PPP Loan Forgiveness – What Do We Know?

On May 22, 2020, the Treasury and Small Business Administration (SBA) released new guidance regarding the Paycheck Protection Program (PPP).[1] This guidance addresses PPP loan forgiveness, the SBA’s loan review procedures, as well as borrower and lender responsibilities under the PPP. Below is a summary of the new Interim Final Rules (IFR).

Loan Forgiveness

To obtain loan forgiveness, a borrower must complete and submit the Loan Forgiveness Application (SBA Form 3508 or lender equivalent) to the lender who approved its PPP loan. The lender then has 60 days to issue a decision to the SBA. Within the 90 days after the lender issues its decision to the SBA, the SBA will, subject to any SBA review of the loan or loan application, remit the appropriate forgiveness amount to the lender, plus any interest accrued through the date of payment.[2]

Payroll Costs

The IFR reaffirms that, in general, payroll costs paid or incurred during the covered period, which is the eight weeks following disbursement of the PPP funds, are eligible for forgiveness. Borrowers may also use an “alternative payroll covered period” as described in the instructions to the Loan Forgiveness Application, in which the borrower may opt to use a covered period beginning on the first day of the borrower’s first payroll cycle.

The IFR also confirms that payroll costs are incurred on the day the employee’s pay is earned. If employees are not performing work and are still on a borrower’s payroll, payroll costs are incurred based on the schedule established by the borrower (i.e. each day the employee would have performed work).

The new guidance clarifies that employee bonuses and hazard pay are eligible for payroll costs, as long as the employee’s total compensation does not exceed $100,000/ year. Moreover, wages paid to furloughed employees during the covered period are eligible for forgiveness.

The guidance reaffirms the caps on the amount of loan forgiveness available for owner-employees and self-employed individuals’ own payroll compensation. Owner-employees and self-employed individuals are limited to “payroll compensation” no greater than the lesser of 8/52 of 2019 compensation or $15,385 per individual. Owner-employees are further capped by the amount of their 2019 employee cash compensation and retirement and health care contributions made by the employer. Schedule C filers are capped by the amount of their owner compensation requirement, calculated based on 2019 net profit. General partners are capped by the amount of their 2019 net earnings from self-employment, subject to certain reductions.

Nonpayroll Costs

The IFR reaffirms that eligible nonpayroll costs cannot exceed 25% of the loan forgiveness amount (where the remaining 75% must be used for payroll expenses).[3]

The guidance reiterates that nonpayroll costs must be paid during the covered period or incurred during the covered period and paid on or before the next regular billing date, even if the billing date is after the covered period. If a borrower’s nonpayroll expenses include the covered and noncovered period and are paid after the covered period, the borrower may seek partial forgiveness of the expenses incurred during the covered period but paid on the next regular billing date. For example, if a borrower’s “covered period” ends on July 26 and its electricity expenses for July are not paid until August 10, the borrower’s electricity expenses for July 1-26 are forgivable.

Lastly, the IFR states that advance payments of interest on mortgage obligations are not eligible for loan forgiveness.

Reductions to Loan Forgiveness Amount

Head Count Reductions

The IFR confirms that borrowers will not be penalized for voluntary resignations and schedule reductions or for-cause terminations that occur during the covered period or the alternative payroll covered period. Moreover, borrowers will not be penalized if they offer to re-hire an employee for the same salary and same number of hours and the employee declines the offer. In this case the borrower must document the request and denial in writing and the borrower must inform the applicable state unemployment insurance office within 30 days of the employee’s rejection of the offer.

Salary/Wage Reductions

The IFR confirms that the 25% salary/wage reduction calculation (for employees who were not paid more than the annualized equivalent of $100,000 during any 2019 pay period) is performed on a per-employee basis. The salary/wage reduction applies only to the decline in employee salary and wages, it is not attributable to the FTE reduction.

Remedies for Reductions in Head Count and Salary/Wage

The restoration benefit applies only to eliminating, before June 30, 2020, FTE and only those salary reductions that occurred between February 15, 2020 and April 26, 2020.

Loan Review

The SBA may review any PPP loans, at any time in its discretion. In that review, the SBA may consider whether a borrower correctly calculated the loan amount, properly used the loan proceeds, and/or is entitled to the loan forgiveness amount sought.

Previously, in its FAQ #46, the SBA created a safe harbor for PPP loans under $2 million. The new guidance clearly state that the SBA may undertake a review of any loan at any time in SBA’s discretion. Therefore, it is imperative that all borrowers retain PPP documentation for at least six years after the date the loan is forgiven or paid in full. The SBA and SBA Inspector General may request to view this documentation.

If loan documentation submitted to the SBA by the lender indicates that the borrower may be ineligible for a PPP loan or may be ineligible to receive the loan amount or loan forgiveness amount claimed by the borrower, the SBA will require the lender to contact the borrower in writing to request additional information. SBA may also request information directly from the borrower. Failure to respond to the SBA’s request for information may result in a determination that the borrower is ineligible for forgiveness or for the loan itself.

If the SBA determines that a borrower is ineligible for the PPP loan, the SBA will direct the lender to deny loan forgiveness. If the SBA determines that the borrower is ineligible for the loan amount or loan forgiveness amount claimed by the borrower, the SBA will direct the lender to deny the loan forgiveness application in whole or in part. Furthermore, the SBA may seek repayment of the outstanding PPP loan balance or pursue other available remedies.

A borrower may appeal the SBA’s determination that the borrower is ineligible for a PPP loan or ineligible for the loan amount or the loan forgiveness amount claimed by the borrower.[4]

Loan Forgiveness Process for Lenders

The IFR states that lenders must confirm receipt of required documentation to verify payroll and nonpayroll costs. Lenders must also confirm the loan forgiveness calculations performed by borrowers, although the calculation’s accuracy remains the borrower’s responsibility. Lenders are only expected to provide a “good faith review, in a reasonable time, of the borrower’s calculations and supporting documents.”

The level of scrutiny applied to these calculations will depend on the reliability of the payroll records. For instance, payroll reported by a recognized payroll provider will require minimal review, as compared to a more extensive review that will be required for payroll from an unrecognized source.

If a lender issues a decision approving the Loan Forgiveness Application, it must submit to the SBA the borrower’s: (1) PPP Loan Forgiveness Calculation form; (2) PPP Schedule A; and (3) the PPP Borrower Demographic Information Form (if submitted by the borrower). If the lender determines the borrower is not entitled to forgiveness in any amount, the lender must provide a reason for the denial and submit the above-mentioned forms to the SBA.[5] The lender must also notify the borrower in writing that the denial has been issued to the SBA. A borrower may request the SBA to review the lender’s decision, this must be done within 90 days of receiving a notice from lender.

If the SBA denied the Loan Forgiveness Application, the borrower may request that the lender reconsider the borrower’s Loan Forgiveness Application, unless the SBA has determined the borrower is ineligible for a loan in general.

Finally, the SBA may begin a review of “any PPP loan of any size at any time in SBA’s discretion.” If the SBA decides to review a PPP loan, it will notify the lender in writing and the lender must notify the borrower in writing within five business days of receipt.

[1] See new Interim Final Rules (IFR) here and here.

[2] The general loan forgiveness process described in this paragraph applies only to loan forgiveness applications that are not reviewed by SBA prior to the lender’s decision on the forgiveness application.

[3] The U.S. House approved legislation Thursday making it easier for borrowers to qualify for forgiveness of the loans. The House bill, called the Paycheck Protection Flexibility Act, H.R. 7010, extends from eight weeks to 24 weeks the time PPP recipients have to spend their funds, and lowers to 60% from 75% the portion of PPP funds borrowers must spend on payroll costs to qualify for full loan forgiveness.

[4] The SBA intends to issue a separate interim final rule on this process.

[5] SBA reserves the right to review the lender’s decision in its sole discretion.

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