduce salary or wages for any employee by more than 25%, and did not reduce the number of hours of employees (excepting laid-off employees who refused an offer to return); or
- Experienced a reduction in business activity due to health directives related to COVID-19, and did not reduce salary or wages for any employee by more than 25%.
Please do not fill out either of the above Applications and submit it to us at this time. We are finalizing our process for accepting and submitting forgiveness Applications and will provide you with further instructions on how to submit your Application and supporting documentation.
In preparation for forgiveness, it is recommended that you review and follow these steps:
STEP 1 – Track total eligible costs incurred and paid during the “Covered Period.”
The “Covered Period” begins the day you received your PPP loan proceeds. For borrowers that received their PPP loans prior to June 5, 2020, they can elect either an 8-week period or a 24-week period. The advantage of the 8-week period is that it allows borrowers to receive their forgiveness faster while the 24-week period allows for a longer time to achieve forgiveness. If the 24-week period is chosen, borrowers must maintain staffing levels for the entire period and only expenses up to December 31, 2020, can be included.
At least 60% of your loan proceeds must be used for covered payroll costs for full forgiveness. Covered Payroll Costs include:
- Payroll costs
- Compensation to employees including items such as:
- Salary, wages, commissions or similar
- Cash tips or the equivalent
- Payment for leave
- Allowance for separation or dismissal
- Housing allowance or stipend
- Payments for group health care benefits, including group health care coverage
- Payment of any retirement benefits
- Payment of state and local taxes assessed on the compensation of employees
No more than 40% of your loan proceeds may be used for covered nonpayroll costs. Covered Nonpayroll Costs include:
Mortgage interest on real or personal property
- payments of interest (not including any prepayment or payment of principal) on any business mortgage obligation on real or personal property signed before February 15, 2020
Rent under a leasing agreement
- business rent or lease payments pursuant to lease agreements for real or personal property in force before February 15, 2020
- Includes payment for expenses such as electricity, gas, water, transportation, telephone, or internet access.
- Service must have been established prior to 2/15/2020
Eligible nonpayroll costs 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 payment date is after the last day of the Covered Period.
STEP 2 – Calculate payroll costs for forgiveness floor
- 60% of eligible costs are to be used for payroll costs
- If less than 60%, loan forgiveness is reduced
STEP 3 – Calculate any % decrease in full-time equivalent employees (FTEs) for the 24-week Covered Period (or 8-week Cover Period for borrowers who obtained loans prior to 6/5/20 and select this period) versus the following periods:
- February 15 through June 30, 2019 or, at the borrower’s election, January 1 through February 29, 2020
- Seasonal businesses will use February 15 to June 30, 2019
Do not include any FTE reductions for positions vacated but not filled by a new employee where:
- within the Covered Period, the borrower made a good-faith, written offer to rehire any employee terminated prior to April 26, 2020 and who rejected such offer;
- an employee was fired for cause, voluntarily resigned, or voluntarily requested and received a reduction in hours;
- where the borrower is able to document an inability to rehire individuals who were employees of the eligible recipient on February 15, 2020, and the borrower was unable to hire similarly qualified employees for unfilled positions on or before December 31, 2020; or
- where the borrower is able to document an inability to return to the same level of business activity it was operating at before February 15, 2020, due to compliance with requirements established or guidance issued by the Secretary of Health and Human Services, the Director of CDC, or OSHA during the period beginning March 1, 2020 and ending December 31, 2020 related to the maintenance of standards for sanitation, social distancing, or any other worker customer safety requirement related to COVID-19,
STEP 4 – Calculate any reduction in payroll > 25% of prior quarter
- For any employee who did not receive, during any single pay period during 2019, wages/salary at an annualized rate of pay more than $100K.
- Did their pay during the Covered Period decrease by more than 25% from the previous full quarter (January 1 to March 31, 2020)? Reduce forgivable amount by the reduction that exceeds 25%.
STEP 5 – Determine if a Safe Harbor applies by calculating any adjustment because FTEs and salary/wages were restored by December 31, 2020
- Borrower must have reduced FTEs, salaries/wages between February 15 and April 26, 2020, and must have eliminated the reduction no later than December 31, 2020.
- If “restore” criteria are met, the decreases in loan forgiveness calculated in steps 3 and 4 are ignored.
As a reminder, the CARES ACT excludes from payroll costs:
- Annualized salaries greater than $100K
- Taxes imposed or withheld under chapter 21, 22, or 24 of the IRC of 1986 ( e.g. the employer’s share of FICA and Medicare are not included as payroll costs)
- Compensation of an employee whose principal place of residence is outside the US
- Qualified sick or family leave for which a credit is allowed under §7002 or §7004 of the FFCRA
- Payments to independent contractors
Documentation to Be Provided for Forgiveness
You will need to provide the following documentation to substantiate your request for loan forgiveness. You will be asked to submit the documentation electronically. If these documents are not in digital form, please take the time soon to scan these and get them ready for upload using an Adobe PDF, JPEG, or PNG file format. Please note that you can take a high-quality picture of the document and upload that.
These documents can be one or more of the following:
Payroll Documentation verifying the eligible cash compensation and non-cash benefit payments from the Covered Period or the Alternative Payroll Covered Period consisting of each of the following:
- bank statements or third-party payroll service provide reports documenting payroll
- tax forms or third-party payroll service reports
- payroll tax filings reported or that will be reported on IRS Form 941
- state quarterly business and individual wage reporting (state income tax withholding)
- state unemployment tax filings
- receipts, cancelled checks, or statements documenting health insurance payments
- receipts, cancelled checks, or statements documenting retirement payments
Documentation regarding Full-Time Equivalent (FTE) calculations:
- Documentation showing (at the election of the Borrower):
- the average number of FTE employees on payroll per month employed by the Borrower between February 15, 2019 and June 30, 2019;
- the average number of FTE employees on payroll per month employed by the Borrower between January 1, 2020 and February 29, 2020; or
- in the case of a seasonal employer, the average number of FTE employees on payroll per month employed by the Borrower between February 15, 2019 and June 30, 2019; between January 1, 2020 and February 29, 2020; or any consecutive twelve-week period between May 1, 2019 and September 15, 2019.
- Documents may include payroll tax filings reported or that will be reported on IRS Form 941 and state quarterly business and individual employee wage reporting and unemployment tax filings reported or that will be reported. Documents submitted may cover periods longer than specific time period.
Nonpayroll Documentation verifying eligible interest, rent, and utility payments
- For business mortgage interest, copy of lender amortization schedule and receipts or cancelled checks verifying payments made; OR lender account statements from February 2020 and the months of the covered period through one month after the end of the covered period verifying interest amounts and eligible payments
- For business rent or lease payments, copy of current lease agreement and receipts or cancelled checks verifying eligible payments from covered period; OR lessor account statements from February 2020 and the months of the covered period through one month after the end of the covered period verifying eligible payments
- For business utility payments, copy of invoices from February 2020 and covered period and receipts, cancelled checks, or account statements verifying eligible payments
You are not required to submit but must maintain documentation supporting the FTE and salary/wage reduction calculations, any job offers and refusals, firings for cause, voluntary resignations, and voluntary requests and reductions in hours as well as the safe harbor calculations.
You should maintain these documents together with all records relating to the Borrower’s PPP loan, including documentation submitted with your PPP loan application, documentation supporting your certifications as to the necessity of the loan request and its eligibility for a PPP loan, documentation necessary to support your loan forgiveness application, and documentation demonstrating material compliance with PPP requirements.
You must retain all such documentation in your 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.
Process for Requesting Loan Forgiveness at South State Bank
South State is finalizing the process for accepting and submitting forgiveness applications to the SBA. We suggest you check our website often for updates regarding the application process.