Updated August 31, 2020
On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security Act, also known as the CARES Act, which established, in relevant part, the Paycheck Protection Program (PPP), a loan program that offers eligible borrowers the potential for loan forgiveness. For more information on the PPP and other CARES Act lending programs, click here, and for information about applying for PPP loans, click here.
On June 5, 2020, President Trump signed into law the Paycheck Protection Program Flexibility Act of 2020 (the Flexibility Act), which amends the CARES Act to make certain changes to PPP loans and to provide more flexibility to borrowers. For an overview of the changes made by the Flexibility Act, click here. To the extent available, this blog post has been updated to incorporate the changes made by the Flexibility Act.
The PPP has been subject to substantial modifications and contradictory guidance since it was first signed into law, primarily through the “Frequently Asked Questions” (FAQs) promulgated by the U.S. Small Business Administration (SBA) and the U.S. Treasury Department. Several of the FAQs are inconsistent, and there are as yet unanswered questions as to the effect of the Flexibility Act on prior guidance issued by the SBA. Borrowers should consult legal and financial counsel if they have concerns about their original PPP loan application or their PPP loan forgiveness application.
To assist in the interpretation of various loan forgiveness rules, the SBA, in association with the U.S. Treasury Department, has begun issuing “Frequently Asked Questions” (FAQs) on PPP loan forgiveness, which provide answers to common questions, along with examples. You can access the loan forgiveness FAQs here.
Loan Forgiveness Basics
Section 1106 of the CARES Act, as subsequently amended by the Flexibility Act, sets forth the basic idea of PPP loan forgiveness: a PPP loan borrower is eligible for loan forgiveness in the amount spent by the borrower on eligible expenses for a 24-week period following loan disbursement, provided that such 24-week period ends on or before December 31, 2020. The total amount of potential forgiveness is capped at the original principal balance of the PPP loan, plus accrued interest. Eligible expenses are:
- payroll costs (defined and interpreted in the same way as when applying for the PPP loan, see discussion here), including pay to furloughed employees and hazard pay and bonuses, subject to the total annualized compensation cap of $100,000.00)—note, however, the listed limitations on payroll costs attributable to owner-employees, self-employed individuals, and general partners (the SBA has since clarified that such limitations will not apply to owner-employees in C- or S-corporations who have less than a 5 percent ownership stake in the business);
- business mortgage interest payments (on mortgage obligations arising prior to February 15, 2020), other than any prepayment of interest payments;
- business lease and rental payments (on leases arising prior to February 15, 2020); and
- business utility payments (on service commencing prior to February 15, 2020).
Note that, for PPP loans made prior to June 5, 2020, the Flexibility Act allows borrowers to elect to choose an 8-week period for determination of forgiveness, rather than the newly expanded 24-week period.
The total amount of loan forgiveness may be subject to reduction in two instances.
First, the Flexibility Act requires that, for loan forgiveness purposes, amounts spent on 2, 3, and 4 above, collectively, cannot exceed 40% of the total PPP loan amount. If the amounts spent on 2, 3, and 4, collectively, exceed 40%, then the forgiveness amount will be subject to a proportionate reduction. The forgiveness amount of such non-payroll costs may be further limited by any amounts attributable to the business operation of a tenant or sub-tenant of the borrower or by certain payments to related entities (e.g., entities that have common owner(s) with the PPP borrower).
Second, if, during the 24-week (or 8-week) covered period, a borrower: (a) reduced the wages or salaries of any employee making less than $100,000.00 annually by more than 25%, or (b) reduced its average full-time equivalent (FTE) employee count, then the maximum amount of loan forgiveness will be subject to a proportional reduction (in the case of FTE reduction) or a dollar-for-dollar reduction (in the case of wage/salary reduction). As amended by the Flexibility Act, a borrower can avoid the reduction, however, by restoring employee and wage counts by the submission of the loan forgiveness application or December 31, 2020, whichever is earlier.
Loan Forgiveness Application, Instructions, and Guidance
On June 16, 2020, the SBA issued the following documents, reflecting revisions made by the Flexibility Act:
- a revised PPP Loan Forgiveness Application, which you can access here;
- a revised PPP Loan Forgiveness Application Instructional Guide, which you can access here;
- a new PPP Loan Forgiveness Application EZ, which you can access here; and
- a new PPP Loan Forgiveness Application EZ Instructional Guide, which you can access here.
The application and instructions include information and worksheets that are intended to simplify the forgiveness application process and general program compliance, so review them carefully and consult your lender and financial and legal advisors with any questions. One new change by the SBA is the introduction of a new option for applying for loan forgiveness: the Loan Forgiveness Application EZ, which provides borrowers with a simpler and more streamlined forgiveness application, provided the borrower meets at least one of the following criteria:
- the borrower is a self-employed individual, independent contractor, or sole proprietor who both had no employees at the time of the PPP loan application and did not include any employee salaries in the computation of average monthly payroll on the PPP loan application; or
- the borrower neither reduced salary or wages of employees making less than $100,000.00 per year by more than 25% nor reduced the number of FTE employees (unless exempted due to inability to rehire employees or restore employee hourly count); or
- the borrower did not reduce salary or wages of employees making less than $100,000.00 per year by more than 25% and was unable to operate at the same level of business activity prior to February 15, 2020, due to compliance with federal guidance on sanitation, social distancing, or other COVID-related safety requirements.
If any one of the above criteria applies to a borrower, the borrower may elect to use the Loan Forgiveness Application EZ. The borrower will self-certify its eligibility and must retain documentation supporting its eligibility for 6 years from the date of loan forgiveness or repayment in full (as applicable).
Because the SBA will calculate PPP forgiveness based on the borrower’s use of the entirety of the PPP loan proceeds, borrowers should not complete and submit the application until after all proceeds have been spent, even if such funds are spent before the end of the 24-week covered period. Note, though, that the borrower must still account for any FTE or salary and wage reductions for the entirety of the covered period.
Both applications include line-by-line and step-by-step instructions for completing and submitting the applicable form, so borrowers should not deviate from the form and should conform their answers and calculations to the SBA-required format.
The EZ application consists of two parts:
Part 1: The PPP Loan Forgiveness Application Form; and
Part 2: The PPP Borrower Demographic Information Form, an optional survey for PPP borrowers.
If submitting the EZ application, the borrower must submit completed Part 1 with its loan forgiveness application and must retain all supporting documentation in its records for a minimum of 6 years after loan forgiveness or repayment in full (as applicable).
If using the EZ application, the borrower calculates both the amount of its eligible loan forgiveness and its total eligible cash payroll costs, non-cash payroll costs, and other eligible forgiveness amounts, all on Part 1 of the application.
The traditional application consists of four parts:
Part 1: The PPP Loan Forgiveness Calculation Form;
Part 2: PPP Schedule A;
Part 3: The PPP Schedule A Worksheet; and
Part 4: The PPP Borrower Demographic Information Form, an optional survey for PPP borrowers.
If submitting the traditional application, the borrower must submit completed Parts 1 and 2 with its loan forgiveness application and retain Part 3, along with all supporting documentation, in its records for a minimum of 6 years after loan forgiveness or repayment in full (as applicable).
If using the traditional application, the borrower ultimately calculates the amount of its eligible loan forgiveness on Part 1 of the application. To arrive at that final number, however, the borrower must first calculate its total eligible cash payroll costs, applicable employment or salary reductions, non-cash payroll costs, and other eligible forgiveness amounts. By following the step-by-step instructions, the borrower should first begin with the PPP Schedule A Worksheet (Part III), then move to the PPP Schedule A (Part 2), and finally end with the PPP Loan Forgiveness Calculation Form (Part 1).
Borrowers using either form should pay particular attention to the certifications in Part 1 of the application, concerning compliance with eligibility rules, accurate calculations, and submission of required back-up documentation, and, for borrowers submitting the EZ application, certification of eligibility to do so. Failure to follow the PPP loan and forgiveness rules, including any false certifications, may result in civil and/or criminal penalties. Borrowers should also pay particular attention to the forgiveness caps on any amounts of PPP funds used to pay self-employed individuals or employee-owners of borrowers.
The SBA and the U.S. Treasury Department continue to issue interim final rules governing PPP loans, loan forgiveness and review, and the application of the Flexibility Act, all of which you can access at our Lending Resources Site under “Links to More Information”, here.
Important Forgiveness Clarifications
Since the initial passage of the CARES Act and the Flexibility Act, subsequent SBA and Treasury Department guidance, have made the following important clarifications regarding PPP loan forgiveness:
- FAQ #46 from the SBA and Treasury Department establishes a safe harbor for PPP loans under $2 million. Specifically: “Any borrower that, together with its affiliates, received PPP loans with an original principal amount of less than $2 million will be deemed to have made the required certification concerning the necessity of the loan request in good faith.”
- In connection with the safe harbor referenced in FAQ #46, the borrower will have to self-report whether it, along with any of its affiliates (unless the affiliate rules are otherwise waived), received PPP funding in excess of $2 million. As the SBA previously announced, it will be reviewing all loan and forgiveness applications for PPP loans in excess of $2 million.
- Although the “covered period” of expenses eligible for forgiveness begins on the date of disbursement of PPP funds and ends 24 weeks later, for purposes of calculating payroll costs, a borrower may use an “alternative covered period” that begins on the first day of the first payroll period following disbursement and ends 24 weeks later. Borrowers should pay attention to the directions in the application that refer to the “covered period” only or to the “covered period” or “alternative covered period”, as applicable. Note that, for those borrowers who received PPP funding prior to June 5, 2020, they may elect to continue to use an 8-week covered period or alternative covered period.
- Payroll costs and non-payroll costs that are eligible for loan forgiveness are those actually incurred or paid during the “covered period” or “alternative covered period” (as applicable), but, to the extent such costs are incurred but not paid prior to the end of the period, then the borrower may still include such incurred amounts for forgiveness purposes, so long as the amounts are actually paid on or before the next regularly scheduled payroll or due date. Borrowers may not double count paid amounts and incurred amounts.
- In addition to the safe harbor of restoring FTE employee counts by December 31, 2020, a reduction in the number of full-time equivalent (FTE) employees will not result in a reduction in the maximum amount of loan forgiveness if:
- the borrower made a good faith written offer to rehire a former employee at the same hours and salary as previously employed, and the former employee refused the offer (as documented by the borrower in writing and reported to the state unemployment insurance office within 30 days of the employee’s rejection);
- the borrower was unable to hire similarly qualified employees for any unfilled positions described in (1) before December 31, 2020 (as documented by the borrower in writing);
- the borrower made a good faith written offer to restore any reduction in hours at the same salary or wages and the employee rejected the offer (as documented by the borrower in writing);
- the employee was fired for cause, voluntarily resigned, or voluntarily requested and received a reduction in the number of hours worked; or
- the borrower, in good faith, is able to document that it was unable to return to the same level of business as it had prior to February 15, 2020, due to compliance with worker and customer social distancing, sanitation, or safety guidance or requirements issued by the U.S. Department of Health and Human Services (HHS), the Centers for Disease Control and Prevention (CDC), or the Occupational Safety and Health Administration (OSHA), between March 1, 2020, and December 31, 2020, whether in direct compliance with such federal regulations, or indirect compliance through state and local regulations based on the federal regulations (appropriate documentation maintained by the borrower to show such good faith inability shall include copies of the relevant government guidance, as well as financial records showing the decrease in business).
For any such exemptions, the borrower must retain all related and supporting documentation and make available to the SBA upon request.
Submission of Application and Determination of Forgiveness
In addition to other changes, the Flexibility Act added an outside date by which borrowers must submit a loan forgiveness application and supporting documents. Within ten months following the sooner to occur of: (a) the end of the borrower’s use of the PPP funds (i.e., the 8 or 24-week period), or (b) December 31, 2020, the borrower must submit the application to be eligible for forgiveness. If a borrow does not timely submit an application, then payments on principal, interest, and fees must begin.
Once the borrower completes either the traditional application or the EZ application, the borrower is to timely submit Part 1 (the Loan Forgiveness Calculation Form) and, if using the traditional application, Part 2 (PPP Schedule A) to the lender servicing the PPP loan, along with the following back-up documentation:
- Payroll costs verification (bank account statements verifying amount of cash compensation; IRS payroll tax filings; state wage reporting and unemployment insurance tax filings; and, if applicable, payment receipts, cancelled checks, or account statements verifying amount of borrower contributions to employee health care and retirement plans);
- Pre-PPP loan full-time equivalent (FTE) employee count verification (IRS payroll tax filings and state wage reporting and unemployment insurance tax filings); and
- Non-payroll costs verification (if applicable) (documents that verify existence of obligations prior to February 15, 2020, and amounts expended during covered period, such as lender amortization schedules, lender account statements, lease agreements, lessor account statements, cancelled checks, receipts, account statements, and invoices).
Borrowers should maintain copies of all documents submitted to the lender and all documents used in calculating loan forgiveness amounts, along with Part 3 (PPP Schedule Worksheet) (if submitting the traditional application) and other back-up calculations and documentation, including documentation supporting qualification for safe harbors and exemptions and, if applicable, documentation supporting qualification for use of the EZ application, for a minimum of 6 years following loan forgiveness or repayment of the PPP loan in full (as applicable). The SBA retains the right to review any such documentation upon request.
After the borrower submits all required documents, the lender will have up to 60 days to determine the eligibility for forgiveness and the forgiveness amount. Amounts eligible for forgiveness include the loan principal, along with accrued interest. The lender will report its decision on loan forgiveness to the SBA, who will have up to 90 days to review the borrower’s loan and loan forgiveness applications and determine whether the lender’s determination on forgiveness was correct. The lender will in turn be responsible for communicating any forgiveness amount to the borrower, and, in the event of a partial or full denial of forgiveness, the lender must also notify the borrower of such determination, along with the date that the first payment under the PPP loan is due. In the event of a partial or full denial of forgiveness by the lender, the borrower will have 30 days from the notice of denial to request that the SBA review the lender’s decision. Borrowers will make such request to the lender, who will in turn remit the request to the SBA within 5 days. The SBA is not obligated to honor the review request.
After the SBA renders a final decision on loan forgiveness, the borrower has 30 days within which to lodge an appeal to the SBA’s Office of Hearings and Appeals (OHA) to request reconsideration of the SBA’s determination. More information on the appeals process, including the documentation and information borrowers must include in an appeal application, can be found in the interim final rule issued by the SBA pertaining to the OHA appeals process here.
For federal income tax purposes, all forgiven PPP loan amounts will be excluded from the calculation of gross income; however, the IRS has ruled that borrowers cannot deduct from their gross income any business expenses that were paid with PPP loan amounts forgiven by the SBA. Although efforts to overturn the IRS ruling have been proposed in Congress, no official action has yet been taken.
Keep in mind that the SBA retains the right at any time to review any PPP loan to confirm the following:
- Borrower eligibility (including self-reported good faith certifications and representations);
- PPP loan amount and appropriate use of proceeds; and
- Eligibility for loan forgiveness and forgiveness amount.
The SBA will notify the lender if it initiates a review process, and the lender will in turn notify the borrower.
Both loan forgiveness applications and instructions are detailed, and borrowers should review them carefully in consultation with legal and financial advisors and in conjunction with the changes made by the Flexibility Act. Our COVID-19 Team Members are available to assist with any questions that may arise. We expect that the SBA and Treasury Department will release additional guidance and regulations for borrowers and lenders on PPP loan forgiveness in the coming days and weeks, and we will continue to update this page as necessary. If you have any questions, please contact John Anjier, Nina Skinner, C.J. Miller, or Madeline Thomas.
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