PPP Loans and Forgiveness:  FAQ

McNees Wallace & Nurick LLC

With the SBA finally releasing forgiveness guidance and an application for Borrowers to apply for forgiveness, many questions remain unanswered about how the SBA intends to evaluate and treat loan forgiveness. The below FAQ provides the answers that are available so far, but additional guidance is still expected.

  1. During what period can I make expenditures that will be eligible for forgiveness?

You can make eligible expenditures within the 8-week period beginning on the date of the origination of your loan, which is the date of the first disbursement of your loan proceeds. This 8-week period is referred to as the “Covered Period,” though that term is assigned several meanings under the CARES Act, so Borrowers should make sure any reference in SBA documents to a “Covered Period” refers to this period.

The SBA’s application for forgiveness, and guidance released not long thereafter, created an “Alternative Payroll Covered Period” for which Borrowers can claim forgiveness of expenses. Instead of the 8-week period beginning on the date of a Borrower’s first receipt of loan proceeds, eligible Borrowers can elect to use the 8-week (56 day) period beginning on the first day of its next new pay period after receiving the loan proceeds. If a Borrower elects to use this alternative formula, all eligible uses must be determined for the same 8-week period (i.e. the payment of rents, utilities, etc. will also be determined for the Alternative Payroll Covered Period). The Alternative Payroll Covered Period is only available to Borrowers on a bi-weekly (or more frequent) pay schedule.

For purposes of this FAQ, “Covered Period” will mean either the Covered Period or the Alternative Payroll Covered Period, as is selected by the Borrower.

For reference, under the CARES Act, an “eligible expense” is any payroll costs (as are defined in the CARES Act and the SBA’s FAQ, #7 and #8, located here), mortgage interest or rent paid on an obligation arising prior to February 15, 2020 and utility payments for services existing as of February 14, 2020. Recent SBA guidance has clarified that payroll costs includes (i) pay to furloughed employees (subject to the annualized $100,000 per year limitation per employee), and (ii) hazard pay and bonuses paid during the Covered Period, so long as they are paid to employees making less than $100,000 on an annualized basis. The SBA guidance also stated that mortgage interest and rental payments include obligations for both real property and personal property, provided the applicable agreement was incurred before February 15, 2020.

  1. Can I pre-pay on obligations that, if they were currently due, would qualify as eligible expenditures?

Prepayments on rent and mortgage interest are not forgivable under the CARES Act. The SBA application allows eligible nonpayroll costs to include costs incurred during the applicable Covered Period, provided they are paid on or before the next due date under the applicable contract. No further guidance was provided on prepayment in the SBA’s two interim final rules issued last week, other than to reiterate that pre-paid mortgage interest is not forgivable.

The SBA application also introduces a new concept, that “payroll costs” include both actually paid and incurred payroll costs. For forgiveness purposes, payroll costs are “incurred” on the day the employee’s pay is earned, which is generally the day on which they work. The application further clarifies that incurred payroll costs are eligible so long as they are paid on or before the next payroll date following the end of the applicable 8-week period. The additional periods of payroll potentially includable under the above calculations are still limited to a maximum per employee of $100,000, pro-rated to the Covered Period.

  1. Ihave heard about this “75-25” Rule. What is that?

Basically, to receive full loan forgiveness 75% of your payments made during the Covered Period must be attributable to “payroll costs.” While this rule was issued by the SBA early on, and it is not clear that the rule was ever revoked, the application and the recent guidance do not make mention of it. A second, related rule that has continued to feature in the SBA’s guidance, and was reiterated in one of last week’s interim final rules (which can be found here), states that not more than 25% of your forgivable amount requested can be for loan proceeds spent on nonpayroll uses.

  1. In applying for a loan, I certified that current economic uncertainty makes the PPP loan request necessary to support the ongoing operation of my business. What does that mean?

To have received a PPP loan, all Borrowers certified that the “current economic uncertainty makes this loan request necessary to support the ongoing operations of the [Borrower].” Since then, additional guidance has provided that failure to have made this certification in good faith may create criminal liability for a Borrower.

To ease panic, the SBA’s FAQ #46 clarified that Borrowers who received PPP loans of an original principal amount of less than $2 million will be deemed to have made the necessity certification in good faith. Further, since Borrowers of greater than $2 million are subject to a potential SBA audit, they may still be deemed to have made the certification in good faith if they had an “adequate basis.” There is currently a lack of guidance of what constitutes an “adequate basis,” however, we know that this certification must take into consideration its current business activity and ability to access capital. Additionally, the SBA has confirmed that both publicly-owned and privately-held companies may face consequences for failing to make this certification in good faith.

Although the definition of “adequate basis” is up for interpretation, Borrowers reviewing their good faith certifications should consider the specific risks posed to their business and operations at the time of receiving the PPP loan such as the current financial state of their business and industry, potential third-party/supply chain issues, employee health and wellness, ability to obtain other sources of capital (and the terms thereof), and more. Lastly, even if the SBA determines a Borrower lacked an “adequate basis” for the necessity certification, they can still repay the loan after receiving such notification from the SBA without any enforcement actions or investigations levied against it. All Borrowers should also be aware that if they knowingly made this certification without any basis (i.e. fraudulently) then they may still face a government investigation or criminal prosecution.

  1. I repaid my PPP Loan to avoid penalties for the good faith certification. Could I still be liable for other penalties?

The SBA created a limited safe harbor for the repayment of loans that were made on or before April 24, 2020. If your loan qualified and you repaid it (in full) by May 18, 2020, the SBA will accept that your business made the certification discussed in our FAQ 4 (above) in good faith. This safe harbor, however, does not relieve Borrowers of liability arising under other uses of loans or certifications made by Borrowers. Recent guidance, and the forgiveness application, make special note that audits will be conducted against Borrowers seeking forgiveness, but this does not foreclose on other audits being conducted.

If your business repaid its PPP Loan by May 18, you are once again eligible for the Employee Retention Tax Credit, discussed in detail here.

Alternatively, a Borrower may still submit for forgiveness after a repayment (whether partial or in whole) has been made. Any forgiveness granted in excess of the outstanding principal and interest under the loan will be refunded to the Borrower.

  1. When do I apply for forgiveness?

You may apply for loan forgiveness 8-weeks after the origination of your loan.  Please see our discussion below in our FAQ’s 7 and 8 on how to apply.

  1. Howdo I apply for forgiveness?

On May 15, the SBA released its first version of the PPP loan forgiveness application. The application, which can be found here, details that Borrowers must complete and submit the application through the Lender that is servicing their PPP loan. The application includes information surrounding forgiveness calculations (including calculation schedules for salary or FTE reductions), a summary of costs eligible for forgiveness, and additional certifications surrounding the receipt of forgiveness.

Once a Borrower submits its application to its Lender, the Lender has 60 days in which to conduct its review of the documentation submitted. Lenders are expected to conduct a good-faith review in a reasonable amount of time. While Lenders may rely on representations of Borrowers, their analysis should reflect the reliability of the documentation provided by the Borrower. For example, the SBA’s guidance identifies payroll figures as an area deserving attention from Lenders but acknowledges that records from third-party payroll provider can be accepted without detailed analysis.

Following the Lender’s review, it will submit to the SBA the amount of principal and interest thereon, for which forgiveness is sought. The SBA will repay such amount within 90 days, and the Lender will forward that information to the Borrower. The SBA may ask further questions or reject an application either during or after its 90-day review or thereafter; see our FAQ 15 for details on the SBA’s review.

  1. What records do I need to apply for forgiveness?

Page 10 of the forgiveness application details documentation required to be submitted with your application. Regarding payroll costs, such documentation includes, but is not limited to, bank account statements showing amounts paid to employees, tax forms relating to payroll tax filings (i.e., Form 941) and employee wage reporting, and receipts (or other documentation) relating to employer contributions to health insurance or retirement plans. Borrowers may also elect to submit similar documentation showing the number of FTE’s during the applicable period.

For nonpayroll items, Borrowers must submit documentation evidencing mortgage interest payments, rent, and utility payments. Examples of such documentation include a Lender amortization schedule, copies of your current lease agreement, and copies of utilities invoices. In each case Borrowers must submit receipts verifying eligible payments as well.

Lastly, while not necessary to submit for PPP forgiveness, the application sets forth a list of documentation Borrowers are required to maintain:

  • Documentation supporting the listing of each individual employee in PPP Schedule A Worksheet Table 1, including the “Salary/Hour Wage Reduction” calculation, 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 an employee for reductions in work schedule; and
  • Documentation supporting the PPP Schedule A Worksheet “FTE Reduction Safe Harbor.”

Please carefully review the forgiveness application to determine which documentation is required for you, as each Borrower faces a different set of circumstances.

  1. Please tell me more about reductions for “FTE’s” and how it will/may impact forgiveness.

After an initial calculation of the amount, which is eligible for forgiveness, such initial forgiveness amount may be reduced if there has been a reduction in the number of your “Full-Time Employee Equivalents.” Essentially, if the average number of full-time equivalent employees during the 8-week period (the Covered Period of the Alternative Payroll Covered Period) is less than your average number of full-time equivalent employees prior to receipt of the PPP loan (tested periods are either February 15, 2019 to June 30, 2019, January 1, 2020 to February 29, 2020, or if the business is a seasonal employer, a consecutive 12-week period between May 1, 2019 and September 15, 2019), then the total amount of forgiveness is proportionally reduced. For example, if the Borrower averaged 10 full-time equivalent employees during the selected test periods, and only 9 during the 8-week loan period, then only 90% of the Borrowers initial forgiveness calculation is forgivable.

  1. How do I calculate the average number of Full Time Employee Equivalents for purposes of determining whether my initial forgiveness amount is reduced?

Each employee will receive a number between 0 and 1, which reflects its Full Time Employee Equivalent value. Employees working 40 or more hours per week have an FTE value of 1. All employees working less than 40 hours per week have a value equal to [hours worked]/40. No employee may be attributed an FTE value more than 1, regardless of hours worked. For employees working less than 40 hours, Borrowers may elect to calculate their FTE value by either (i) using the foregoing calculation each week and taking the average across the Covered Period, or (ii) assign all part-time employees the value of 0.5.

  1. Is the amount of loan forgiveness impacted if the Borrower reduced the salary of some employees?

The initial forgiveness amount is also reduced based upon any reduction in total salary or wages of any employee that is more than 25% of the employee’s total salary during the most recent full quarter prior to receiving your PPP loan. To determine the reduction, the Borrower should determine for each employee receiving less than $100,000 in annualized wages, the average effective wage of the employee in the period from January 1, 2020 to March 31, 2020. Borrowers then determine the average effective wage of the employee in the Covered Period. The difference between the measurement period effective wage and the Covered Period effective wage, after deducting the 25% grace amount (determined from the employee’s measurement period pay), is then deducted from the forgiveness amount. The SBA provided the below example:

“A borrower reduced a full-time employee’s weekly salary from $1,000 per week during the reference period to $700 per week during the covered period. The employee continued to work on a full-time basis during the covered period with an FTE of 1.0. In this case, the first $250 (25 percent of $1,000) is exempted from the reduction. Borrowers seeking forgiveness would list $400 as the salary/hourly wage reduction for that employee (the extra $50 weekly reduction multiplied by eight weeks).”

This reduction amount is calculated for each employee of the Borrower, and the reduction amounts are added together and subtracted from the forgiveness amount.

The calculation of wage reductions is not duplicative to the determination of FTE, meaning that reductions in wages that reflect solely a decrease in hours worked will not be included in the formulation. For example, if an employee worked 40 hours per week in the prior measurement period and was reduced to 20 hours a week for the applicable Covered Period at the same rate of pay, the reduction of that employee’s wages is disregarded because its treatment as an FTE captures the change in circumstance.

However, a safe harbor does exist. If a Borrower rehires any FTE’s or eliminates any salary or wage reduction by June 30, 2020, a Borrower’s initial forgiveness amount will not be reduced.

  1. I havehad ordinary staffing changes, or some employees refuse to return to work; will this impact my forgiveness?

Borrowers will not be penalized under either the FTE test nor the wage reduction test for employees who (i) were terminated for cause, (ii) resigned, or (iii) requested a reduction in hours or refused to return to their prior work level. In calculating FTE, Borrowers are directed to count employees working at reduced hours by choice at the FTE level applicable to them prior to the reduction. The SBA states in its guidance, “[s]pecifically, in calculating the loan forgiveness amount, a borrower may exclude any reduction in full-time equivalent employee headcount that is attributable to an individual employee if:

  • the borrower made a good faith, written offer to rehire such employee (or, if applicable, restore the reduced hours of such employee) during the covered period or the alternative payroll covered period;
  • the offer was for the same salary or wages and same number of hours as earned by such employee in the last pay period prior to the separation or reduction in hours;
  • the offer was rejected by such employee;
  • the borrower has maintained records documenting the offer and its rejection; and
  • the borrower informed the applicable state unemployment insurance office of such employee’s rejected offer of reemployment within 30 days of the employee’s rejection of the offer.” (emphasis not in original).
  1. Are the rules the same if I am self-employed?

Since self-employed individuals may use their PPP loan proceeds to replace lost compensation, the SBA released guidance that only 8-weeks’ worth of net profit from 2019 is eligible for forgiveness. We released an article, which can be found here, that discusses self-employment PPP issues more in-depth. Additional amounts eligible for forgiveness for self-employed individuals include mortgage interest, rent, and utility payments that are entitled for expense deductions on 2019 Form 1040 Schedule C.

Recent guidance from the SBA has added that forgiveness applicable to owner-employee and self-employed individuals is limited to $15,385 per individual (which is not subject to duplication across separate Borrowers). The forgiveness amount is limited further to such person’s 2019 compensation (inclusive of retirement and health care costs). For Schedule C filers, forgiveness is capped at the owner’s 2019 net profit amount. Similarly, for general partners, the maximum applicable forgiveness amount is limited to 2019 net earnings from self-employment (reduced by Section 179 deductions) multiplied by 0.9235.

  1. My loan was not forgiven 100%. What are my options?

If your loan is not forgiven, first consider connecting with your Lender to see if they will allow you to provide any additional documentation if you feel that you should have been entitled to 100% forgiveness.

If not, you may either prepay on the loan without penalty, or, depending on your uses of those excess funds, allow the outstanding balance to accrue 1% during the 2-year loan period. Under the CARES Act there are limitations on the use of the loan proceeds and these same limitations should continue to apply to any proceeds that are not forgiven.

  1. I have seen a few things about the SBA auditing PPP Loans; is that true?

The SBA has announced that they will be reviewing individual PPP Loans and forgiveness records. The SBA has stated that they will review application for (i) eligibility of the Borrower, (ii) the determination of the loan amount secured, and (iii) the amount of forgiveness.

In the SBA’s review, Borrowers may be contacted by the SBA or through their Lender if there are questions about the loan. The Borrower should respond to inquiries, or risk being found ineligible, which would negate all rights to forgiveness. The SBA will look to whether a Borrower was eligible based on the guidance available at the time the Borrower applied for the PPP Loan, not upon the final guidance (if it is ever finalized).

All Borrowers are directed to maintain all relevant documents and records for 6 years following submitting their forgiveness application (or obtaining their loan if they elect not to submit for forgiveness). If a Borrower is found to be ineligible, or other defects are uncovered in the SBA’s review, the SBA may further request immediate repayment of the loan. The SBA will also be seeking the return of loan processing fees from Lenders who made ineligible loans.

There will be additional guidance provided with specifics of how the SBA will treat its review, notice and the appeal process for Borrowers.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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