Treasury Releases PPP Loan Forgiveness Application And Related Guidance
On May 15, 2020, the Small Business Administration (SBA) released the long-awaited form of Paycheck Protection Program Loan Forgiveness Application and instructions (the Application), as well as detailed instructions for the Application. You can view a copy of the application and instructions here.
On May 22, 2020, the Treasury issued its first interim final rule titled Paycheck Protection Program – Requirements – Loan Forgiveness (the Interim Final Rule) as additional guidance in navigating the key changes identified within the Application. You can view a copy of the Interim Final Rule here. Based upon prior experience with the legislative and rulemaking process we anticipate that the Interim Final Rule will be amended and, potentially replaced.
The Application and Interim Final Rule advise borrowers how to apply for forgiveness of their Paycheck Protection Program loans (PPP Loans) under the Coronavirus Aid, Relief, and Economic Security Act, or CARES Act. The PPP Loan program was created by the CARES Act to provide forgivable loans to eligible small businesses to keep American workers on the payroll during the COVID-19 pandemic.
Congress and the Department of the Treasury are in the process of developing changes to the program to allow lengthen the forgiveness period, reallocate percentages for use of funds and other items. As of the writing of this article, the U.S. House of Representatives has passed sweeping changes to the PPP Loan Program that we highlight below. Below are highlights of the Application in its current form and the guidance provided by the SBA:
- The Application has four parts: (1) the PPP Loan Forgiveness Calculation Form, (2) the PPP Schedule A, (3) the PPP Schedule A Worksheet, and (4) an optional Demographic Information Form. The PPP Loan Forgiveness Calculation Form and the PPP Schedule A must be submitted to the borrower’s lender.
- The Application consists of a 3-partcalculationtodeterminetheamountofthePPP Loan that is eligible for forgiveness:
- First, the Application asks for the payroll and qualifying non-payroll costs that the borrower has paid during the applicable covered 8-week period.
- The second part of the Application covers the reduction in the forgiveness amount if the borrower reduced pay for employees greater than 25 percent or if it did not retain same number of full-time equivalent employees (FTE’s) it had prior to the pandemic.
- The third section of the Application covers the 75 percent payroll cost test, which states that the forgiveness request must be comprised of at least 75 percent payroll costs. The other 25 percent can only be utilized for rent, mortgage interest debt and utilities.
Covered Period & Alternative Payroll Covered Period
- The Application provides that the 8-week “Covered Period” in which eligible expenses are forgivable begins on the date the lender disburses PPP loan funds to the borrower. However, the Application also provides that, for administrative convenience, borrowers with a bi-weekly (or more frequent) payroll schedule may choose to calculate their payroll costs within an “Alternative Payroll Covered Period.” This Alternative Payroll Covered Periods is the 8-week period beginning on the 1st day of the 1st pay period after the date the PPP loan was disbursed to the Borrower and ending on the 56th day thereafter. The Interim Final Rule contains a useful example for utilizing Alternative Payroll Covered Periods.
- A borrower that elects the Alternate Payroll Covered Period must use it consistently throughout the Application, except where the application specifies the “Covered Period” only. The Alternative Payroll Covered Period is not used to determine the amounts spent on non-payroll costs for loan forgiveness purposes. Instead, non-payroll costs must be reported for the “Covered Period” (the first 56 days after the after the date the PPP loan proceeds were disbursed to the Borrower).
Eligible Payroll Costs
- The Application does not change the definition of “eligible payroll costs.” Eligible payroll costs continue to include gross salary, gross wages, gross tips and gross commissions, and paid leave not including leave covered by the Families First Coronavirus Response Act (FFCRA). The Interim Final Rule has also clarified that if an employee’s total compensation does not exceed $100,000 on an annualized basis, the employee’s hazard pay and bonuses are payroll expenses for loan forgiveness because they constitute supplemental wages that are similar to compensation.
- The Interim Final Rule makes it clear that wages paid to employees are still eligible for forgiveness even if those employees are not able to perform their day-to-day duties, whether due to lack of economic demand or public health considerations.
- The Application also follows the CARES Act restriction that payroll costs for any employee be capped at a pro-rated portion of $100,000 (on an annualized basis) and states that the cap or the Covered Period for any such employee is $15,385; prior guidance from the SBA’s Frequently Asked Questions clarified that this cap applied only with respect to cash compensation and not benefits or other non-cash compensation.
- The Application requires the borrower to specify its payroll schedule (weekly, bi-weekly, semi-monthly, monthly or other), but for purposes of allocating compensation it treats all borrowers as having a weekly or bi-weekly pay period.
- Payments made to independent contractors cannot be included in the payroll cost calculation.
Non-Payroll Costs and Expenses
- Only covered mortgage interest payments, rent obligations, and utility payments that were in place before February 15, 2020 are considered eligible non-payroll costs, and those costs must have been paid during the Covered Period, or incurred during the Covered Period and paid on or before the next billing date (even if that date extends beyond the Covered Period).
- The Application and Interim Final Rule specifically state that prepayments of interest and payments of principal on covered mortgage obligations cannot be included in the forgiveness calculation.
- Prior to the issuance of the Application guidance, it was not clear whether payments for personal property leases would be eligible for forgiveness. The Application clarifies that rent payments must include payments what were made pursuant to a lease agreement for real or personal property.
- The Application and Interim Final Rule also define what utility expenses may be eligible for forgiveness. These expenses include “…electricity, gas, water, transportation, telephone or internet access.”
- The Application and Interim Final Rule confirms previous SBA guidance that not more than 25% of the loan forgiveness amount may be attributable to non-payroll costs, such as interest on mortgage and covered rent and utility obligations. If that amount requested for forgiveness exceeds 75 percent, then the borrower must divide the amount of its eligible payroll costs by .75 to calculate the total forgiveness amount.
Amounts Paid & Incurred
- The CARES Act created some confusion as to whether eligible expenses must be incurred and paid during the covered 8-week period.
- The Application and Interim Final Rule now clarify that Borrowers are generally eligible for forgiveness of payroll costs paid and incurred during the 8-week Covered Period or Alternative Payroll Covered Period. If payroll costs are incurred, but not paid, during the borrower’s last pay period of the 8-week Period, such payroll costs are eligible for forgiveness if they are paid on or before the borrower’s next regular payroll date.
- It is worth noting that the Application instructions indicate that non-wage payroll costs must include only costs paid for health insurance, the employer portion of employee retirement contributions, and state and local taxes on employee compensation, the implication being that these costs should not be included if they have been incurred but have not been paid. Further clarification from the SBA is needed on this point.
- As a reminder, borrowers will be allowed to include eligible mortgage, rent, or utility payments costs incurred but not paid during the 8-week Covered Period or Alternative Payroll Covered Period, as long as those amounts are paid before the next billing date. However, neither the Interim Final Rule nor the Application addresses whether a borrower who deferred rent payments (which remain due but unpaid) until sometime after the covered period will be entitled to forgiveness for rent that the borrower pays outside of the covered period; it is to be anticipated that, if the payment is not made during the covered period or prior to the next billing date, it will not be eligible for forgiveness.
Reductions in Full Time Equivalents Employees & Wage Reduction
- As a reminder, the CARES Act provides that the amount of PPP Loan forgiveness will be proportionally reduced if a borrower’s average number of FTEs during the 8-week Covered Period or Alternative Payroll Covered Period is less than the borrower’s average number of FTEs during the borrower’s chosen reference period (generally, for non-seasonal employers, February 15, 2019, to June 30, 2019, or January 1, 2020, to February 29, 2020).
- The amount of loan forgiveness is also reduced if employees who made less than $100,000 in annualized wages in 2019 receive a reduction in pay of more than 25% during the Covered Period or Alternative Payroll Covered Period. If wages are reduced, they are deducted on a dollar-for-dollar basis from a borrower’s forgiveness amount. This calculation is made on a per employee basis. Each employee’s compensation during the Covered Period or Alternative Payroll Covered Period is measured against that employee’s compensation from January 1, 2020 to March 31, 2020.
- The Application provides a relatively borrower-friendly interpretation of how to apply both the FTE and wage/salary reduction provisions that would reduce the amount of debt forgiven. The Application makes it clear that one FTE is based on a 40-hour work week for one employee. The Application does not use the SBA’s prior 30-hour full-time metric for calculating full-time employees.
- Borrowers can use two alternative methods for calculating the number of FTE employees before the pandemic and during the 8-week covered period. Borrowers can calculate the number of hours paid per week, divide by 40, and round the total to the nearest tenth. The maximum for each employee is capped at 1.0. Alternatively, the Application also allows a simpler method that assigns 1.0 for employees who are paid for 40 hours or more per week and .5 for employees who are paid for fewer than 40 hours.
- Reductions in FTEs or salary that occur between February 15, 2020 and April 26, 2020 can be “cured,” and will not impact the amount of loan forgiveness if the borrower eliminates the reduction in employees or the reduction in wages, as applicable, on or before June 30, 2020. The Application and Interim Final Rule clarify that the borrower must restore its FTE employee levels to the borrower’s pay period that included February 15, 2020. There is no requirement that the borrower rehire the same employees.
- The Application also allows for exemptions from the loan forgiveness reduction based on FTEs (1) for borrowers who made a good-faith, written offer to rehire workers that was declined, and (2) for employees who (a) were terminated for cause, (b) voluntarily resigned, or (c) voluntarily requested and received a reduction in their hours. To qualify for this exemption: 1) the borrower must have made a written offer to rehire in good faith; 2) the borrower must have offered to rehire for the same salary/wage and number of hours as before they were laid off, and 3) the Borrower must have documentation of the employee’s rejection of the offer.
- The Interim Final Rule also explicitly points out that the salary/wage reductions applies only to the portion of the decline in employee salary and wages that is not attributable to the FTE reductions to ensure that borrowers are not doubly penalized.
- To document the payroll costs, the SBA is requiring each of the following from the borrower:
- Bank accounts or third-party payroll service reports documenting the cash compensation paid to employees.
- Tax forms (or equivalent third-party payroll service provider reports) for the periods that overlap with the Covered Period or the Alternative Payroll Covered Period. For tax forms, the SBA is requesting payroll tax forms (usually 941) and state quarterly wage and unemployment filings.
- Payment receipts, cancelled checks or account statements documenting the amount of employer contributions to employee health insurance and retirement plans.
- To document the non-payroll costs and expenses, the SBA is requiring each of the following from the borrower:
- With respect to mortgage obligations, a lender amortization schedule, receipt of payments, as well as statements for February 2020 and during the 8-week Covered Period or Alternative Payroll Covered Period.
- With respect to rent or lease payments, a copy of the lease agreement evidencing it was in force before February 15, 2020, as well as copies of account statements from its landlord/lessor showing the payments or cancelled checks evidencing the payments made during the 8-week Covered Period or Alternative Payroll Covered Period.
- With respect to utility payments, copies of invoices or statements showing the utility service in place as of February 2020, as well as account statements, cancelled checks or bank-account statements showing the payments made during the eight-week period, the business can use.
- TodocumentFTEs and Wages, theSBA is requiring each of the following from the borrower:
- The average number of FTE employees on payroll per month employed 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 between February 15, 2019 and June 30, 2019; between January 1, 2020 and February 29, 2020; or any consecutive 12-week period between May 1, 2019 and September 15, 2019.
- The average number of FTE employees on payroll per month employed between February 15, 2019 and June 30, 2019.
- Documents may include payroll tax filings (typically Form 941) and state quarterly business and individual employee wage reporting and unemployment insurance tax filings.
- The borrower is required to retain all such documentation supporting (i) the PPP Loan application, (ii) the borrower’s certification as to the necessity of the loan request and its eligibility for a PPP loan, and (iii) the loan forgiveness application for six (6) years after the date the loan is forgiven or repaid in full.
- The Application also requires numerous certifications from the borrower, including certifications that the borrower has verified the payments and understands that knowingly using loan funds for unauthorized purposes subjects the borrower to civil and criminal fraud charges.
- Borrowers must submit their applications for loan forgiveness and the other required documentation to the lender that originated the PPP loan, and the lender must issue a decision on the application within 60 days. Lenders will process loan forgiveness applications directly, and if approved, the SBA will purchase the forgiven loan from the lender within 90 days of forgiveness.
- Neither the Application nor the Interim Final Rule clarify whether a borrower must submit its application for PPP Loan forgiveness within a specific deadline.
On May 22, 2020, the SBA issued its second interim final rule titled – SBA Loan Review Procedures and Related Borrower and Lender Responsibilities to address loan review procedures and borrower and lender responsibilities in the PPP Loan Forgiveness process. You can view a copy of the second Interim Final Rule here.
For all PPP Loan forgiveness applications, each lender is required to:
- Confirm receipt of the borrower certifications in the application,
- Confirm receipt of the documentation borrowers must submit to aid in verifying payroll and non-payroll costs, as specified in the instructions to the application,
- Confirm the borrower’s calculations on the loan forgiveness application (including cash compensation, non-cash compensation, and compensation to owners, as well as non-payroll costs) by reviewing the documentation submitted with the application, and
- Confirm that non-payroll costs do not exceed 25% of the loan forgiveness request.
The second Interim Final Rule affirms prior rule guidance from the SBA that accuracy of the calculations is ultimately the responsibility of the borrower. However, the second Interim Final Rule also makes it clear that lenders are expected to perform a good-faith review in a reasonable amount of time but are not required to obtain independent review of the borrower’s reported documents. Nonetheless, if the lender identifies errors in the borrower’s calculation or material lack of substantiation in the borrower’s supporting documents, the lender should work with the borrower to remedy the issue.
The lender is required to issue a decision to the SBA approving or denying (in whole or in part) the forgiveness amount within 60 days of the receipt of the borrower’s loan forgiveness application. If the application is denied, the Borrower must notify also notify the borrower. The SBA may direct a lender to deny the forgiveness amount without prejudice due to a pending SBA review. Within 30 days of receiving notice from the lender, a borrower whose application has been denied may request SBA review of the lender’s decision. The SBA intends to issue a separate interim final rule to address appeals of forgiveness and eligibility determinations.
The second Interim Final Rule affirms that the SBA may review any PPP Loan of any size, including any application for PPP Loan forgiveness. Furthermore, the SBA Administrator is authorized to review multiple components of the PPP Loan, including borrower eligibility, the amount and use of loan proceeds, and the borrower’s entitlement to loan forgiveness. This additional guidance also notes the 6-year retention period for PPP loan documents, suggesting that review could come at any time during that 6-year period.
If the SBA decides to review a PPP loan it must notify the lender in writing, and the lender must in turn notify the borrower within 5 business days. The lender must deliver the borrower’s initial application, the loan forgiveness application, the signed and certified transcript of account, a copy of the executed note, and all supporting information for both applications to the SBA within 5 business days after the lender notice from the SBA. The lender must also request the borrower to submit the Schedule A Worksheet included in the Application and deliver it to the SBA within 5 days of receipt from the Borrower.
Lenders are not eligible for a processing fee if the SBA determines that a borrower was ineligible for the PPP loan. The SBA will also seek repayment of the processing fee from the lender if the SBA determines that a borrower was ineligible for a PPP loan within one year after the disbursement date. This action, however, will not affect the SBA’s guarantee of the PPP Loan if the lender complied with its obligations to process the PPP Loan.
The SBA intends to issue a subsequent interim final rule establishing appeal procedures for borrowers that disagree with the SBA’s determinations.
Lenders are advised to remain up to speed with all of the requirements set forth in the SBAs rules, regulations and guidelines. Although the Application and both interim final rules are a good start to providing additional guidance to borrowers and lenders, there continues to be some unanswered questions related to loan forgiveness. The SBA is expected to issue further guidance in the coming weeks. Such questions include:
- What is the deadline to submit the PPP Loan Application for forgiveness?
- With respect to PPP Loans that were disbursed to borrowers prior to May 5, 2020, will loan forgiveness will be reduced if that borrower maintained the required number of FTEs during the Covered Period or Alternative Payroll Covered Period but subsequently reduced its FTE levels prior to June 30, 2020 (because it no longer had any funds to pay its employees)?
As mentioned above, the U.S. House of Representatives nearly unanimously passed a standalone bill called the Paycheck Protection Flexibility Act, H.R. 7010, on Thursday May 28, 2020 making it easier for borrowers of PPP Loans to qualify for forgiveness. The bill still requires passage from the United States Senate and President’s approval before it can take effect.
The Paycheck Protection Flexibility Act:
- Extends the deadline for borrowers to apply for a PPP Loan from June 30, 2020 to December 31, 2020.
- Increases the PPP Loan payment deferral period from 6 months to the date on which the amount of forgiveness is determined, but if a borrower does not apply for forgiveness, within 10 months after the last day of the forgiveness period, then deferment ends on a date no earlier than 10 months after the last day of the covered period. This extension would apply both to existing and any future PPP Loans.
- Extends the time borrower have to spend their PPP loan funds from 8 weeks from the date of disbursement to the earlier of (a) 24 weeks from the date of disbursement, or (b) December 31, 2020.
- Lowers the portion of PPP funds borrowers must spend on payroll costs to qualify for full loan forgiveness from 75% to 60%. That change would allow borrowers to direct more funds to costs such as rent, mortgage interest and utilities.
- More than doubles the minimum term period for PPP Loans from 2 years to 5 years, and allows companies whose PPP Loans are forgiven to delay payment of payroll taxes.
- Clarifies that a borrower doesn’t have to start repaying a PPP Loan until the SBA determines whether it can be forgiven, if applied for
Currently, PPP Loan borrowers must maintain their FTE level to secure full forgiveness of their PPP loan. The new legislation would provide safe harbor from this requirement for borrowers in certain circumstances, which include:
- If PPP Loan borrowers attempt to rehire laid off or furloughed staff but are unable to do so AND are not able to hire similarly qualified individuals by December 31.
- If borrowers can document an inability to return to their pre-COVID-19 level of business activity due compliance with federal guidelines related to sanitization, social distancing or other safety requirements related to COVID-19.
We will continuing to monitor any developments and will update this alert as appropriate.
Michael Smith works with lenders and borrowers in transactions involving automobile dealerships, community associations, construction projects, and government contracting, along with SBA loans. For more information, you can reach him at 301-657-0166 or [email protected].