On May 15, 2020, the Small Business Administration (“SBA”) and the Treasury Department (“Treasury”) released the long-awaited Paycheck Protection Program (“PPP”) loan forgiveness application, which can be found here, with guidance regarding forgiveness imbedded in a series of included worksheets and instructions. The guidance is important as many borrowers were required to begin spending the PPP loan funds already and have needed more information to determine how to spend the PPP loan funds and remain eligible for forgiveness. Congress created the PPP under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) to provide forgivable loans to eligible small businesses facing economic hardship to retain U.S. employees on their payroll during the COVID-19 pandemic.
PPP loan recipients can be eligible to have their loans forgiven if the funds were used for eligible expenses over the eight-week coverage period commencing when the loan was originally disbursed (the “Covered Period”). The amount of forgiveness may be reduced if the percentage of eligible expenses attributed to non-payroll expenses exceeds 25% of the loan, if employee headcount decreases or compensation decreases by more than 25% for employee making less than $100,000, unless the headcount or compensation are restored by June 30, 2020.
The forgiveness application form and instructions include several measures intended to reduce compliance burdens and simplify the process for borrowers, including:
- Options for borrowers to calculate payroll costs using an “alternative payroll covered period” that aligns with borrowers’ regular payroll cycles;
- Flexibility to include eligible payroll and non-payroll expenses paid or incurred during the eight-week period after receiving their PPP loan;
- Instructions on how to perform the calculations required by the CARES Act to confirm eligibility for loan forgiveness;
- Implementation of statutory exemptions from loan forgiveness reduction based on rehiring by June 30; and
- Addition of a new exemption from loan forgiveness reduction for borrowers who have made a good-faith, written offer to rehire workers that was declined, which was previously announced in SBA’s Frequently Asked Question (FAQ) 40.
What’s in the Forgiveness Application and What Questions are Resolved?
Below we identify some of the major questions in the forgiveness process, and summarize the answers provided by the new PPP loan forgiveness application.
Calculating payroll costs using an “Alternative Covered Period” to align with a borrower’s regular payroll cycle
Question: Our biweekly payroll period does not align with the covered period of the loan. How do we calculate costs incurred and paid?
Answer: If a borrower’s payroll period does not align exactly with the Covered Period of the loan, the borrower can elect an alternative eight-week period (the “Alternative Payroll Covered Period”), which would enable it to specify a full eight weeks of payroll that is eligible for forgiveness without having to make a special payroll run within the eight-week Covered Period. If borrowers elect to use an Alternative Payroll Covered Period, the Alternative Payroll Covered Period will be calculated using the eight-week (56-day) period that begins on the first day of their first pay period following the date that they received the PPP loan proceeds from the lender (the “Alternative Payroll Covered Period”). Treasury provided the following example:
“If the Borrower received its PPP loan proceeds on Monday, April 20, and the first day of its first pay period following its PPP loan disbursement is Sunday, April 26, the first day of the Alternative Payroll Covered Period is April 26 and the last day of the Alternative Payroll Covered Period is Saturday, June 20.”
Notably, borrowers who opt for the Alternative Payroll Covered Period are still required to use the standard Covered Period for other costs.
Ability to include eligible payroll and non-payroll expenses paid or incurred during the coverage period
Question: When are payroll and nonpayroll costs “incurred?”
Answer: Payroll costs are considered incurred on the day that the employee’s pay is earned.
Question: When are payroll costs deemed “paid?” Do payroll “payments made during the covered period” mean when payment is made by a borrower to its payroll provider or when the payroll provider pays the employee?
Answer: Payroll costs are considered paid on the day that paychecks are distributed by the borrower or the borrower originates an ACH credit transaction (whether directly to the employee or to a payroll provider).
Question: For expenses to be eligible for forgiveness, must they have been both “incurred” and “paid” during the covered period” (the 8-week period)?
Answer: Borrowers are generally eligible for forgiveness for the payroll costs paid and payroll costs incurred during the eight-week (56-day) Covered Period (or Alternative Payroll Covered Period) (“payroll costs”). 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 if paid on or before the next regular payroll date. Otherwise, payroll costs must be paid during the Covered Period (or Alternative Payroll Covered Period). Treasury further noted that payroll costs that were both paid and incurred should be counted only once. Similarly, eligible 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, and nonpayroll costs that were both paid and incurred should be counted only once.
Instructions on how to perform the calculations required by the CARES Act to confirm eligibility for loan forgiveness
Question: Do eligible costs for rent or lease payments include personal property as well as real property?
Answer: Business rent or lease payments extend to lease agreements for real or personal property.
Question: Can you prepay expenses such as rent or mortgage interest payments and have that included in the forgiveness amount?
Answer: Borrowers may not include prepayments or payments of principal on business mortgage obligations on real or personal property. The application is silent regarding prepayments of business rent or lease payments for real or personal property.
Question: When calculating the average number of full-time equivalents during the Covered Period as compared to a past reference period, what does full-time equivalent (FTE) mean?
Answer: An employee who works at least 40 hours per week is 1 full time equivalent (“FTE”). Average full-time equivalency is the average numbers of hours paid per week divided by 40 (rounded to the nearest tenth), with the maximum for each employee capped at 1.0. Treasury has additionally provided a simplified calculation method that assigns a 1.0 for employees who work 40 hours or more per week and 0.5 for employees who work fewer hours that may be used at the election of the borrower. Borrowers will use FTE in determining reductions to headcount for loan forgiveness.
Instructions on loan forgiveness reductions and exemptions to reductions
Question: Borrowers are exempt from the reduction in loan forgiveness based on headcount if the borrower reduced its FTE employee levels during the period beginning February 15, 2020, and ending April 26, 2020, but restored its FTE employee levels not later than June 30, 2020, to its prior FTE employee levels. What period should borrowers use to determine its initial FTE employee levels?
Answer: Borrowers are exempt from the reduction in loan forgiveness based on FTE employees if both of the following conditions are met:
- the Borrower reduced its FTE employee levels in the period beginning February 15, 2020, and ending April 26, 2020; and
- the Borrower then restored its FTE employee levels to its prior FTE employee levels not later than June 30, 2020.
When comparing restored FTE employee levels to its prior FTE employee levels, a borrower should compare such restored FTE employee levels to such borrower’s FTE employee levels in the pay period that included February 15, 2020.
In addition, if a borrower has not reduced the number of employees or the average paid hours of its employees between January 1, 2020 and the end of the Covered Period, no reduction in loan forgiveness is required, provided FTEs are the same at the end of the Covered Period as they were on January 1, 2020.
Question: A borrower’s PPP loan forgiveness amount is subject to reduction if it reduced wages by more than 25% for certain employees during the Covered Period or Alternative Payroll Covered Period. To which period should borrowers compare?
Answer: Loan forgiveness may be reduced if salary and hourly wages for employees who made less than $100,000 in 2019 are reduced more than 25% during the Covered Period or Alternative Payroll Covered Period as compared to the period of January 1, 2020 through March 31, 2020. The borrower may avail itself of a safe harbor if it restores these salaries: SBA will ignore a reduction in salary during the Covered Period relative to the 1st quarter of 2020, if that salary is restored to what it was on February 15, 2020, by June 30, 2020.
Question: Will a borrower’s PPP loan forgiveness amount be reduced if the borrower terminated employees for cause, the employees voluntarily resigned or voluntarily requested a reduction of their hours?
Answer: The loan forgiveness amount may be reduced if the borrower’s average weekly FTE employees during the Covered Period (or the Alternative Payroll Covered Period) was less than during the borrower’s chosen reference period. However, the following are exceptions to the reduction in loan forgiveness:
- any positions for which the borrower made a good-faith, written offer to rehire an employee during the Covered Period or the Alternative Payroll Covered Period which was rejected by the employee (previously announced in SBA’s Frequently Asked Question (FAQ) 40); and
- any employees who during the Covered Period or the Alternative Payroll Covered Period (a) were fired for cause, (b) voluntarily resigned, or (c) voluntarily requested and received a reduction of their hours.
If the borrower hires replacement employees for those positions, it would count such employees in its FTE calculations, but would not get additional FTE credit.
Requirement to Disclose Loan Amount
Question: How do borrowers calculate the loan amount for purposes of determining whether a borrower’s loan is $2 million? Can a borrower that returned or repaid a portion of its loan count solely the remaining outstanding amount?
Answer: Borrowers should calculate their loan based on the original principal amount disbursed, ignoring any repayment. A borrower that was initially approved for amounts in excess of $2 million, but elected to return a portion (but not all) of the funds, would still need to report the amount of its original loan.
Notably, the SBA may request additional information to evaluate borrower’s eligibility for the PPP loan and for loan forgiveness, and failure to provide information may result in an ineligibility determination or denial of the loan forgiveness application.
What’s Missing from the Forgiveness Application and Remaining Questions regarding Forgiveness?
While the forgiveness application does address certain questions from borrowers, it leaves unresolved a number of issues and questions:
- Some small businesses need more flexibility on when the 8-week coverage period should start or need to have the covered period extended to more than 8 weeks.
- Can bonuses paid to employees during the covered period be included in the forgiveness amount and does that include bonuses which were accrued before the covered period but not yet paid?
- Are owner non-compensation payroll costs and benefits excluded from costs eligible for forgiveness? Who is considered an owner for this purpose?
- With respect to utility payments (which are defined under the CARES Act as electricity, gas, water, transportation, telephone, or internet access for which service began before February 15, 2020), what is included in transportation?
- How far in arrears may a borrower pay salaries and wages so long as the payment is made during the Covered Payroll Period (or Alternative Covered Payroll Period)? If a borrower did not pay employees in March but did so after receiving a PPP loan in April, may those amounts be eligible for forgiveness? Similarly, how far back may a borrower pay outstanding rent, interest or utilities? What happens if the eight-week period ends after June 30?
- Borrowers are required to disclose whether the borrower, together with its affiliates (to the extent required under SBA’s interim final rule on affiliates (85 FR 20817 (April 15, 2020)) and not waived under 15 U.S.C. 636(a)(36)(D)(iv)), received more than $2 million. This requirement puts the disclosure burden on the borrower to obtain information about affiliates it may not have the ability to obtain and where the entity with the relevant information is not the borrower. For instance, for a borrower that is a venture- or private equity-backed company, in completing the application, can it be responsible for obtaining from its venture capital investor or private equity sponsor (who would not want to have their separate portfolio companies audited) disclosure for every affiliate that received PPP loans?
The application also provides:
- A list of documents each borrower must submit to support payroll, FTE and non-payroll calculations; and
- A list of documents each borrower must maintain for a period of six years after the date the loan is forgiven or repaid in full, but is not required to submit unless requested by an SBA authorized representative, including representatives of its Office of Inspector General.
In line with the generally expected treatment of information provided by borrowers to lenders (and the SBA) in the PPP, much of the information in the application for forgiveness may become a matter of public record; exceptions include personal and confidential information about individual salaries and employee names and identification numbers.
The concept is consistent with the PPP’s stated focus on the preservation of salaried employment by small businesses—while the stability or viability of a particular small business is important to employment, payment of salaries, rather than viability, is the primary focus of the program. In line with the policy and the specific requirements for employees, employee retention and replacement and compensation levels, the detail to be provided as part of an application for forgiveness is to provide a clear picture of the pattern of employment by the borrower over the Covered Period as compared to the reference period. Much of that information entails information from prior or future tax filings by the borrower. And it can be expected that information provided to lenders or the SBA (or its contractors) will be compared to tax filings. Additional detail demonstrating preexisting (i.e. prior to February 15, 2020) obligations for mortgage and lease obligations, and their payment as well as utility invoices and payments, similarly reinforce the parameters of the program. Notable is the requirement that additional background documentation be maintained by the borrower for a period of six years after the later of forgiveness or repayment in full of the PPP loan, and be supplied to the SBA or its representatives.
Similar to the original PPP loan application, false statements in the loan forgiveness application, including the submission of false or misleading supporting documents or forms, carry significant penalties. The loan forgiveness application itself requires the borrower to certify that they understand that such false statements are criminally punishable under at least three federal statutes. Notably, the period for required record retention discussed above (six years) exceeds the five-year statute of limitations applicable to most federal offenses. In addition, false or misleading statements on the application, or in the supporting documents, risk civil lawsuits under the False Claims Act under a variety of theories.
In light of these potential liability risks, borrowers should pay close attention to ensuring the material accuracy of all statements made in, and supporting materials submitted with, the loan forgiveness application. These materials may be scrutinized as much, if not more than, the certifications made in the original loan application. As we have previously noted, Treasury and the SBA have issued a series of FAQs and other public statements questioning whether certain employers, including those with ready access to capital markets, were the intended beneficiaries of PPP loans. DOJ policy, the evidentiary rules, and other factors may make it difficult for the government or private plaintiffs to use those after-the-fact pronouncements as either an independent basis for a false claim or as evidence of a culpable state of mind in a case concerning the initial PPP application. However, any statements made in the loan forgiveness application will be made against the backdrop of Treasury and SBA’s publicly voiced concerns, and thus those concerns, and the borrower’s awareness of them, could potentially be cited as evidence to show any false statement in the forgiveness application was made with the requisite knowledge and intent.
In an optional segment, the application asks for demographic information, as well as identification of key employees, officer and director management and owners (directly or indirectly) of 20% or more of the equity of the borrower. Much of the information elicited by the questions about ownership and management can feed into the determinations about whether affiliation rules for the program and other SBA programs are to be applied to this borrower and to its original eligibility for the PPP.
As borrowers and lenders begin the process of calculating their forgiveness amount and applying for forgiveness using the new application, new questions will arise, and additional guidance will be necessary. Treasury announced that SBA will also soon issue regulations and guidance to further assist borrowers as they complete their applications, and to provide lenders with guidance on their responsibilities.
Also on May 15, 2020, the House of Representatives passed the Health and Economic Recovery Omnibus Emergency Solutions Act (also known as the HEROES Act), which contains proposals for some significant changes to the PPP. If these proposals are included in a “Phase IV” bill that is ultimately passed by the Senate and signed by the President, it would result in changes to SBA’s PPP loan forgiveness calculation.
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