Updated May 26, 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.
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 borrowers should consult legal and financial counsel if they have concerns about their original PPP loan application or their PPP loan forgiveness application.
Loan Forgiveness Basics
Section 1106 of the CARES 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 an 8-week period following loan disbursement. 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, limitations on payroll costs attributable to owner-employees, self-employed individuals, and general partners;
- 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).
The total amount of loan forgiveness may be subject to reduction in two instances.
First, guidance from the SBA and the Treasury Department clarified that, for loan forgiveness purposes, amounts spent on 2, 3, and 4 above, collectively, cannot exceed 25% of the total PPP loan amount.
Second, if 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, between February 15, 2020 and April 26, 2020, 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). A borrower can avoid the reduction, however, by restoring employee and wage counts by June 30, 2020.
Loan Forgiveness Application, Instructions, and Guidance
On May 15, 2020, the SBA issued the PPP Loan Forgiveness Application and Instructions, 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.
Because the SBA will calculate PPP forgiveness based on the entire 8-week period during which certain expenses are eligible for forgiveness, borrowers should not complete and submit the application until after all 8 weeks have passed since the borrower received its first disbursement of PPP loan funding.
The application includes line-by-line and step-by-step instructions for completing and submitting the form, so borrowers should not deviate from the form and should conform their answers and calculations to the SBA-required format.
The 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.
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).
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 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. Failure to follow the PPP loan and forgiveness rules, including any false certifications, may result in civil and/or criminal penalties.
The SBA and the U.S. Treasury Department have issued two interim final rules governing PPP loan forgiveness and review, which you can access at the following links: (1) First Rule (general loan forgiveness guidance) and (2) Second Rule (SBA review process and party obligations).
Important Forgiveness Clarifications
Since the initial passage of the CARES Act, subsequent SBA and Treasury Department guidance, and the loan forgiveness application, 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 8 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 8 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.
- 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.
- 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: (1) the borrower made a good faith written offer to the former employee to return 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), or (2) the employee was fired for cause, voluntarily resigned, or voluntarily requested and received a reduction in the number of hours worked (borrowers must retain all records related to any such reductions and make available to the SBA upon request).
Submission of Application and Determination of Forgiveness
Once the borrower completes the PPP Loan Forgiveness Application, the borrower is to submit Part 1 (the Loan Forgiveness Calculation Form) and 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, along with Part 3 (PPP Schedule Worksheet) and other back-up calculations and documentation, 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, and, in the event of a full or partial denial of forgiveness, will also report its decision to the borrower. The borrower will have 30 days from the notice of denial to request that the SBA review the lender’s decision.
For federal income tax purposes, all forgiven PPP loan amounts will be excluded from the calculation of gross income.
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.
The loan forgiveness application and instructions are detailed, and borrowers should review them carefully in consultation with legal and financial advisors. 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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