A critical aspect of the PPP Loan program is the promised tax-free forgiveness of loans used for specific payroll and operating expenses. On Friday, May 15, 2020, the SBA released the loan forgiveness application and detailed instructions for applicants seeking forgiveness of their PPP Loan. The application and instructions can be found here.
Notably, the SBA also announced that it will “soon issue regulations and guidance to further assist borrowers as they complete their applications, and to provide lenders with guidance on their responsibilities.” As we have seen with respect to other programs issued under the FFCRA and CARES Acts, the devil is often in the details of additional guidance issued by SBA and the Treasury Department.
So while borrowers may be anxious to determine what amount of loan forgiveness they might qualify for, and working through this application may be a worthwhile exercise – caution is warranted before drawing any conclusions regarding their specific amount of loan forgiveness until the SBA’s additional guidance is issued and specific instructions are issued by each borrower’s lender. FOS is monitoring for updates, and will advise when they are available.
Under the PPP Loan program, borrowers are generally eligible for forgiveness of the amount of their PPP Loan when at least 75% is used for “payroll” costs and 25% is used for specifically authorized nonpayroll costs. The amount of eligible loan forgiveness may be reduced if the borrower reduces its number of full-time employees, or reduces salaries of employees over 25%. Borrowers are to submit a written loan forgiveness request to their lender. Note that lenders may adopt different forms for seeking loan forgiveness, so be sure to work carefully with your lender on its particular requirements. Under the PPP Loan program, lenders are required to make a decision on forgiveness within 60 days of the application.
The recently released PPP Loan Forgiveness Application provides some additional clarification on how borrowers may seek loan forgiveness, and how much forgiveness they may be entitled to obtain.
Loan Forgiveness Application and Calculation. While borrowers should review the Loan Forgiveness Application carefully, some takeaways may be of particular interest, including:
• Clarification of the “Covered Period.” The “Covered Period” (the eight week/ 56-day period in which borrowers may spend down their PPP Loan to obtain forgiveness) begins on the same day that the PPP Loan was disbursed.
• The announcement of an “Alternative Payroll Covered Period.” Through the application, the SBA made clear that “Borrowers with a biweekly (or more frequent) payroll schedule may elect to calculate eligible payroll costs using the eight-week (56-day) period that begin on the first day of their first pay period following their PPP Loan Disbursement Date.” This should assist borrowers whose loans were disbursed in the middle of a pay period.
• “Check the box” requirement if the borrower – together with its affiliates – received PPP Loans in excess of $2 million. We know from additional announcements made by the SBA and the Treasury Department that borrowers who received loans in excess of $2 million will be subject to review. The application appears to indicate that if a borrower, and its affiliates, received more than $2 million in loans, those borrowers together may be subject to review.
• Definition of “eligible payroll costs.” There has been some confusion over whether payroll costs paid or payroll costs incurred are eligible for loan forgiveness. According to the application, both may be forgiven. The application provides that “Borrowers are generally eligible for forgiveness for the payroll costs paid and payroll costs incurred during the eight-week (56-day) Covered Period (or Alternative Payroll Covered Period) (“payroll costs”). 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. Payroll costs incurred but not paid during the Borrower’s last pay period of the Covered Period (or Alternative Covered Period) are eligible for forgiveness if paid on or before the next payroll date.”
• Clarification that “Payroll Costs” include employer contributions to a self-insured, employer-sponsored group health plan.
• Confirmation that the total cash compensation eligible for loan forgiveness for any employee is $15,385 (or a $100,000 annualized salary).
• Important information regarding reduction of loan forgiveness for a reduction in Full Time Employees. Many borrowers have been concerned about requirements to maintain head count during the Covered Period, and the effect of reductions in head count on the amount they may receive in loan forgiveness. The PPP Loan Forgiveness Application indicates that the eligible loan forgiveness amount will not be reduced for:
1) Any position where the Borrower made a good faith-effort to rehire an employee, and the employee rejected the offer; or
2) Any employees who were fired for cause, voluntarily resigned or voluntarily requested a reduction of their hours during the covered period.
This is a significant clarification for employers who have been unsuccessful in rehiring employees who were laid off, or who have had routine reductions in the number of employees unrelated to the COVID-19 pandemic or downturn in business. Employers should be very careful to maintain accurate and complete records regarding any refused offers to rehire, terminations, resignations, or voluntary reductions in hours, for employees during the Covered Period.
Required Representations and Certifications of Borrower. The Loan Forgiveness Application also requires borrowers to make additional representations and certifications regarding the Loan Forgiveness Application, including:
• That the amount that was sought to be forgiven was actually used to pay costs that are eligible for forgiveness;
• Verification that the requested forgiveness amount does not included nonpayroll costs in excess of 25% of the amount requested to be forgiven;
• Acknowledgement that the federal government may seek recovery of loan amounts or civil or criminal fraud charges if funds were used for unauthorized purposes; and
• That any tax documentation submitted in connection with the Loan Forgiveness Application is consistent with what the borrower has or will submit to the IRS and/or state tax authorities.
Documentation Requirements. The Loan Forgiveness Application also provides important information regarding the documentation that must be submitted by Borrowers in connection with their Loan Forgiveness Applications, as well as documentation that must be maintained for six years after the date that the loan is forgiven or repaid in full.
Required documentation to be submitted with the Loan Forgiveness Applications includes:
1. The PPP Loan Forgiveness Calculation Form.
2. PPP Schedule A.
3. Documentation verifying payroll, which may be bank account statements or third party payroll provider reports, payroll reporting tax forms for the Covered Period or payment receipts, cancelled checks or account statements documenting employer contributions to health and retirement plans.
4. Full Time Employee documentation.
5. Nonpayroll cost documentation, including lender amortization schedule and receipts/cancelled checks, copies of any current lease agreement and receipts/cancelled checks for lease payments, and copies of invoices and receipts/cancelled checks for utility payments.
Documents that borrowers must maintain for 6 years, but are not required to submit, includes:
1. Individual employee documentation supporting payroll calculations.
2. “Documentation regarding any employee job offers and refusals, firings for cause, voluntary resignations, and written requests by any employee for reductions in work schedule.”
3. Documentation relating to the Full Time Employee safe harbor calculation.
Undoubtedly, borrowers will have specific questions regarding their unique circumstances under the PPP Loan program. Borrowers should work carefully with their FOS attorneys, tax advisors, accountants and lenders in completing and submitting the PPP Loan Forgiveness Application. If you have any questions about the PPP Loan program, the Loan Forgiveness Application, or any other legal matter, please contact your FOS attorney.