May 18, 2020

Paycheck Protection Program: Loan Forgiveness Guidance

The Department of the Treasury posted the Loan Forgiveness Application for borrowers with Paycheck Protection Program (PPP) loans on May 15, 2020.

Below is a summary of key takeaways, an overview of certain procedures for borrowers and definitions contained in the application.

Key Takeaways

  • Timing of expenses eligible for forgiveness. Under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, borrowers are eligible for forgiveness if PPP loan proceeds are spent on eligible expenses “incurred and paid” during the 8-week loan period. It was unclear whether that required an expense to be both incurred and paid during the 8-week loan period. The application instructions clarify timing requirements for eligible expenses. As noted below, certain expenses will still be eligible for forgiveness, even if paid after the loan period.
    • Payroll costs: Payroll costs “paid” and payroll costs “incurred” during the 8-week loan period are eligible for forgiveness. Payroll costs are considered “paid” on the day that paychecks are distributed or an ACH credit transaction is initiated. Payroll costs are considered “incurred” on the day that the employee’s pay is earned. Payroll costs incurred but not paid during the last pay period of the loan period are still eligible for forgiveness if paid on or before the next regular payroll date. Otherwise, payroll costs must be paid during the loan period. Based on this guidance, it appears that payroll costs paid but not incurred during the loan period are counted toward forgiveness (meaning that a borrower could pay wages owed to employees on the date it receives PPP funds).
    • Nonpayroll costs: The instructions state that an eligible nonpayroll cost (mortgage obligation, rent or utility payments) must be paid during the loan period or incurred during the loan period and paid on or before the next regular billing date (even if such date is after the end of the loan period). For example, a business could use PPP funds to pay May 2020 rent and still be eligible for forgiveness for such expense, even if the rent obligation was incurred before receipt of PPP loan funds.
  • Loans over $2 million. The forgiveness calculation form includes a checkbox that must be filled if the borrower (together with affiliates, if applicable) received PPP loans in excess of $2 million. This form does not request further information aside from this check-off, but borrowers who check this box will be subject to additional Small Business Administration (SBA) scrutiny (which is not otherwise described) regarding their certification of financial need in connection with their PPP loan application. See our prior alert regarding open questions for loans over $2 million.
  • Documentation required. Borrowers must submit documents verifying that payroll costs, eligible mortgage interest payments, rent or lease payments, and utility payments existed prior to February 15, 2020. Borrowers must also acknowledge that SBA may request additional information for the purposes of evaluating the borrower’s eligibility for the PPP loan and for loan forgiveness. Borrowers are also required to maintain documents related to their PPP loan (including documents supporting the financial necessity of the PPP loan) for six years after the loan is forgiven or repaid in full.
  • Average full-time equivalency (FTE) calculation. Borrowers are instructed to calculate FTEs during the loan period by entering the average hours paid per week per employee, divide by 40 and round to the nearest tenth. A borrower may also use a simplified procedure that assigns a number of 1.0 for each employee working 40 hours or more per week and 0.5 for employees who work fewer than 40 hours per week. This procedure is different that the calculation used under the Internal Revenue Code (which refers to a full-time employee as an individual who works an average of at least 30 hours per week), and the 40-hour threshold may be lower than a borrower’s internal threshold for full-time classification.
  • Lender requirements. Lenders may require borrowers to submit electronic forgiveness applications and may have their own deadlines and procedures for processing such applications. Borrowers need to communicate with their lender to determine the methodology, format, and/or other guidelines they may require.

Forgiveness Application Process

  1. The forgiveness application must be submitted to the borrower’s lender either in hardcopy or electronically.
  2. Borrower must provide:
    1. PPP Schedule A
    2. Payroll documentation verifying cash compensation and noncash benefit payments, including:
      1. Bank account statements or third-party payroll service provider reports;
      2. Tax forms (or equivalent third-party payroll service provider reports) for the periods that overlap with the (Alternative) Covered Period:
        1. Payroll tax filings reported/to be reported to the IRS; and
        2. State quarterly business and individual employee wage reporting and unemployment insurance tax filings reported/will be reported; and
      3. Payment receipts, cancelled checks or account statements documenting the amount of any employer contributions to employee health insurance and retirement plans
    3. FTE average documentation
    4. Nonpayroll costs documentation:
      i. Business mortgage interest payments: a copy of lender amortization schedule and receipts or cancelled checks verifying eligible payments from the Covered Period, or lender account statements from February 2020 and the months of the Covered Period through one month after the end of the Covered Period verifying interest amounts and eligible payments
      ii. Business rent or lease payments: a copy of current lease agreement and receipts or cancelled checks verifying eligible payments from the Covered Period, or lessor account statements from February 2020 and from the Covered Period through one month after the end of the Covered Period verifying eligible payments
      iii. Business utility payments: copies of invoices from February 2020 and for those paid during the Covered Period and receipts, cancelled checks or account statements verifying eligible payments
  3. Borrower must certify:
    1. That the dollar amount for which forgiveness is requested:
      1. Was used to pay costs that are eligible for forgiveness;
      2. Includes all applicable reductions due to decreases;
      3. Does not include nonpayroll costs in excess of 25% of the amount requested; and
      4. 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
    2. The funds were not knowingly used for any unauthorized purpose
    3. The calculations are accurate
    4. The required documentation has been provided
    5. The information provided in all supporting documents and forms is true
    6. The tax documents submitted are consistent with those submitted or to be submitted to the Internal Revenue Service (IRS) and/or state tax or workforce agency
  4. Borrower must retain the following documentation for six years after the PPP is forgiven or paid in full:
    1. PPP Schedule A Worksheet
    2. Documentation supporting each line on Schedule A
    3. Documentation regarding any employee job offers and refusals, firings for cause, voluntary resignations and written requests by any employee for reductions in work
    4. All records relating to the borrower’s PPP loan:
      1. Documentation submitted with its PPP loan application;
      2. Documentation supporting the borrower’s certifications as to the necessity of the loan request and its eligibility for a PPP loan;
      3. Documentation necessary to support the borrower’s loan forgiveness application, and
      4. Documentation demonstrating the borrower’s material compliance with PPP requirements
Definitions
Average FTE Calculation Average number of hours paid per week, divide by 40 and round the total to the nearest tenth
Average FTE Alternative Calculation At the borrower’s election, the simplified method may be used. Assign a 1.0 for employees who work 40 hours or more per week and 0.5 for employees who work fewer hours.
Compensation Gross salary, gross wages, gross tips, gross commissions, paid leave, and allowances for dismissal or separation paid or incurred during the (Alternative) Covered Period
Covered Period The eight weeks (56 days) beginning with the Loan Disbursement Date
Alternative Covered Period

Borrowers with a biweekly (or more frequent) payroll schedule may elect to begin the 8-week (56-day) period on the first day of their first pay period following their Loan Disbursement Date.

**Borrowers who elect to use the Alternative Payroll Covered Period must apply the Alternative Payroll Covered Period wherever there is a reference in the application to “the Covered Period or the Alternative Payroll Covered Period.” Borrowers must apply the “Covered Period” wherever there is a reference in the application to “the Covered Period” only.**

Employees at Time of Loan Application / Time of Forgiveness Application Total number of employees (excluding any owner-employees, self-employed individuals or partners)
Full Time Equivalent (FTE) Period

Total average weekly FTE during the chosen period. At the borrower’s election, either

  • February 15, 2019 to June 30, 2019 or
  • January 1, 2020 to February 29, 2020
  • For seasonal employers: either of the preceding periods or a consecutive 12-week period between May 1, 2019 and September 15, 2019
FTE Reduction Exceptions

These FTEs do not reduce the loan forgiveness and should not be listed on the application if the employee was replaced.

The FTE Reduction Exception is for:

  • Any positions for which the borrower made a good-faith, written offer to rehire during the (Alternative) Covered Period which was rejected by the employee; and
  • Any employees who during the (Alternative) Covered Period
    • Were fired for cause,
    • Voluntarily resigned, or
    • Voluntarily requested and received a reduction of their hours
FTE Reduction Safe Harbor Borrower is exempt from the reduction in loan forgiveness based on FTE employees if its FTE employee level is restored to its February 15, 2020 number not later than June 30, 2020.
FTE Safe Harbor Exemption Borrower is exempt from a reduction in loan forgiveness if the FTE Reduction Safe Harbor applies.
Loan Amount The disbursed principal amount
Loan Disbursement Date The date that borrower received PPP loan proceeds
Loan Forgiveness Reduction Calculation Pro-rata, based on any full-time equivalency (FTE) reductions
Nonpayroll Costs
  • Covered mortgage obligations: payments of interest (excluding prepayment or payment of principal) on any business mortgage obligation on real or personal property incurred before February 15, 2020 (“business mortgage interest payments);
  • Covered rent obligations: business rent or lease payments pursuant to lease agreements for real or personal property in force before February 15, 2020 (“business rent or lease payments”); and
  • Covered utility payments: business payments for a service for the distribution of electricity, gas, water, transportation, telephone or internet access for which service began before February 15, 2020 (“business utility payments”)
Salary/Hourly Wage Reduction The calculation to determine if the loan forgiveness amount must be reduced due to decreases in employee salaries and wages. A borrower may qualify for an exception if wages are restored.
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