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May 18, 2020

COVID-19: SBA Releases Highly Anticipated PPP Loan Forgiveness Application

In a press release published on May 15, the Small Business Administration (SBA) published its highly anticipated loan forgiveness application to be used by borrowers who received loans under the Paycheck Protection Program (PPP), which was promulgated under the Coronavirus Aid, Relief, and Economic Security (CARES) Act.

Application Form Highlights

Some of the main features of the application form and related instructions include:

  1. Options for borrowers to calculate payroll costs using an “alternative payroll covered period” that aligns with borrowers’ regular payroll cycles
  2. Flexibility to include eligible payroll and non-payroll expenses paid or incurred during the eight-week period after receiving the PPP loan
  3. Step-by-step instruction on how to perform the calculations required by the CARES Act to confirm eligibility for loan forgiveness
  4. A borrower-friendly implementation of statutory exemptions from loan forgiveness reduction based on rehiring by June 30
  5. The addition of a new exemption from the loan forgiveness reduction for borrowers who have made a good-faith, written offer to rehire workers that was subsequently declined

To avoid accounting and administrative nightmares, the alternative payroll covered period has been made available to borrowers. Under this, borrowers may elect to calculate their eligible payroll costs using the eight-week (56-day) period that begins on the first day of their first pay period following their PPP loan disbursement date.

Borrowers may be exempt from the loan forgiveness reduction based on levels of full-time employees if the borrower both reduced its full-time employee levels in the period beginning February 15, 2020 and ending April 26, 2020 and restored its full-time employee levels by no later than June 30, 2020 to its levels in the borrower’s pay period that included February 15, 2020. Exceptions to the reduction will be made for borrowers who made a good-faith written offer to rehire an employee and was subsequently rejected. Additionally, borrowers will fall into this exception for employees who were fired for cause, voluntarily resigned, or voluntarily requested and received a reduction in their hours.

Costs Included in the Forgiveness Calculation

The loan forgiveness application details that borrowers are eligible for loan forgiveness on both payroll and non-payroll costs. Eligible payroll costs include both payroll costs paid and payroll costs incurred during the borrower’s eight-week (56-day) covered period or the alternative covered period for borrowers with a biweekly (or more frequent) payroll schedule. The covered period begins on the same day as the PPP loan disbursement date, while the alternative payroll covered period begins on the first day of a borrower’s first pay period following their PPP loan disbursement date. Payroll costs are considered paid on the day that paychecks are distributed or when the borrower originates an ACH credit transaction incurred on the day the employee’s pay is earned. Payroll costs are required to be paid during the covered period (or alternative payroll covered period); however, payroll costs incurred but not paid during the borrower’s last pay period of the covered period (or alternative payroll covered period) are eligible for forgiveness as long as they were paid on or before the next regular payroll date. For purposes of calculating the amount eligible for forgiveness, it’s also important to note that an individual employee’s annual salary cannot exceed $100,000, and payroll costs paid and incurred must only be counted once.

Non-payroll costs eligible for forgiveness consist of the following:

a) Covered mortgage obligations, including payments of interest on any business mortgage obligation on real or personal property incurred before February 15, 2020 but excluding any prepayments or payments of principal

b) Covered rent obligations, including business rent or lease payments pursuant to lease agreements for real or personal property in effect before February 15, 2020

c) Covered utility payments, including business payments for a service for the distribution of electricity, gas, water, transportation, telephone, or internet access for which service began prior to February 15, 2020

All eligible non-payroll costs must be paid or incurred during the covered period and paid on or before the next regular billing date, even if that date falls after the covered period. As with payroll costs, both paid and incurred non-payroll costs are only to be counted once for purposes of calculating loan forgiveness.

Interpreting the 75-Percent Rule

One of the most significant uncertainties that the loan forgiveness application has cleared up is with respect to the requirement that at least 75 percent of the forgiveness amount be spent on payroll costs. The application makes clear that this requirement focuses on the loan proceeds actually expended as opposed to the total amount of the PPP loan. The rule states that once a borrower determines its payroll costs, as defined under the CARES Act, the sum of a borrower’s non-payroll costs cannot exceed 33.3 percent of the payroll costs or 25 percent of the total amount expended.

For example, consider a borrower, ABC, Inc., that receives a PPP loan of $1.5 million. ABC, Inc. spends $1 million of their $1.5 million loan; more specifically, $750,000 on payroll costs and $250,000 on eligible non-payroll costs (i.e., rent, mortgage interest, and utilities). Assume that ABC, Inc. maintained full employment numbers and no reduction in its employees’ wages throughout the covered period. To calculate its forgiveness amount, ABC, Inc. must first determine its payroll costs, which, as mentioned above, are $750,000. The amount of ABC Inc.’s loan which is forgivable cannot exceed $750,000 divided by 75 percent or $1 million. Since $1 million was spent on eligible costs, the entire $1 million would be forgivable. The balance of $500,000 can either be used to prepay the PPP loan or repay over two years with 1-percent interest.

Borrowers’ Certifications

As with the PPP loan application, the forgiveness application requires an authorized representative of a borrower to make certain certifications. Among these certifications are:

  • The dollar amount for which forgiveness is requested was used to pay costs that were eligible for forgiveness, including all applicable reductions due to decreases in the number of full-time equivalent employees and salary and hourly wage reductions
  • The dollar amount for which forgiveness is requested doesn’t include non-payroll costs in excess of 25 percent of the amount requested
  • The dollar amount for which forgiveness is requested doesn’t exceed eight weeks’ worth of 2019 compensation for any owner-employee or self-employed individual or general partner, capped at $15,385 per individual

Borrowers must also certify that all required documentation has been submitted to the lender and that, specifically, the tax documents are consistent with the tax documents that have been or will be submitted to the Internal Revenue Service. Finally, and consistent with the PPP application, a certification that the information provided and related supporting documents are true and correct in all material respects is required.

It’s important to note the loan forgiveness application makes clear that penalties will be imposed if a borrower used loan proceeds for unauthorized purposes or makes false certifications. If a borrower used loan proceeds for unauthorized purposes, the federal government may pursue a recovery of the loan or civil or criminal fraud charges. Furthermore, making false certifications to obtain forgiveness is punishable by imprisonment or a fine of up to $1 million, depending on the statute implicated.

Necessary Documents for Borrowers

The loan application form provides a list of supporting documents to be submitted by borrowers as well as retained by borrowers despite not being required for submission. With respect to payroll costs, documents are required that verify the eligible cash compensation and non-cash benefit payments and include each of the following:

  • Bank account statements or third-party payroll service provider reports
  • Tax forms and payment receipts
  • Cancelled checks or account statements showing the amount of any employer contributions to employee health insurance and retirement plans

Documents verifying the non-payroll costs of the borrower vary depending on the cost being claimed, but include records such as:

  • A copy of a current lease agreement
  • A lender amortization schedule showing mortgage interest payments
  • Copies of invoices or cancelled checks for utilities

Borrowers must also submit documentation demonstrating the average number of full-time equivalency (FTE) employees on payroll per month for the periods between February 15, 2019 to June 30, 2019 or between January 1, 2020 and February 29, 2020.1

Borrowers must maintain, but not submit, the PPP Schedule A Worksheet, which is part of the loan application. Moreover, borrowers must keep documentation:

  1. That supports the listing of each individual employee in the PPP Schedule A Worksheet Table 1
  2. That supports the listing of each individual employee in the PPP Schedule A Worksheet Table 2
  3. Regarding any employee job offers and refusals, firings for cause, voluntary resignations, and written requests by any employee for reductions in work schedule
  4. That supports the PPP Schedule A Worksheet FTE Reduction Safe Harbor

The application and related instructions provide a solid foundation for borrowers to take advantage of the forgiveness under the PPP. The SBA is expecting to build upon this foundation by issuing additional regulations and guidance soon to further assist borrowers as they complete their applications.

If you have any questions regarding the content of this alert, please contact Roger Cominsky, Financial Institutions & Lending Practice Area chair, at rcominsky@barclaydamon.com; Danielle Katz, associate, at dkatz@barclaydamon.com; or Samantha Podlas, associate, at spodlas@barclaydamon.com.

We also have a specific team of Barclay Damon attorneys who are actively working on assessing regulatory, legislative, and other governmental updates related to COVID-19 and who are prepared to assist clients. Please contact Yvonne Hennessey, COVID-19 Response Team leader, at yhennessey@barclaydamon.com or any member of the COVID-19 Response Team at COVID-19ResponseTeam@barclaydamon.com.

1 For seasonal employers, documents verifying the average number of FTE employees may be submitted for an alternative time period of any consecutive 12-week period between May 1, 2019 and September 15, 2019.

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