Applying for PPP Loan Forgiveness

Update: CARES Act section 1106(i) specifically excludes any amount of PPP loan forgiveness from inclusion in taxable income, including unrelated business taxable income. Accordingly, a church or other nonprofit organization that receives full or partial PPP loan forgiveness is not required to report the loan forgiveness amount as taxable income on Form 990-T.

One of the most valuable features of the CARES Act’s Paycheck Protection Program (PPP) loans is the ability for employers with 500 or fewer employees, including nonprofits and churches, to apply to have its loan forgiven, in full or in part, essentially converting the forgiven portion into a nontaxable grant if certain criteria are met.

On June 5, 2020, President Trump signed the Paycheck Protection Program Flexibility Act of 2020 (PPP Flexibility Act) into law. This new statute amends several key criteria of the CARES Act, including:

Since the passage of the PPP Flexibility Act, the SBA has released 4 new interim final rules (IFRs), 2 new versions of the PPP Loan Forgiveness Application, and 1 new FAQ, with more FAQs anticipated. These publications are all available on the SBA’s Paycheck Protection Program webpage.

This article provides a comprehensive look at PPP loan forgiveness, including changes arising from the enactment of the PPP Flexibility Act and subsequent SBA guidance.

PPP loan forgiveness is accomplished by completing SBA Form 3508 or SBA Form 3508EZ and submitting it to the lender servicing your PPP loan at the time of application. You can also use an equivalent substitute form or application provided by the lender, if available.

Loan forgiveness is determined by reference to several key factors that are discussed in greater detail below, including:

This article will describe each of these factors before discussing the loan forgiveness application process and the two different forms.

The CARES Act, as originally enacted, created an 8-week (56-day) Covered Period that the SBA determined begins on the date PPP loans are first disbursed to the borrower. The PPP Flexibility Act extended this 8-week period to a new Covered Period of 24 weeks (168 days) that similarly begins on the date PPP loans are first disbursed to the borrower. However, for borrowers whose loan was issued prior to June 5, 2020, the PPP Flexibility Act permits the borrower to elect either the original 8-week Covered Period or the new 24-week Covered Period.

The extension of the Covered Period from 8 weeks to 24 weeks will greatly increase the ability of many borrowers to aggregate forgivable costs without scrambling to include amounts for which there is limited guidance.

In the Loan Forgiveness IFR, the SBA created an Alternative Payroll Covered Period (APCP) intended to align with a borrower’s payroll cycle. As originally defined, the APCP begins on the first day of the first payroll period that begins after the commencement of the Covered Period and extends 55 days for a total of 56 days (8 weeks). The Amended Loan Forgiveness IFR allows the APCP to also extend 167 days, for a total of 168 days (24 weeks). A borrower with a biweekly or more frequent payroll cycle is permitted to choose the APCP.

The Revised Loan Forgiveness IFR provides that a borrower may apply for loan forgiveness before the end of the Covered Period (either the 8-week or 24-week Covered Period) if the borrower has used all of the loan proceeds for which it is requesting forgiveness. However, if the borrower applies for loan forgiveness before the end of the selected Covered Period and has reduced the salary or wage of any worker by more than 25 percent, then the borrower must compute the salary and wage reduction amount based on the full 8- or 24-week Covered Period.

As a practical matter, if a borrower is not eligible for the reduction in level of business operations safe harbor discussed below, it is unlikely it will make sense to file for loan forgiveness before December 31, 2020. Future FAQs published by the SBA may address this question more fully.

As described in the First Interim Final Rule, qualifying payroll costs consist of a variety of items, including:

Allowable payroll costs do not include:

A few words of explanation are useful here. In the First Interim Final Rule, the SBA set out a requirement that at least 75 percent of the loan proceeds must be used for payroll costs. In practice, as shown on the original PPP Loan Forgiveness Application, the intent is that at least 75 percent of the costs submitted for forgiveness (i.e., the combined total of payroll and non-payroll costs) must be payroll costs, even if this amount is less than the total of the loan proceeds. The PPP Flexibility Act revised the 75 percent threshold to 60 percent.

Second, FAQ 32, published on April 24, 2020, clarified that all cash compensation is includible in payroll costs, including a “housing stipend or allowance.” Based on this FAQ, it is clear that a minister’s housing allowance is includible in payroll costs for both the purpose of the PPP loan application and the PPP Loan Forgiveness Application.

Third, the definition of payroll costs for the purpose of applying for a PPP loan is identical to the definition of payroll costs for the purpose of applying for PPP loan forgiveness. While the SBA has not specifically addressed the question of whether payroll costs omitted during the loan application process may nonetheless be included in payroll costs submitted for loan forgiveness, it does not appear that this omission will be a barrier to including such otherwise eligible payroll costs in your church’s loan forgiveness calculation.

Fourth, the PPP Loan Forgiveness Application instructions clarify that the exclusion of salary and wages paid in excess of $100,000 on an annualized basis means the maximum amount of salary and wages that can be included for an individual employee for the 8-week Covered Period is $15,385 ($100,000 ÷ 52 × 8 = $15,385). If an employer uses the 24-week Covered Period, the maximum amount of salary and wages that can be included for an individual employee for the 24-week Covered Period is $46,154 ($100,000 ÷ 52 × 24 = $46,154). This limit only applies to salary and wages. It does not apply to an employee’s allocable share of group health care benefits and retirement benefits.

Fifth, in FAQ 16, the SBA clarified that payroll costs begin with gross wages and are not reduced for an employee’s federal income tax withheld or an employee’s share of FICA and Medicare tax (payroll taxes). However, the FAQ makes it clear that the employer share of payroll taxes is not includible in payroll costs.

Sixth, the Loan Forgiveness IFR clarified that bonuses and hazard pay are includible in payroll costs as salary and wages. In addition, wage payments to furloughed employees are includible in payroll costs, even if paid to employees who are not providing services. Note that the $100,000 annualized limit on salary and wages applies to these payments.

Also note that an additional salary or wage payment made during the Covered Period for hours worked during the Covered Period for the purpose of restoring a cut in an employee’s pay rate, or for the purpose of paying an employee for hours they did not work due to a reduction in work hours, should be includible in eligible payroll costs. The basis for this conclusion is that a principal purpose of the PPP loan program is to keep employees employed at their full pay rate for their regularly scheduled number of work hours.

Seventh, the SBA has yet to address the scope of benefits that qualify as group health care coverage. From the quoted text above it is clear this includes employer-paid premiums for group health insurance. It is likely the term includes employer-paid premiums for group vision and dental insurance plans to the extent they are separate policies from a group health insurance plan.

However, it is unclear how employer payments to the following plans are treated:

Eighth, it is clear that employer costs related to a self-insured health plan are includible. However, the SBA has not provided guidance regarding how these costs are to be computed.

Ninth, it is clear that “state and local taxes assessed on compensation of employees” include state unemployment tax. In the absence of guidance to the contrary, it is likely this provision includes state programs such as California’s Employment Training Tax (ETT). New York’s disability insurance premium may be includible if it is incurred and paid during the Covered Period. However, New York’s paid family benefit amount may be paid by an employer or the employee and it is not clear if it is a tax. Therefore, it is likely not includible. Finally, workers’ compensation insurance is not a tax assessed on employee compensation. Therefore, in the absence of guidance it to the contrary, it is unlikely to be an includible expense.

Tenth, not all employee benefits are includible payroll costs. Employer-paid group term life insurance, disability insurance, gym memberships, and other similar benefits are not includible payroll costs.

The CARES Act specified three different categories of non-payroll costs which may be forgiven:

The Loan Forgiveness IFR states that mortgage loan interest on any business mortgage obligation—whether for real estate or personal property—is includible so long as the mortgage itself was in place on February 15, 2020. Only interest is includible, not the principal payment portion of a mortgage payment or any prepayment of principal or interest. In addition to interest on real property mortgages, interest on personal property mortgages (e.g., a loan for the purchase of an automobile, office equipment, or manufacturing equipment) is includible. Note that to be eligible for inclusion in forgivable expenditures, the mortgage or other loan must be an obligation of the applicant.

The SBA has yet to release guidance regarding mortgages or construction loans in existence on February 15, 2020, that were subsequently refinanced or converted to permanent mortgages after February 15, 2020.

Rent is includible so long as the rental agreement was in place on February 15, 2020. This includes rent on real property and rent paid for the rental of equipment. The SBA has yet to provide clarity as to whether payments for certain services billed by a landlord along with rent (e.g., property insurance) and sales tax are includible. Note that to be eligible for inclusion in forgivable expenditures, the lease agreement giving rise to the rent payment must be an obligation of the applicant.

While the SBA has not addressed this specific question, it is our belief that rent must be paid to a third party. It would be an aggressive position to treat an internal allocation that is characterized as “rent” (such as between a church and the church’s preschool program that is not a separate legal entity) as rent for purposes of both a PPP loan application and an application for PPP loan forgiveness.

Payments for the following utilities are included in forgivable PPP loan expenses:

The utility service must have been in place on February 15, 2020. The SBA has yet to provide a definition of what is includible in transportation costs. Further, the SBA has not stated whether sewer service, trash collection, cell phone allowances for bring-your-own-device programs, or allowances for home internet service supporting work-from-home environments are allowable expenses.

Payments for church parsonage utilities have not been addressed in specific SBA guidance. It would appear that a reasonable argument could be made that these utilities are either part of the cash compensation paid to a minister (in which case they would count as payroll costs in satisfying the 60 percent payroll cost threshold) or as the payment of utilities on church property.

The Loan Forgiveness IFR states that “[i]n general, payroll costs paid or incurred during the eight consecutive week (56 days) covered period are eligible for forgiveness.” (Emphasis added.) The Revised Loan Forgiveness IFR clarifies that this rule extends to the 24-week Covered Period or, if elected, the 8-week Covered Period. In addition, the instructions to Line 1 of the application state that the applicant should enter “total eligible payroll costs incurred or paid during the Covered Period or the Alternative Payroll Covered Period.” (Emphasis added.)

The Loan Forgiveness IFR further states that “[p]ayroll costs are considered paid on the day that paychecks are distributed or the Borrower originates an ACH credit transaction.” This means that payroll is paid on the date when it is paid to employees and not on the date that funds are remitted to a payroll processing firm. In addition, “[p]ayroll costs are considered incurred on the day that the employee’s pay is earned.” This appears to be a reference to the employee having actually worked on that day. If a borrower pays employees who are not actually performing services (e.g., a borrower continues to pay furloughed employees), then payroll costs are incurred based on the schedule established by the borrower. This will typically be each day the employee would have performed work had the employee not been furloughed or otherwise not called in to perform services.

Based on this explanation of the rule, payroll costs paid during the Covered Period or the APCP are includible, regardless of when the payroll costs are incurred.

The Loan Forgiveness IFR also states that payroll costs incurred during the Covered Period, but not paid until the first regularly scheduled payroll after the Covered Period, are includible.

The Loan Forgiveness IFR states that non-payroll costs are includible in forgivable costs if they are either paid during the Covered Period or incurred during the Covered Period and paid on or before the next regular billing date, even if that date is after the Covered Period. Based on this statement of the rule, non-payroll costs paid during the Covered Period are includible even if incurred before the Covered Period.

While the ability to pay on the next regular billing date will assist in some cases, it does not address amounts that are paid in advance. For example, rent is generally paid in advance. As the rule is worded, a tenant that pays a quarterly rent payment in advance on April 1 and whose 8-week Covered Period begins and ends within the second calendar quarter (i.e., April 1–June 30) would not meet the condition of incurring the expense within the Covered Period and paying for those incurred expenses on the next regularly scheduled billing date (i.e., July 1). However, the extension of the Covered Period to 24 weeks means the July 1 and October 1 payments would be includible.

As previously noted, to help determine the amount of the loan that can be forgiven (and turned into a nontaxable grant), the PPP Flexibility Act reduced the required percentage spent by recipients on payroll costs from 75 percent to 60 percent. The PPP Loan Forgiveness Application mechanically applies this rule at Line 10 by dividing the total payroll costs reported on Line 1 by 0.60 (60 percent). The resulting amount is then compared to (a) the PPP loan amount and (b) the sum of payroll costs (adjusted by the salary/wage reduction amount and headcount reduction factor) and non-payroll costs. The smallest of these three amounts then becomes the loan forgiveness amount.

The bottom line is that a borrower must spend at least 60 percent of its total PPP loan forgiveness includible expenditures on payroll.

The Salary and Wage Reduction Amount (SWRA) considers whether an employee’s weekly salary or hourly wage during the Covered Period declined by more than 25 percent when compared to the period beginning on January 1, 2020, and ending on March 31, 2020 (the most recent full calendar quarter before the Covered Period).

For the purpose of this computation, exclude any employee who received more than $100,000 in wages or salary on an annualized basis during any pay period in 2019. Since this exclusionary rule applies to wages or salary, it appears that bonuses or other similar supplemental earnings may be excluded when determining the applicability of this rule.

For reference, the table below shows the amount of gross wages or salary that equates to $100,000 on an annualized basis:

The SWRA computation first looks at whether an employee’s rate of pay has decreased by more than 25 Percent. If an employee’s rate of pay has changed by more than 25 percent, then the computation converts the amount of the decrease into a dollar amount.

Employee

Method of Pay

Average Rate of Pay

Note that the instructions do not provide guidance on the following relevant points:

The full-time equivalent reduction quotient (FTERQ) is an adjustment to the loan forgiveness amount. A careful reading of CARES Act section 1106(d)(2)(A) validates that the PPP Loan Forgiveness Application correctly applies the FTERQ to both payroll costs and non-payroll costs. The FTERQ is computed on Schedule A using Lines 11 through 13.

The FTERQ is computed by dividing the total average FTEs during the Covered Period by the total average FTEs during a reference period. The quotient may never be greater than 1.0. A borrower may choose between up to three different reference periods:

The Loan Forgiveness IFR provides the following process for computing FTEs:

Note that this computation looks at the number of hours for which an employee is paid. Accordingly, in the circumstance where an employee was kept on the payroll but was not performing services, they are included in the FTE computation based on the number of hours the borrower chose to pay them.

The instructions provide a simplified method for completing the FTE calculation. In this version, an employee working at least 40 hours a week counts as 1 FTE, and an employee working less than 40 hours a week counts as 0.5 FTE. If this simplified method is selected, it must be used for all FTE calculations.

If the number of employees in each category has been stable across all time periods, the simplified method should produce a comparable result that will not negatively affect the outcome of the various tests. However, if there is more than an insignificant amount of movement between employees working 40 or more hours per week and employees working fewer than 40 hours a week, you should avoid the simplified method.

FTEs may need to be computed for up to five periods:

These computations may be performed by a payroll service provider.

The Revised Loan Forgiveness IFR clarifies that an employer can include a terminated employee in its FTE headcount if the employer:

In addition to the statutory exemption permitting the inclusion of certain terminated employees in FTE headcount computation, the instructions provide for FTERQ relief in four additional instances:

The nature of the relief is that you are permitted to include these employees in your FTE headcount for the Covered Period. However, if you replace an employee described in items 1 through 4, you are not allowed to include them in this FTE adjustment (because this would mean the position represented by the otherwise excepted employee would be double-counted).

Notably missing from this list is the normal annual temporary cessation of operations by a seasonal employer, preschool, or school.

The CARES Act and the PPP Flexibility Act each created a safe harbor from the FTERQ. The CARES Act’s safe harbor relies on the restoration of staffing to the February 15, 2020, level by December 31, 2020. The PPP Flexibility Act’s safe harbor considers the borrower’s ability or inability to maintain its pre-pandemic level of operation in light of various mandates and recommendations of government agencies in response to the pandemic.

This section will examine each safe harbor.

The CARES Act provides a safe harbor for employers who decreased their FTE headcounts at the outset of the COVID-19 pandemic and then restore their headcounts by December 31, 2020. Your church is eligible for this safe harbor if two conditions are met:

To calculate your eligibility for the FTE Restoration Safe Harbor, complete the following steps:

The PPP Flexibility Act added a new, more expansive, safe harbor that will provide many organizations with an exemption from the application of the FTERQ. This safe harbor applies when the organization is able to document in good faith that it is unable to return to the same level of business activity that it was operating at before February 15, 2020, due to compliance with requirements or guidance related to the maintenance of standards for sanitation, social distancing, or any other worker- or customer-safety requirement related to COVID-19 published by one of these entities during the period of March 1, 2020, through December 31, 2020:

In the Revised Loan Forgiveness IFR, the SBA clarified that a triggering event for this safe harbor includes a local government order, pursuant to CDC guidelines, to shut down all nonessential businesses. The SBA has extended this to both a direct reduction in business activity and an indirect reduction in business activity. This seems to clearly imply that even an essential business that remained open in the face of a local government order, but which experienced a decrease in business activity, should be able to take advantage of this safe harbor. Note also that the rule does not specify the degree to which the business activity must have decreased to take advantage of the safe harbor.

To take advantage of the reduction in operating activity safe harbor, your good-faith documentation must include a copy of the applicable government agency requirements or guidance, or both, which will usually be documented in the local government order, and a copy of appropriate financial records showing the decline in activity. These appropriate financial records should demonstrate a decline in persons served, products sold, or other similar business operating activity measures.

As mentioned earlier, the SBA has now provided two different versions of its PPP Loan Forgiveness Application. The applications are available on the Treasury Department PPP Loan webpage. Form 3508EZ is a short-form application that may be used when specific criteria described below are met. Form 3508, PPP Loan Forgiveness Application, is the long-form application and must be used when Form 3508EZ cannot be used. Lenders are permitted to develop their own substitute versions of these forms.

The application consists of:

Only the core form and Schedule A are required to be filed. The Borrower Demographic Form is optional and does not appear applicable to nonprofit organizations.

The EZ version of the application consists of:

Form 3508EZ may be used in three specific situations that are outlined in the Instructions to Form 3508EZ. These situations are discussed below.

Situation 1
In this situation, the borrower is an individual who is:

In addition, the borrower had no employees at the time he or she submitted a PPP loan application and did not include any employee salaries in the computation of average monthly payroll in arriving at his or her PPP loan amount.

Situation 2
In this situation, the borrower must meet two conditions. First, the borrower must not have reduced the wages of any employee by more than 25 percent during the Covered Period or the APCP compared to the first calendar quarter of 2020. For the purpose of this condition, exclude from consideration any employee paid more than an annualized rate of $100,000 during any pay period during 2019.

Second, the borrower must not have reduced the number of employees or the average paid hours of employees between January 1, 2020, and the end of the Covered Period or APCP. For the purpose of this condition, ignore any reductions arising from an inability to rehire individuals who were employees on February 15, 2020, if the borrower was unable to hire similarly qualified employees for unfilled positions on or before December 31, 2020. Also, ignore reductions in an employee’s hours that the borrower offered to restore and the employee refused.

Many borrowers who weathered the Covered Period with minimal or no changes in rates of pay and no changes in staffing will find this situation applicable. In addition, borrowers who were able to rehire or replace staff before the end of the Covered Period may find this situation applicable. However, for borrowers who are relying on the exemption for employees who rejected an offer of reemployment, this situation is unlikely to be applicable.

Situation 3
In this situation, the borrower must meet two conditions. First, the borrower must not have reduced the wages of any employee by more than 25 percent during the Covered Period or the APCP compared to the first calendar quarter of 2020. For the purpose of this condition, exclude from consideration any employee paid more than an annualized rate of $100,000 during any pay period during 2019.

Second, during the Covered Period, the borrower was unable to operate at the same level of business activity as the borrower was able to operate at prior to February 15, 2020, due to its compliance with requirements established or guidance issued between March 1, 2020, and December 31, 2020, by HHS, the DC, or OSHA, related to the maintenance of standards of sanitation, social distancing, or any other worker- or customer-safety requirement related to COVID-19.

This situation has the broadest applicability, as it forgoes any requirement to maintain staffing levels for borrowers who can meet the substantiation requirements of the reduction in level of business operations safe harbor.

As with the PPP Loan Application, the PPP Loan Forgiveness Application includes several certifications. Certifications common to both Form 3508 and 3508EZ include:

Form 3508 requires the following additional certifications:

Form 3508EZ requires the following additional certifications:

There are a few takeaways from reviewing these certifications.

First, the focus is largely on the completeness and accuracy of the information supplied both on the face of the application and in supporting documentation.

Second, while the references to fines and civil or criminal fraud charges should be taken to heart, they are standard terms and should not make an applicant fearful.

Third, while in FAQ 46 the SBA created a safe harbor around the good-faith necessity certification in the PPP loan application for loans with original principal amounts of less than $2 million, the SBA has reserved the right to review loan eligibility in conjunction with the loan forgiveness application for other reasons. Among the eligibility rules the SBA could review during the forgiveness process are:

Lenders are the gatekeepers of the PPP Loan Forgiveness Application process. They are charged with reviewing PPP Loan Forgiveness Applications and making the initial determination of a borrower’s eligibility for loan forgiveness. Accordingly, many decisions regarding the application of the PPP loan forgiveness guidance will be at the discretion of lenders.

The Revised Loan Forgiveness IFR requires that a lender’s review of the loan forgiveness application include the following steps:

If the borrower submits the EZ version of the loan forgiveness calculation, these steps are simply adjusted to reflect the different layout of the form.

The Revised Loan Forgiveness IFR clearly states that the accurate calculation of the loan forgiveness amount is the responsibility of the borrower and not the lender. Further, the borrower must attest to the accuracy of the information presented and the calculations shown on the loan forgiveness application. However, lenders are responsible for performing a good-faith review, in a reasonable time, of the borrower’s calculations and the supporting documentation presented. The lender is permitted to perform a minimal review of calculations based on a report prepared by a recognized third-party payroll provider.

While an application should not be accepted by a lender if it contains calculation errors or there is a material lack of substantiation in the submitted supporting documentation, lenders are encouraged to work with borrowers to resolve these deficiencies rather than simply deny forgiveness, in full or in part. Moreover, a lender is permitted to accept the borrower’s attestation, without further independent verification, that the borrower accurately verified the payments for eligible costs.

A lender is permitted 60 days after the receipt of a completed loan forgiveness application to render a decision as to the borrower’s eligibility for full or partial loan forgiveness. This decision is issued to the SBA. When issuing its decision, the lender must forward to the SBA the borrower’s completed loan forgiveness application; however, it does not appear the supporting documentation is forwarded.

If the lender denies any loan forgiveness, a procedure exists for the borrower to appeal this decision.

The CARES Act specifies that the PPP loan forgiveness amount is reduced by any amount of an Economic Injury Disaster Loan (EIDL) advance a borrower receives. The PPP Loan Forgiveness Application addresses this by capturing the amount of the EIDL advance and the EIDL application number assigned when the advance was obtained. But the instructions then include this cryptic statement, “If applicable, SBA will deduct EIDL Advance Amounts from the forgiveness amount remitted to the Lender.” Accordingly, if you enter an EIDL advance amount on your loan application, expect that the actual amount of your loan forgiveness will be reduced by the amount of your EIDL advance.

There are three options if a PPP loan is not fully forgiven. First, the borrower may appeal the lender’s denial of full forgiveness to the SBA. Second, the borrower can choose to repay the unforgiven part in full. There is no prepayment penalty, although interest will be due at the annualized rate of 1 percent on the unforgiven balance from the date the loan disbursed until the date the unforgiven portion of the loan is paid. Contact the lender servicing the loan for a loan payoff amount. Third, the borrower can choose to pay the unforgiven portion back over the remaining life of the loan.

The instructions to the PPP Loan Forgiveness Application include a detailed list of documentation that should be gathered in support of the PPP loan forgiveness application. The instructions clarify documentation that must be submitted with the loan application, along with documentation that should be maintained by the applicant but is not required to be submitted. Significantly, applicants are instructed to maintain this documentation for a period of “six years after the date the loan is forgiven or repaid in full.” In addition, the documents are to be made available upon request to an authorized SBA representative or a representative of the SBA’s Office of Inspector General.

The application requires organizations that, together with their affiliates, received PPP loans in the aggregate with an original principal balance of more than $2 million to check a box. Presumably this means that an affiliate whose own original principal balance is less than $2 million must check this box if it is a member of an affiliate group that borrowed more than $2 million in the aggregate.

Note that in its Second Interim Final Rule (second IFR), published in the Federal Register on April 15, 2020, the SBA addressed the application of the affiliation rules to faith-based organizations. The SBA acknowledged “that the organizational structure of faith-based entities may itself be a matter of significant religious concern” and that US Supreme Court precedents guarantee to faith-based organizations “the ‘power to decide for themselves, free from state interference, matters of church government as well as those of faith and doctrine’” (citing Kedroff v. St. Nicholas Cathedral of Russian Orthodox Church in N. Am., 344 U.S. 94, 116 (1952)).

In addition, the Religious Freedom Restoration Act, together with Supreme Court precedents, prevent the government from substantially burdening the exercise of religion without a compelling governmental interest. The SBA has determined that applying the SBA affiliation rules to faith-based organizations would impose a substantial burden without a compelling governmental interest.

For this reason, the affiliation rules:

However, to avoid the application of the affiliation rules, a faith-based borrower must make a “reasonable, good-faith interpretation” that the affiliation rules should not apply to a given relationship because the relationship is “based on a sincere religious teaching or belief” or in some manner “constitutes a part of the exercise of religion.” The application of this standard to a church, or an association or convention of churches or their integrated auxiliaries, is likely to be more straightforward than its application to parachurch ministries.

In addition to the changes previously discussed, the PPP Flexibility Act changed the minimum loan maturity and the duration of loan deferral.

The CARES Act specified a maximum loan maturity of not more than 10 years. In its First Interim Rule, the SBA announced a loan maturity of two years would apply to each PPP loan. The PPP Flexibility Act sets the minimum loan maturity of PPP loans issued after June 5, 2020, to five years. In addition, the PPP Flexibility Act explicitly allows for borrowers and lenders to renegotiate the loan maturity of loans issued prior to June 5, 2020.

The CARES Act specified a loan deferral period of not less than six months and not more than one year. Exercising its regulatory discretion, the SBA determined that a deferral period of six months would apply to each PPP loan. During this deferral period, payments of principal, interest, and fees would be deferred. However, interest would accrue pending loan forgiveness.

The PPP Flexibility Act statutorily changed termination of the loan deferral period to the date on which the loan forgiveness amount is remitted to the lender by the SBA. However, the PPP Flexibility Act requires that if a borrower fails to submit a PPP Loan Forgiveness Application within 10 months after the end of the Covered Period, the borrower must begin to make loan payments.

Ted R. Batson Jr. is a CPA and tax attorney, and serves as a partner and Professional Practice Leader – Tax for CapinCrouse LLP, a national CPA and consulting firm. He speaks and teaches frequently for national conferences and organizations on exempt organization and charitable giving matters. He is an advisor at large for Church Law & Tax.

Brent Baumann is a Senior Manager in CapinCrouse’s Denver office, where he works with audit, accounting, and advisory clients. He has over 15 years of experience providing services and expertise to financial statement, internal control, internal audit, and information technology audit and advisory clients.