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PPP Loan – Will You Be Forgiven?
Wednesday, May 27, 2020

The United States Department of the Treasury (Treasury) and the Small Business Administration (SBA) began issuing information, guidance and rules with respect to the forgiveness piece of the Paycheck Protection Program (PPP) and the loans available under it by the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). These have been much anticipated, especially for those early borrowers in the PPP whose covered period is coming to an end. The SBA recently released the PPP Loan Forgiveness Application (this or the lender’s equivalent is the Application) which provides guidance and instruction on the calculation of the forgivable portion of a PPP loan. The Treasury and the SBA followed the Application up with interim rules "Loan Forgiveness" and "SBA Loan Review Procedures and Related Borrower and Lender Responsibilities" (collectively, First Forgiveness Interim Rules). The Application and the First Forgiveness Interim Rules shed light on a number of the issues surrounding the loan forgiveness process, calculations related to the same and the potential review of PPP loans by the SBA.

A. Loan Forgiveness Process

In order for a borrower to receive forgiveness on all or a portion of its loan amount, the borrower must complete the Application and submit it to its lender. After the lender has determined what portion, if any, of the borrower’s loan is entitled to forgiveness, the lender will advise the SBA of that determination. The SBA will remit the forgiveness amount to the lender (plus any accrued interest) no later than 90 days after receipt of the lender’s determination of the forgiveness amount; provided, however, that such 90 days is subject to extension if the SBA is reviewing the loan, the loan application or forgiveness calculation. The more material aspects of the submission and determination process include:

  • The lender has 60 days after its receipt of the Application to issue its determination to the SBA. That determination can be in the form of: (a) approval in whole or part; (b) denial; or (c) if directed by the SBA, a denial without prejudice due to a pending SBA review of the underlying PPP loan.

  • The SBA may review any PPP loan that it deems appropriate, and the review may include evaluation of: (i) the borrower’s eligibility (i.e., size of employees, accuracy of certifications, etc.); (ii) calculation of the loan amount and use of the proceeds; and (iii) the loan forgiveness determination.

  • The SBA may undertake a review of a PPP loan at any time, including within a 6 year period after the later of: (1) forgiveness of the loan; and (2) the date of repayment in full.  A borrower will be permitted to respond to questions raised by the SBA in its review of such borrower’s PPP loan. If the borrower fails to respond to an inquiry by the SBA, it risks being deemed ineligible for the loan in general or ineligible for forgiveness. A borrower will be able to appeal determinations of the SBA, and further rules will be issued on this process.  

  • A borrower that is not eligible for a PPP loan will not receive forgiveness on any portion of the loan, and the SBA may pursue repayment of the loan and other remedies available to it.

Prior to the issuance of the First Forgiveness Interim Rules, it was unclear what role the lender would have in the forgiveness process. The lender is charged with confirming that: (A) borrower has completed the Application; (B) borrower has submitted all other required documentation (see Section C. below for more details); (C) the calculations for loan forgiveness match the supporting documentation; and (D) borrower correctly calculated what percentage of the requested loan forgiveness was used for payroll costs. The lender’s confirmations and review are to be done in good faith, and the lender may rely on the borrower’s representations and documents in conducting such review.

Key Takeaway – The SBA’s ability to review a borrower’s PPP loan will extend well past the forgiveness period process, and a borrower’s lender will be active in the review and submission of the Application. We expect many lenders to include certifications or attestations made by the borrower for the benefit of the lender with respect to the accuracy and completeness of the information and supporting documents provided with the Application.

B. Certifications

The Application requires a borrower to make additional certifications at the time of the loan forgiveness request.

Key Takeaway – The borrower is not recertifying that the economic uncertainty made the loan request necessary to support the ongoing operations of the borrower. The certifications, however, do include:

  • The dollar amount for which forgiveness is requested (a) was used to pay costs that are eligible for forgiveness; (b) includes all applicable reductions due to decreases in the number of FTE employees and salary/hourly wage reductions; (c) does not include non-payroll costs in excess of 25% of the amount requested; and (d) does not exceed 8 weeks’ worth of 2019 compensation for any owner-employee or self-employed individual/general partner, capped at $15,385 per individual. Key Takeaway - Although “owner-employee” is not defined in the Application, this limitation comes in previously issued rules, and more specifically as set forth in 85 CFR 21747, 21749 (April 20, 2020), and we believe it is limited to those employees that are self-employed for federal income tax purposes and file Form 1040, Schedule C, and not to employees who are also shareholders of corporations taxed as C-corporations or S-corporations for federal income tax purposes.

  • If the loan proceeds were knowingly used for unauthorized purposes, the government may pursue recovery of loan amounts and/or civil or criminal fraud charges.

  • Borrower accurately verified the payments for the eligible payroll and non-payroll costs for which forgiveness is requested. 

  • The documentation required to verify payrolls costs, the existence of obligations and service (as applicable) prior to February 15, 2020, and eligible business mortgage interest payments, business rent or lease payments and business utility payments were submitted to the lender.

  • The information provided in the Application and information provided in all supporting documents and forms is true and correct in all material respects. The certifying party also certifies that it understands that knowingly making a false statement to obtain forgiveness is punishable under law, including by imprisonment and/or fine.

  • The tax documents submitted to the lender are consistent with those borrower submitted or will submit to the IRS and/or state tax or workforce agency.

C. Documentation

Borrowers are required to submit certain documents and information to its lender along with the Application. This includes the loan forgiveness calculation form and the PPP Schedule A that are part of the Application. In addition, borrowers must provide the following:

  • Documentation necessary to verify the cash compensation and non-cash benefit payments for the payroll costs paid or incurred, including:

    • Bank statements or third party payroll service provider reports documenting the compensation paid to employees.

    • Tax forms (or equivalent reports from third party payroll service providers) for the periods in question, such as (a) payroll tax filings (e.g., Form 941), and (b) state quarterly business or individual employee wage reporting and unemployment insurance tax filings.

    • Payment receipts, cancelled checks or account statements documenting borrower’s contributions to employee health insurance and retirement plans that are included in the forgiveness amount.

  • Documents showing the average number of FTE employees on the payroll per month employed by borrower between either (i) February 15, 2019 and June 30, 2019, or (ii) January 1, 2020 and February 29, 2020, as selected by borrower. A borrower that is a seasonal employer will use the time period it selected, which can be different than the two options above.

  • Documents verifying that existence of the obligations or services prior to February 15, 2020, and the eligible payments of those non-payroll costs included in the forgiveness amount, including where applicable:

    • Business mortgage interest payments, such as lender amortization schedules and receipts or cancelled checks verifying payments, or lender account statements for the relevant periods of time.

    • Business rent or lease payments, such as current lease agreement and receipts or cancelled checks verifying payments. 

    • Business utility payments, such as copies of invoices and receipts or cancelled checks, or account statements verifying the payments for the relevant periods of time.

Each borrower should also have available, but it is not required to submit to the lender, such borrower’s PPP Schedule A Worksheet or equivalent, along with (1) documents supporting the listing of each employee in that worksheet, whether the listing is done for salary/hourly wage reduction or exclusion of individuals receiving an annualize rate of compensation of more than $100,000, (2) documents regarding any job offers and refusal, firings for cause, voluntary resignations and written requests by employee for reduction, if applicable, (3) documents supporting the FTE Reduction Safe Harbor calculation on such worksheet. Further, all records related to the borrower’s PPP Loan, such as its application, support for its certifications, its eligibility and support for forgiveness must be retained for 6 years after the later of the date of its loan forgiveness, and its repayment of the loan.

Key Takeaway – The documentation to be submitted to the lender for forgiveness is relatively light. However, the amount of supporting documents and backup that the borrower should have at the ready for a six year plus period is quite extensive.

D. Forgivable Expenses

The Application and the First Forgiveness Interim Rules set forth in greater detail than the CARES Act itself the expenses that a borrower pays or incurs that are eligible for forgiveness. Those expenses are grouped into two categories: (1) payroll costs, and (2) non-payroll costs. In general, to be forgiven, the enumerated expenses must be paid or incurred during the applicable 8-week period.

  1. Covered Period and Paid/Incurred. In general, payroll costs and non-payroll costs are eligible for forgiveness only if they are paid or incurred in the applicable covered period. The Application and new rules provide very meaningful guidance in this area.

    1. Covered Period. First, borrowers have the option of selecting which 8-week period will be used to measure the paid or incurred payroll costs. Borrowers can seek forgiveness for payroll costs for the 8-week period beginning on either: (i) the date of disbursement of the loan proceeds (Original Covered Period); or (ii) the first day of the first payroll cycle in the 8-week period in the Original Covered Period (Alternative Payroll Period). The Alternative Payroll Period provides flexibility to a borrower and helps it align the covered period better to its payroll cycle. The Alternative Payroll Period is not available for non-payroll costs.

    2. Paid/Incurred. The CARES Act indicated that the forgivable expenses of the borrower had to be paid and incurred in the covered period. This created questions surrounding how to measure the same, and whether or not the use of “and” was intended to be conjunctive or disjunctive in nature. The Application and rules greatly simplify the analysis on this front. In short, a borrower can seek forgiveness for appropriate payroll and non-payroll expenses that are paid during the applicable covered period, and for those 5 expenses incurred during the applicable covered period that are paid on the next regular payroll date, or for non-payroll costs on the next regular billing cycle. Payroll costs are considered paid on the day that paychecks are distributed or the day borrower originates an ACH credit transaction. Payroll costs are incurred on the day the employee’s pay is earned (i.e., the day the employee worked).

Key Takeaway – A borrower can submit expenses either paid or incurred in the applicable period so long as they are not double counted. And, unless changed by supplemental rules, a borrower gets the benefit of more than 8 weeks of payroll paid or incurred during the Original Covered Period or the Alternative Payroll Period, as applicable.

  1. Payroll Costs. The new guidance reiterates that forgivable payroll costs is the compensation to employees whose principal place of residence is in the United States during the applicable 8-week period. Compensation includes (a) salary, wages, commissions or similar compensation; (b) cash tips or equivalent (based on borrower’s records of tips or, if no such records, a reasonable good-faith estimate); (c) payment for vacation, parental, family, medical or sick leave; (d) allowance of separation or dismissal; (e) payment for the provision of employee benefits consisting of group health coverage, including insurance premiums, and retirement; (f) payment of state and local taxes assessed on compensation of employees; and (g) for an independent contractor or sole proprietor, wages, commissions, income or net earnings from self-employment or similar compensation. Key Takeaway - The First Forgiveness Interim Rules clarify that compensation payments to furloughed employees in the applicable 8-week period are eligible for forgiveness (subject to the $100,000 annualized cash compensation limitation). In addition, if an employee’s total cash compensation does not exceed $100,000 on annualized basis, the employee’s hazard pay and bonuses are eligible for forgiveness. Finally, the amount of forgiveness requested for owneremployees and self-employed individuals’ payroll compensation can be no more than the lesser of 8/52 of 2019 compensation or $15,385 per individual in total across the business (see commentary in Section B. on the definition of “owneremployee”).

  2. Non-Payroll Costs. While the Application and latest rules do not define payroll costs and non-payroll costs specifically, they do shed light on a few questions surrounding the items includable in those categories. Generally, the Application and the rules reiterate that non-payroll costs that are potentially forgivable are (a) interest payments on business mortgage obligations on real or personal property that were incurred before February 25, 2020 (but not any prepayment or payment of principal); (b) payments on business rent obligations on real or personal property under a lease agreement in force before February 15, 2020; and (c) business utility payments for the distribution of electricity, gas, water, transportation, telephone or internet access for which service began before February 15, 2020.

Key Takeaway – Payments under rental or lease agreements for personal property are eligible for forgiveness. And, the SBA confirmed prepayment of interest is not a forgivable use of PPP loan proceeds.

E. Reduction in Forgiveness Mechanics

The SBA also addressed and answered several outstanding questions related to the reductions for forgiveness required under the CARES Act and the rules promulgated thereunder, including those for reduction in work force (including furloughs and reduction in hours) or employees’ wages. Additionally, the SBA created several borrower-friendly exemptions in the process, relying on “administrative convenience” and the statutory authority to grant de minimis exemptions. Several of the First Forgiveness Interim Rule’s questions and answers are worthy of note, but with guidance still ever-changing and regulations still to follow, we advise seeking counsel and reviewing the most up-to-date guidance before calculating whether a PPP loan is subject to a reduction in forgiveness.

  1. Order of Application. There are specific instances where the amount of forgiveness can be reduced. Those instances are when there is a reduction in employee pay level, a reduction in the number of FTEEs, and more than 25% of the amount sought to be forgiven is related to non-payroll costs. Before issuance of the Application, it was not clear in what order these potential reductions were to apply, and how they would interact. Key Takeaway – The reductions are to be applied by first addressing the reduction in employee pay level, then the reduction for any decrease in FTEEs, and finally calculation of any reduction needed because more than 25% of the amount applied for forgiveness is attributable to non-payroll costs.

  2. Employees Who Refuse to Come Back to Work. Prior guidance indicated that if a borrower offered to restore an employee to its prior wage/hours/employment status and the employee refused, that employee would not be counted against the borrower in calculating forgiveness. This was codified in the First Forgiveness Interim Rules, which also applied this exemption to situations where the borrower had previously reduced the hours of the employee and offered to restore the employee to the same salary or wages. Key Takeaway – The First Forgiveness Interim Rules provided a five-part test for borrowers to qualify for the exemption. The test includes that the borrower must make a good faith offer to rehire or restore the reduced hours to the same salary or wages and same number of hours as earned by the employee in the last pay period prior to the separation or reduction in hours. The offer must be rejected by the employee, and the offer and rejection must be documented. The borrower must inform the state unemployment office of the rejected offer within 30 days of the employee’s rejection of the offer.

  3. Effect of a Reduction in Full-Time Equivalent Employees (FTEEs). When calculating a reduction in forgiveness based on a reduction in FTEEs, the borrower is to divide the average number of FTEEs during the Original Covered Period or the Alternative Payroll Period by the average number of FTEEs during the “reference period,” with the total eligible expenses available for forgiveness reduced proportionally by the percentage of reduction in FTEEs. In prior publications, the SBA had suggested that the borrower may not be able to choose the reference period (as had initially been suggested by the language of the CARES Act) and that borrowers that were in business prior to February 15, 2019 had to use February 15 to June 30, 2019 as the reference period.  Key Takeaway –The SBA made clear that the borrower will have a choice in selecting the reference period, which should allow most borrowers to choose the reference period that minimizes any reduction to forgiveness based on a reduction in workforce. Most borrows have two choices in determining the reference period to calculate any reduction of forgiveness due to a reduction in FTEEs: (a) February 15-June 30, 2019, or (b) January 1-February 29, 2020. Seasonal employers, however, could also choose any consecutive 12-week period between May 1 and September 15, 2019.

  4. Calculating FTEEs. FTEE calculations are determined on a 40 hour work week. Any employee who works 40 hours or more is considered one FTEE. However, the SBA creates two options for calculating FTEEs when it comes to employees who work less than 40 hours per week. The borrower must apply the option it selects consistently for calculating both the reference period and the Original Covered Period (or the Alternative Payroll Period), and for all employees. The first option is to calculate the actual numbers a part-time employee was paid per week and divide that number by 40. The second, alternative option—created for administrative convenience—is to use a full-time equivalency of 0.5 for each part-time employee, without concern to the actual hours the employee worked. Key Takeaway – The second option for calculating FTEEs will be significant for certain borrowers, like those in retail and restaurant industries, who are slowly re-opening at reduced capacity, and often have a significant portion of the staff working less than 40 hours a week. While we advise seeking counsel prior to making a choice between the two options provided, the creation of the second option may allow some borrowers to mask small reductions in hours for individual employees that are likely to occur as the borrower is reopening at reduced capacity. Of note, this option does not exempt these part-time employees from calculating a reduction in forgiveness due to a reduction in salary, nor does it change the requirement that at least 75% of the forgivable amount be actually spent on payroll costs.

  5. Effect of a Reduction in Employees’ Wages on Forgiveness. The SBA made clear that the reference period for calculation in wage-reduction was January 1 through March 31, 2020 and that the reduction is based on a per employee basis (not in the aggregate). Key Takeaway – Borrowers will not be doubly penalized for a reduction in FTEEs when calculating reductions in forgiveness. If a borrower merely reduces hours but does not change the salary/wage of the employee, the SBA indicates that the borrower will not also suffer a reduction in forgiveness for a reduction in wages. Likewise, terminating an employee should not also count as a reduction in wages to that employee. 

  6. Safe Harbor for Rehiring. The CARES Act provides for a safe harbor period for any borrower who saw a reduction in FTEEs or employee wages from February 15 through April 26 (30 days after the Act was enacted), but cures those reductions by June 30, 2020. Key Takeaway – The rules provide that a borrower who saw reductions to FTEEs or wages during the safe harbor period, but cures such reduction by June 30 will suffer no reduction in forgiveness for that employee. However, even with this 8 effort for clarity, borrowers should seek counsel before calculating safe harbor exemptions to reductions in forgiveness, as, for example, an employee who was laid off on February 14 is treated differently than one laid off on February 15, and an employee who had wages reduced on April 26 is treated differently than one whose wages were reduced on April 27.

  7. Employees fired for cause or voluntarily causes reduction in hours. The First Forgiveness Interim Rules give a borrower a better understanding of what employees or former employees count in the FTEE calculations, and certain terminations of employment will not be counted against the borrower. Key Takeaway – The SBA created an exemption not contemplated by the CARES Act. Specifically, when an employee is fired for cause, voluntarily resigns, or voluntarily requests a reduction of hours during the covered period, the borrower may count such employee as the same FTEE level as before the event when calculating the FTEE penalty. This would likely include employees who abandoned positions after being offered to return to work, even if the employee did not formally reject the offer as otherwise required in Section E.2 above. However, the SBA cautioned borrowers that the borrower must maintain records (for up to six years) demonstrating the employee was fired for cause, voluntarily resigned or requested a reduced schedule, and must provide the records upon request of the SBA.

F. Questions that Remain Unanswered.

While the Application and the First Forgiveness Rules addressed several issues surrounding the forgiveness aspects of the PPP, borrowers will be waiting and watching for further issuances by the Treasury and the SBA on questions not yet addressed. Some of those items are:

  • Will lenders be able to extend the 6 month deferment on the repayment of the PPP loan so as to allow the forgiveness process to be completed, or will a borrower need to start making payments based on the lender’s determination of forgiveness?

  • If a borrower has multiple payroll cycles (e.g., bi-weekly and monthly), does it only get to use the Alternative Payroll Period once, or can it elect to change the Original Covered Period for each payroll cycle?

  • Are retirement plan contributions, which are not monthly payroll cycle matches, but instead discretionary in nature, a forgivable expense if paid during the applicable covered period?

  • Is there a deadline for a borrower to make the request for forgiveness?

  • Can PPP loan proceeds be used for permissible purposes after June 30, 2020, or if not spent by then do they need to be returned to the lender? We expect even more guidance and interim rules on the loan forgiveness aspects of the PPP to be forthcoming.

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