NOTE: The SBA issued its Interim Final Rule on PPP loan forgiveness on May 23, 2020.
Following the enactment of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) on March 27, 2020, the Small Business Administration (SBA) and the United States Department of the Treasury (Treasury) have unleashed a plethora of Interim Final Rules (IFRs), Frequently Asked Questions (FAQs), and other guidance regarding the Paycheck Protection Program (PPP). Most recently, the SBA released its PPP Loan Forgiveness Application form (SBA Form 3508) (Forgiveness Application) on May 15, 2020. Although sometimes contradictory to the CARES Act and previously released guidance and often raising more questions than it answered, such guidance has helped small businesses navigate the confusing process of applying for PPP loans and better understand the all-important loan forgiveness aspect of the PPP. This bulletin will attempt to update our earlier white paper (White Paper) on the PPP as to some of the more noteworthy guidance with a specific focus on the Forgiveness Application.
1. Forgiveness Application. As discussed in our White Paper, Section 1106(b) of the CARES Act provides forgiveness of the portion of a covered loan under the PPP equal to certain eligible costs incurred and payments made during the "Covered Period" of eight weeks beginning on the date of the origination of the covered loan. The following is a brief recap of the loan forgiveness process and summary of the main points of clarification gleaned from the Forgiveness Application.
a. Application Sections. The Forgiveness Application released by the SBA consists of the following parts:
• Instructions for Borrowers (pp. 1-2);
• PPP Loan Forgiveness Calculation Form and Certifications (pp. 3-4);
• PPP Schedule A and Instructions for same (pp. 5-6);
• PPP Schedule A Worksheet and Instructions for same (pp. 7-9);
• List of "Documents that Each Borrower Must Submit with its PPP Loan Forgiveness Application" and "Documents that Each Borrower Must Maintain but is not Required to Submit" (p. 10); and
• PPP Borrower Demographic Information Form (optional).
As discussed in more detail below, borrowers should start with the calculations on the PPP Schedule A Worksheet, which totals and then feeds into PPP Schedule A. The amounts for "Total Payroll Costs" in line 10 of the PPP Schedule A and "FTE Reduction Quotient" in line 13 of the PPP Schedule A in turn carry over to the PPP Loan Forgiveness Calculation Form which calculates the "Forgiveness Amount". It should be noted that the PPP Schedule A Worksheet is not required to be submitted with the completed Forgiveness Application, but must be maintained by the borrower with supporting documentation in its internal records.
b. Covered Period and Costs Eligible for Forgiveness.
(i) Covered Period. The Covered Period of eight weeks (56 days) begins on the date the PPP loan is disbursed and in the case of multiple disbursements of a PPP loan, the Covered Period is counted from the date of the first disbursement. In order to accommodate borrowers with more frequent payroll dates, the Forgiveness Application allows borrowers to use an "Alternative Payroll Covered Period" that begins on the first day of their first pay period following the date the PPP loan is disbursed and ends eight weeks (56 days) thereafter.
(ii) Eligible Payroll Costs. As more particularly described in Section 1102 of the CARES Act and the Interim Final Rule issued by the SBA on April 2, 2020, the "payroll costs" that are eligible for forgiveness include gross salary, gross wages, gross tips, gross commissions, and paid leave of up to $100,000 of annualized cash compensation per employee, which the Forgiveness Application caps at a maximum of $15,385 per individual for the eight- week (56 day) Covered Period. In addition to this capped portion of payroll costs, the following costs can also be included in payroll costs and are not subject to the cap:
• Employer contributions for employee health insurance and employee retirement plans (excluding pre-tax or tax contributions by employees); and
• Payments for employer state and local taxes assessed on employee compensation (excluding taxes withheld from employee earnings).
Prior confusion and speculation as to the exact meaning of the references to "paid and incurred" in the CARES Act have been somewhat clarified in the Forgiveness Application. Generally speaking, "and" has effectively been changed to "or" which should allow borrowers to include a greater amount of payroll costs toward loan forgiveness. Borrowers are eligible for forgiveness of both payroll costs paid during the Covered Period and payroll costs incurred but not paid during the Covered Period, provided that such costs are paid on or before the next regular payroll date following the end of the Covered Period. Payroll costs are considered "paid" on the day that paychecks are distributed or the borrower originates an ACH credit transaction. Payroll costs are considered "incurred" on the day that the employee's pay is earned. For example, if a borrower received a PPP loan on April 12, 2020 and paid payroll on April 15, 2020, the costs paid on April 15, 2020 are eligible for forgiveness even though they were not completely incurred during the Covered Period or Alternative Payroll Covered Period. Additionally, if the Covered Period or Alternative Payroll Covered Period ends on June 12, 2020 and the borrower's next payroll is to be paid on June 15, 2020, the payroll costs paid on June 15, 2020 that were incurred during the Covered Period or Alternative Payroll Covered Period would be eligible for forgiveness.
(iii) Eligible Nonpayroll Costs. Nonpayroll costs eligible for forgiveness consist of the following items all of which obligations must have been entered into before February 15, 2020 (or service commenced before such date in the case of covered utility payments):
• Covered Mortgage Obligations. Payments of interest on business mortgage obligations secured by real or personal property that were entered into before February 15, 2020 (does not include payment of principal and, although not entirely clear, presumably does not include prepayments of interest during the Covered Period);
• Covered Rent Obligations. In addition to rent obligations on lease agreements for real property, lease payments on an equipment lease for personal property are also included; and
• Covered Utility Payments. Payments for a service for the distribution of electricity, gas, water, transportation (presumably fuel charges), telephone, or internet access.
As with payroll costs, borrowers can include the various nonpayroll costs incurred during the Covered Period even if the billing date is after the Covered Period. As previously established, the total nonpayroll costs may not exceed 25% of the total loan forgiveness amount.
c. Reductions in Forgiveness Amount. Section 1106(d) of the CARES Act provided for two instances in which a borrower's expected loan forgiveness amount would be reduced by its lender:
• (x) if the average number of full-time equivalent employees (FTEs) was less during the Covered Period as compared to either of the following two periods selected by borrower: (i) the period beginning on February 15, 2019 and ending on June 30, 2019, or (ii) the period beginning January 1, 2020 and ending on February 29, 2020; and
• (y) if the total salary or wage of any employee during the Covered Period was reduced by more than 25% of the total salary or wage of such employee during the most recent full quarter during which the employee was employed before the Covered Period.
Section 1106(d) also granted an exemption or safe harbor to a borrower facing a reduction in its loan forgiveness amount by virtue of clauses (x) and/or (y) above if such borrower either eliminated the reduction in FTEs by June 30, 2020, and/or eliminated the reduction in the salary or wages of the affected employees by June 30, 2020, as applicable. The Forgiveness Application provides for some much-needed clarifications with respect to the reductions and adds additional safe harbors for borrowers.
(i) Calculation of FTEs. Prior to issuance of the Forgiveness Application, neither the CARES Act nor any subsequent guidance had addressed calculation of a FTE for purposes of the reduction in number of employees. The Forgiveness Application calculates FTEs by dividing the average number of hours paid per week per employee by 40 and rounding to the nearest tenth. To simplify calculations, the maximum amount for each employee is capped at 1.0 for an employee who works 40 hours or more per week. A borrower may also elect to use a FTE of 0.5 for employees working less than 40 hours per week. Please see the Instructions for the PPP Schedule A Worksheet for a more detailed discussion of the calculation of the average FTEs.
(ii) Reductions in Salary or Hourly Wage. The Forgiveness Application clarifies that the determination as to reductions in salary for salaried employees or hourly wage for hourly employees must be determined for each specific employee. This will be a cumbersome process for larger organizations, but hopefully payroll processing companies are busy working on applications to assist with these calculations and back-up reporting requirements. Please see the Instructions for the PPP Schedule A Worksheet for a more detailed discussion of the calculation of the average FTE calculations.
(iii) New Exceptions to Reductions. As noted above, if reductions in the number of employees or in the salaries or wages of employees are restored by June 30, 2020 to their levels existing as of February 15, 2020, a borrower will not have its expected loan forgiveness amount reduced. Pursuant to Question 40 of the FAQs released May 3, 2020, the SBA clarified that if a borrower made a good faith written offer of rehire to an employee that was rejected by the employee, such borrower will not have the failure to rehire such employee counted against it for loan forgiveness purposes. In addition to this safe harbor, the SBA noted three additional exceptions in which reductions in FTEs during the Covered Period or the Alternative Payroll Covered Period would not be applied to reduce a borrower's expected loan forgiveness amount:
• Employees fired for cause;
• Employees who voluntarily resigned; or
• Employees who voluntarily requested and received a reduction in their hours.
d. Payroll Cost 75% Requirement. In the CARES Act and guidance issued prior to the Forgiveness Application, there were three basic "truths" in determining the loan forgiveness amount:
• The amount of forgiveness can never exceed the amount of the PPP loan;
• The amount of forgiveness can never exceed the amount spent on eligible or covered costs; and
• No more than 25% of the loan proceeds can be spent on nonpayroll costs (or, conversely, at least 75% of the loan proceeds must be spent on payroll costs).
However, the way in which the calculations in the Forgiveness Application are structured could potentially lower the amount of loan forgiveness that some borrowers expected to receive. The PPP Loan Forgiveness Calculation Form imposes the requirement that the ultimate "Forgiveness Amount" is the smallest of (x) the borrower's calculation of loan forgiveness reflected in line 8 (after adjustments for reductions in FTE and salary and wage reductions), (y) the borrower's "PPP Loan Amount" (line 9), and (z) the "Payroll Cost 75% Requirement" (line 10), which is the quotient obtained by dividing the borrower's total "Payroll Costs" (line 1) by 0.75. According to the Instructions, this "determines whether at least 75% of the potential forgiveness amount was used for payroll costs". Thus, if a borrower spends more than 25% of the loan proceeds for nonpayroll costs, this will result in a greater decrease in the ultimate forgiveness amount than might have been anticipated.
e. Certifications. Although the Forgiveness Application does not require the borrower to expressly re-certify as to the economic need for the PPP Loan (see discussion in paragraph 2 below), the authorized representative of the borrower is required to make the following certifications in the Forgiveness Application:
• The dollar amount for which forgiveness is requested (i) was used to pay eligible costs; (ii) includes all applicable reductions due to decreases in FTEs and/or salary/hourly wage reductions; (iii) does not include nonpayroll costs in excess of 25% of the amount requested; and (iv) does not exceed eight weeks' worth of 2019 compensation for any owner-employee or self-employed individual/general partner, capped at $15,385 per individual;
• Acknowledgment that federal government may pursue recovery of loan amounts and/or civil or criminal fraud charges if loan funds were used for unauthorized purposes;
• Borrower has accurately verified payments for eligible payroll and nonpayroll costs for which borrower is seeking forgiveness;
• Borrower has submitted all required documentation verifying payroll costs and nonpayroll costs (as discussed below);
• Information in Forgiveness Application and all supporting documents is true and correct in material respects and acknowledgment of potential penalties for making a false statement;
• Tax documents submitted to lender are consistent with those that borrower has submitted or will submit to the IRS and/or any state tax or workforce agency;
• Acknowledgment that lender can share tax information with SBA's authorized representatives including SBA's Office of the Inspector General; and
• Acknowledgment that the SBA may request additional information for purpose of evaluating borrower's eligibility for the PPP loan and for loan forgiveness and that borrower's failure to provide the same may result in a decision that such borrower was ineligible for the PPP loan or a denial of such borrower's Forgiveness Application (there is further statement prior to the signature block that the SBA may direct a lender to disapprove the borrower's Forgiveness Application if the SBA determines that the borrower was ineligible for the PPP Loan).
f. Supporting Documents. Page 10 of the Forgiveness Application contains an extremely detailed list of documents that each borrower must submit with the Application to substantiate the payroll costs, nonpayroll costs, and FTE calculations included in the Application. In addition, there is a list of documentation (including the PPP Schedule A Worksheet) that each borrower is not required to submit to its lender, but which must be maintained in such borrower's internal files for at least six years after the date the loan has been forgiven or repaid in full. Each borrower must permit authorized representatives of the SBA (including its Inspector General) to access such files upon request.
g. Timing for Submitting Forgiveness Application and Receipt of Loan Forgiveness.
Notwithstanding issuance of the form of the Forgiveness Application, the SBA has not yet issued any regulations at the time of this writing. Since there is no specific requirement as to the date by which a borrower should submit its Forgiveness Application, it is advisable to wait for the issuance of such regulations or other guidance. It is also prudent to wait for the expiration of any payroll periods and billing cycles occurring after the expiration of a borrower's Covered Period (so that costs incurred but not paid during the Covered Period may be captured). Once a borrower submits the final Forgiveness Application with all supporting documents to its lender, the lender has 60 days to review and respond to the borrower with its forgiveness determination. Any portion of the PPP loan not forgiven by a lender would then be repayable pursuant to the terms previously discussed in our earlier White Paper.
2. FAQ 46 – Deemed Good Faith Certifications for Loans Less than $2,000,000.
With the release of FAQ 46 on May 13, 2020, the SBA quelled some of the uproar resulting from its answer to FAQ 31 released on April 23. FAQ 31 warned applicants to carefully review the certification in the PPP loan application that "current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant." FAQ 31 also provided that any borrower who repaid the loan prior to May 7, 2020 (later extended to May 14 and then again to May 18), would be deemed to have made the required certification in good faith (see previous legal update). FAQ 46 essentially gave a "free pass" on the economic necessity certification by providing that any borrower and its affiliates whose PPP loan was less than $2,000,000 would be deemed to have made the required certification in good faith. FAQ 46 certainly makes sense in light of the SBA's earlier statement in the answer to FAQ 39 (published April 29) that all PPP loans of $2,000,000 or greater would be reviewed by the SBA for eligibility purposes. It is interesting to note that borrowers with loans of exactly $2,000,000 are not deemed to have made the required need certification in good faith, but neither will they be subject to audit by the SBA. Borrowers with PPP loans in excess of $2,000,000 who did not repay their loan funds by the May 18 cut-off date may still be anticipating SBA review, but FAQ 46 threw this group of borrowers a lifeline as well. Any such borrower found by the SBA to lack an adequate basis for the required certification will not be eligible for loan forgiveness and must immediately repay the loan. However, upon such repayment, the SBA stated in FAQ 46 that it would not pursue administrative enforcement or referrals to other agencies based on its determination with respect to the necessity certification.
3. Loan Increases to Cover Partner Compensation.
Pursuant to the IFR posted on April 14, 2020, the SBA clarified that the self-employment income of general active partners could be reported as a payroll costs (up to $100,000 annualized per partner) on the PPP application filed by the partnership. The SBA then provided further information on the calculation of PPP loan amounts for partnerships, limited liability companies and other business entities in its "How To Calculate Maximum Loan Amounts" guidance on April 24, 2020. The SBA issued a further IFR effective May 19, 2020, allowing partnerships that received a PPP loan, but did not include the payroll costs with respect to its partners in calculating the loan amount, to request additional loan funds from its lender. Lenders can make this request for additional loan funds electronically through the SBA E-Tran Servicing site provided that the lender's first SBA Form 1502 report has not yet been submitted to the SBA. In no event can a partnership obtain more than the $10,000,000 maximum loan limit in the aggregate or $20,000,000 for a corporate group (see discussion in paragraph 4 below). Presumably, limited liability companies filing their taxes as a partnership would also have the same opportunity to increase their PPP loans.
4. $20,000,000 Aggregate Limitation on Loans to Corporate Groups.
With the stated goal of preserving limited resources available to fund the PPP, the SBA issued an IFR with an effective date of May 4, 2020 stating businesses that are part of a "single corporate group" may not receive more than $20,000,000 of PPP loans in the aggregate. The IFR defines a "single corporate group" as businesses that are majority owned, directly or indirectly, by a common parent. Since the rule provides that it is immediately effective with respect to any PPP loan that has not yet been fully disbursed as of April 30, 2020, it does not appear to be otherwise retroactive to fully funded loans. The onus is on the applicant to notify the lender if a pending loan will result in a violation of the rule and the failure to do so will result in the loan being deemed by the SBA as used for unauthorized purposes and ineligible for forgiveness. The rule goes on to note that consideration of whether the "single corporate group" rule is applicable, is independent upon the application of the SBA's affiliation rules. Exemptions from such affiliation rules are still subject to the $20,000,000 aggregate loan limitation.