SBA Issues PPP Loan Forgiveness Application and Guidance
On May 15, 2020, the Small Business Administration (“SBA”) published the application for loan forgiveness of the loans disbursed pursuant to the Paycheck Protection Program (“PPP”) along with much needed guidance to clarify questions that borrowers have been asking. Below are some of the important takeaways:
- The eight-week “Covered Period” for the PPP loans begins on the date the loan is disbursed, but borrowers with biweekly or more frequent payroll schedules may choose to instead use an “Alternative Payroll Covered Period” which begins on the first day of the borrower’s first pay period following the PPP loan disbursement date in order to calculate forgiveness amounts based upon spending for applicable payroll costs. This is important for borrowers to know when and how to be able to calculate what loan proceeds were used for payroll amounts without affecting their right to forgiveness.
- Borrowers may apply for loan forgiveness for the following costs:
- Eligible Payroll Costs – the SBA has clarified that payroll costs incurred but not paid during the Covered Period (or Alternative Covered Period) are still eligible for forgiveness so long as they are paid on or before the borrower’s next regular payroll date. Payroll costs are considered paid on the day that paychecks are distributed or the borrower originates an ACH credit transaction. Payroll costs are incurred on the day that the employee’s pay is earned.
- Eligible Non-Payroll Costs – Non-payroll costs eligible for forgiveness consist of the following:
- a) covered mortgage obligations: payments of interest (not including any prepayment or payment of principal) on any business mortgage obligation on real or personal property incurred before February 15, 2020;
- b) covered rent obligations: business rent or lease payments pursuant to lease agreements for real or personal property in force before February 15, 2020; and
- c) covered utility payments: business payments for a service for the distribution of electricity, gas, water, transportation, telephone or internet access for which service began before February 15, 2020.
- Eligible non-payroll costs must have been 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. Notably, the Alternative Covered Period does not apply for purposes of this calculation.
- The application also clarifies that the SBA may direct a lender to disapprove the borrower’s loan forgiveness application if the SBA determines that the borrower was ineligible for the PPP loan.
- In order to qualify for forgiveness, borrowers are required to maintain the number of employees that they employed prior to obtaining the loan. The SBA has indicated the correct way to calculate the average full time equivalency (“FTE”) during the applicable reference period and the Covered Period or Alternative Payroll Covered Period. For each employee, the borrower must enter the average number of hours paid per week, divide by 40, and round to the nearest tenth. The maximum for each employee is capped at 1.0.
- Borrowers may use a simplified method that can be used at the election of the borrower, which is to assign a 1.0 for employees who work 40 hours or more per week and 0.5 for employees who work fewer hours.
- The SBA has also clarified the cases in which FTE reductions will not reduce a borrower’s loan forgiveness amount. These exceptions are (1) any positions for which the borrower made a good-faith, written offer to rehire an employee during the Covered Period or Alternative Payroll Covered Period which was rejected by the employee, and (2) any employees who during the Covered Period or Alternative Payroll Covered Period (a) were fired for cause, (b) voluntarily resigned or (c) voluntarily requested and received a reduction of their hours. The borrower must indicate these FTE on the application to avoid a reduction of the loan forgiveness amount.
- The FTE Reduction Safe Harbor is available for borrowers exempting them from a reduction in the loan forgiveness amount based upon a reduction in FTE employees if both of the following conditions are met: (1) the borrower reduced its FTE employee levels in the period beginning February 15, 2020, and ending April 26, 2020; and (2) the borrower then restored its FTE employee levels by no later than June 30, 2020 to its FTE employee levels in the borrower’s pay period that included February 15, 2020.
- Borrowers will be required to make certain certifications when they apply for forgiveness including that they understand that if the funds were knowingly used for unauthorized purposes, the federal government may pursue recovery of loan amounts and/or civil or criminal fraud charges. Knowingly making a false statement to obtain forgiveness of an SBA-guaranteed loan is punishable by both fines and potential imprisonment.
The SBA has also clarified the documentation that borrowers will be required to submit along with their application:
- Payroll documentation consisting of (a) bank statements or third-party payroll service provider reports documenting the amount of cash compensation paid to employees; (b) tax forms (or equivalent third-party payroll service provider reports) for the periods that overlap with the Covered Period or the Alternative Payroll Covered Period including payroll tax filings reported or that will be reported to the IRA (typically a form 941) and state quarterly business and individual employee wage reporting and unemployment insurance tax filings reported or that will be reported to the relevant state; and (c) payment receipts, cancelled checks or account statements documenting the amount of any employer contributions to employee health insurance and retirement plans that the borrower included in the forgiveness amount.
- FTE documentation to be provided consisting of the appropriate documentation of (a) the average number of FTE employees on payroll per month employed by the borrower between February 15, 2019 and June 30, 2019; (b) the average number of FTE employees on payroll per month employed by the borrower between January 1, 2020 and February 29, 2020; or (c) in the case of a seasonal employer, the average number of FTE employees on payroll per month employed by the borrower between February 15, 2019 and June 30, 2019; between January 1, 2020 and February 29, 2020, or any consecutive 12-week period between May 1, 2019 and September 15, 2019.
- Non-payroll documentation to verify the existence of obligations/services prior to February 15, 2020 and eligible payments from the Covered Period includes: (a) for business mortgage interest payments: copy of lender amortization schedule and receipts or cancelled checks verifying eligible payments from the Covered Period; or lender account statements from February 2020 and the months of the Covered Period through one month after the end of the Covered Period verifying interest amounts and eligible payments; (b) for business rent or lease payments: copy of the current lease agreement and receipts or cancelled checks verifying eligible payments from the Covered Period, or lessor account statements from February 2020 and from the Covered Period through one month after the end of the Covered Period verifying eligible payments; and (c) business utility payments: copies of invoices from February 2020 and those paid during the Covered Period and receipts, cancelled checks, or account statements verifying those eligible payments.
- Borrowers are also required to maintain the following documentation, but need not submit it along with their application:
- Documentation supporting the listing of each individual employee in PPP Schedule A Worksheet Table 1, including the “Salary/Hourly Wage Reduction” calculations, if necessary.
- Documentation supporting the listing of each individual employee in PPP Schedule A Worksheet Table 2; specifically, that each listed employee received during any single pay period in 2019 compensation at an annualized rate of more than $100,000.
- Documentation regarding any employee job offers and refusals, firings for cause, voluntary resignations, and written requests by any employee for reductions in work schedules.
- Documentation supporting the PPP Schedule A Worksheet “FTE Reduction Safe Harbor.
All records relating the borrower’s PPP loan, including documentation submitted with the PPP loan application, documentation supporting the borrower’s certification as to the necessity of the loan request and its eligibility for a PPP loan, documentation necessary to support the borrower’s loan forgiveness application, and documentation demonstrating the borrower’s material compliance with PPP requirements. The borrower must retain all such documentation demonstrating the borrower’s material compliance with PPP requirements. The borrower must retain all such documentation in its files for six years after the date the loan is forgiven or repaid in full, and permit authorized representatives of SBA to access such files upon request.
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