Borrowers under the Small Business Administration’s (“SBA”) Paycheck Protection Program (“PPP”) are required to either maintain or submit to lenders and the SBA certain documentation associated with their application for and their use of PPP loan proceeds. In addition, certain documentation is required for an appeal. Because the SBA has provided limited specific guidance to inform borrowers’ documentation efforts, we are providing a general summary of considerations a borrower may keep in mind as it aims to comply with the documentation requirements associated with application for, the receipt of, and the use of PPP loan proceeds (for forgiveness or otherwise), and an appeal of an unfavorable forgiveness decision.
Five Broad Categories of Documentation
To facilitate their record-keeping efforts, PPP borrowers may be well served by approaching documentation from four angles: eligibility, necessity, use of funds, and forgiveness.
Eligibility: First, a borrower should maintain thorough contemporaneous records with information used to determine the borrower’s eligibility for applying for and participating in the PPP. Ideally, these documents would address issues related to SBA size standards, compliance with SBA affiliation rules, and employee count, among other considerations.
Necessity: Second, a PPP borrower should be able to produce documentation containing information used to substantiate the certification on its PPP loan application that the “current economic uncertainty makes this loan request necessary to support the ongoing operations” of the borrower. Such documents would have information to help the borrower show it made the certification in good faith, taking into account its business activity at the time of the application, and the borrower’s ability to access other sources of liquidity sufficient to support its operations in a manner that is not significantly detrimental to the business.
Use of Funds: Third, PPP borrowers will benefit from maintaining accurate records of how PPP loan proceeds were used. The funds are to be used to retain workers and maintain payroll or make mortgage interest payments, lease payments, and utility payments as specified in the PPP. These usage records should allow the SBA to track the inflow of PPP loan proceeds from the borrower’s lender and the outflow of PPP loan proceeds toward payment of covered expenses, like payroll expenses and lease payments. Consider having a separate bank account to facilitate this requirement.
Forgiveness: Fourth, if the borrower will seek forgiveness, it must maintain and submit documentation set forth in the SBA’s loan forgiveness applications along with additional documentation lenders may require. Please see below for specific documentation outlined by the SBA.
Appeals: Fifth, if the borrower appeals certain forgiveness decisions, it needs to produce specific documents.
Specific Guidance on Documents
Eligibility: In the PPP “How to Calculate Maximum Loan Amounts – By Business Type” document, the SBA has outlined certain documents that can be used to substantiate the borrower’s calculations of average monthly payroll costs, including payroll reports by a recognized third-party payroll processor and certain tax records. A borrower should maintain the records that it relied upon in making the application.
Forgiveness: Although the SBA has not provided extensive guidance on documentation, the SBA did give borrowers specific examples of documentation required for loan forgiveness via the PPP loan forgiveness applications released on June 16, 2020, and they have provided further guidance in Interim Final Rules. Documents that each borrower must submit to its lender along with the forgiveness application in order to substantiate payroll costs include bank account statements, third-party payroll service provider reports, payment receipts, tax forms, account statements, and cancelled checks. To show the average number of full-time equivalent (“FTE”) employees on payroll per week for the applicable period, borrowers may include (i) payroll tax filings reported, or that will be reported, to the IRS (typically, Form 941); and (ii) state quarterly business and individual employee wage reporting and unemployment insurance tax filings reported, or that will be reported, to the relevant state. Borrowers also must provide payroll tax filings reported, or that will be reported, to the IRS (typically, 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 to show the average number of FTE employees on payroll per week. Borrowers will also have to submit documentation verifying existence of the obligations and services prior to February 15, 2020, for which PPP loan proceeds were used, such as lender amortization schedules, current lease agreements, receipts or cancelled checks, and utility invoices.
Initially, the loan forgiveness application required that borrowers maintain, but not submit, documentation supporting:
- listings of individual employees in the forgiveness worksheets;
- written employee job offers and refusals, written records of the rejection or refusals to accept restoration of reduction in hours, written records of firings for cause and voluntary resignations, written requests by any employee for reductions in work schedules, and written records of any inability to hire a similarly qualified individual for unfilled positions on or before December 31, 2020;
- the certification, if applicable, that the borrower was unable to operate between February 15, 2020, and the end of the Covered Period at the same level of business activity as before February 15, 2020 due to compliance with requirements established or guidance issued between March 1, 2020 and December 31, 2020 by the Secretary of Health and Human Services, the Director of the Centers for Disease Control and Prevention, or the Occupational Safety and Health Administration, related to the maintenance of standards of sanitation, social distancing, or any other work or customer safety requirement related to COVID-19; and
- the FTE reduction safe harbors and FTE reduction exception.
However, the Interim Final Rule posted on June 22, 2020 requires lenders to collect and provide these records to the SBA; that is the applicable documentation listed under “Documents that Each Borrower Must Maintain but is Not Required to Submit.” Consider also keeping a record of the borrower’s notification to the applicable state unemployment insurance office of any rejected rehire offer (must be informed within 30 days of the employees’ rejection of the offer). For the FTE Reduction Safe Harbor 1, documents must include copies of the applicable COVID-19 requirement or guidance for each business location (such as any local government’s shutdown orders that reference a federal COVID-19 requirement or guidance described above) and any relevant borrower financial records or other records that document that the reduction in business activity during the Covered Period stems directly or indirectly from compliance with the COVID-19 requirement or guidance. For borrowers that submit a PPP Loan Forgiveness Application Form 3508EZ, the borrower must also maintain documents that support the certifications required by that form.
Record-Keeping Duration and SBA Access
All records relating to the borrower’s PPP loan, including documentation submitted with its PPP loan application, documentation supporting the borrower’s certifications as to the necessity of the loan request and its eligibility for the PPP loan, documentation necessary to support the borrower’s loan forgiveness application, and documentation demonstrating the borrower’s material compliance with PPP requirements, must be retained in the borrower’s files for six years after the date the loan is forgiven or repaid in full. In addition, the borrower must permit authorized representatives of the SBA to access such files upon request.
- Petition: Under the Rules of Practice for Appeals of Certain SBA Loan Review Decisions under the PPP (the “PPP Appeal Rules of Practice”), the appeal petition must include the following information: (1) the basis for the SBA Office of Hearings and Appeals (“OHA”) jurisdiction, including, but not limited to, evidence that the appeal is timely filed in accordance with PPP Appeal Rules of Practice; (2) a copy of the SBA loan review decision that is being appealed, or a description of that decision if a copy is unavailable; (3) a full and specific statement as to why the SBA loan review decision is alleged to be erroneous, together with all factual information and legal arguments supporting the allegations; (4) the relief being sought; (5) signed copies of payroll tax filings actually reported to the Internal Revenue Service (IRS), and state quarterly business and individual employee wage reporting and unemployment insurance tax filings actually reported to the relevant state, for the relevant periods of time, if not provided with the PPP Loan Forgiveness Application (SBA Form 3508, SBA Form 3508EZ, or lender’s equivalent), or an explanation as to why they are not relevant or not available; (6) signed copies of applicable federal tax returns actually filed with the IRS with appropriate schedules (e.g., IRS Form 1040 with Schedule C/F) documenting income for self-employed individuals or partners in a partnership, if not provided with the PPP Borrower Application Form (SBA Form 2483 or lender’s equivalent), or an explanation as to why they are not relevant or not available; and (7) the name, address, telephone number, email address, and signature of the appellant or its attorney. The SBA further notes that certain financial information must be available (the SBA has determined that submission by the appellant of financial information, or an explanation as to why they are not relevant or not available, is appropriate to support SBA’s efforts to assess compliance with the PPP requirements set forth in the statute, rules, and guidance). An appeal petition that does not contain all of the required information may be dismissed, with or without prejudice, at the judges’ own initiative, or upon motion of the SBA or an SBA motion for a more definite statement.
- Administrative Record: Under the PPP Appeal Rules of Practice, the administrative record is to include relevant documents that the SBA considered in making its final decision or that were before the SBA at the time of the final decision. The administrative record need not, however, contain all documents pertaining to the appellant. In addition, the SBA may claim privilege as to certain materials. The SBA will file the administrative record with the OHA and serve it on appellant. The borrower appellant can object to the absence of any document from the administrative record that the appellant believes should have been included in the administrative record. An appellant also may object to any claim that documents in the administrative record are privileged. Such objections must be filed with OHA and served on the SBA no later than 10 calendar days after appellant’s receipt of the administrative record. The judge will rule upon such objections and may direct or permit that the administrative record be supplemented.
- Evidence: Generally, the OHA judge may not admit evidence beyond the written administrative record or permit any form of discovery. Discovery will be permitted only if the judge determines that the SBA, upon written submission, has made a showing of good cause for discovery. Generally, oral hearings will not be held on an appeal of an SBA loan review decision. All appeals will be decided solely on a review of the written administrative record, the appeal petition, and response(s) filed thereto, any admitted evidence, and an oral hearing, if held.
- Confidential Information and Protective Order: If a filing or other submission made pursuant to an appeal contains confidential business and financial information; personally identifiable information; source selection sensitive information; income tax returns; documents and information covered under Confidentiality of Reports, Risk Ratings and related Confidential Information (13 CFR § 120.1060); or any other exempt information, that information is not available to the public pursuant to the Freedom of Information Act (FOIA), 5 U.S.C. 552. The appellant or the SBA may seek a protective order over any document or information exchanged in discovery, if discovery is permitted.
For information about the review process, see “A Guide to the SBA PPP Loan Forgiveness Review Process.”
Suggested Next Steps
Borrowers maintaining documentation to demonstrate eligibility, necessity, use, and basis for forgiveness and to support an appeal should keep in mind the different sources of statutory and regulatory guidance related to these four areas. For example, Treasury Frequently Asked Questions 17 and 31 remind borrowers that questions related to eligibility and necessity must be addressed based on the “laws, rules, and guidance available at the time of the relevant application.” In addition, the Interim Final Rule posted on June 22, 2020 states: “If SBA determines in the course of its review that the borrower was ineligible for the PPP loan based on the provisions of the CARES Act, the SBA rules or guidance available at the time of the borrower’s loan application, or the terms of the borrower’s PPP loan application (for example, because the borrower lacked an adequate basis for the certifications that it made in its PPP loan application), the loan will not be eligible for forgiveness.” A borrower planning to use PPP loan proceeds with the intention of later seeking forgiveness must take into account the continually evolving guidance issued by the SBA, the Department of the Treasury, and lenders.
Schwabe is closely monitoring developments related to the PPP and other legal implications of COVID-19.