Part 2: Small Business Administration Updates Paycheck Protection Program Guidance

Part 1 of this series, Calculating COVID-19 PPP Loan Forgiveness, discussed how the Small Business Administration’s Paycheck Protection Program has become a vital lifeline for businesses during the ongoing COVID-19 pandemic and provided an overview of the recently released PPP Loan Forgiveness Application.

Here, we provide the documentation requirements for supporting loan forgiveness requests and offer additional takeaways.

The Loan Forgiveness Application provides two categories of documentation to be maintained by borrowers:

1. documents that must be submitted to the lender with the Application and
2. documents that must be kept, but need not be submitted.

Documents to be Submitted
Borrowers must submit payroll records, records of full time equivalent employees and non-payroll expense records with the Loan Forgiveness Application. Payroll records must be sufficient to verify eligible cash compensation and non-cash benefits during the relevant covered period, and must include:

• bank account statements or third-party payroll service provider reports documenting the amount of cash compensation paid to employees,
• tax forms for the periods that overlap with the covered period (including payroll tax filings, state quarterly business and individual employee wage reporting, and unemployment insurance tax filings) and
• records reflecting the amount of any employer contributions to employee health insurance and retirement plans included in the borrowers requested forgiveness amount.

For FTE records, the borrower must submit records reflecting the average number of FTE employees on payroll per month for the selected reference period used to calculate loan forgiveness, as mentioned above. This means a borrower will need to submit records for the average number of FTE employees per month for either the period between Feb. 15, 2019 and June 30, 2019 or the period between Jan. 1, 2020 and Feb. 29, 2020. In the case of a seasonal employer, the employer will need to submit records of the average number of FTE employees on payroll per month between Feb. 15, 2019 and June 30, 2019, between Jan. 1, 2020 and Feb. 29, 2020 or any consecutive 12-week period between May 1, 2019 and Sept. 15, 2019. The application provides that the supporting documents may include payroll tax filings and state quarterly business and individual employee wage reporting and unemployment insurance tax filings.

Finally, a borrower must submit non-payroll documentation verifying the existence of the obligations/services prior to Feb. 15,2020 and eligible payments from the covered period. The eligible non-payroll costs and required documents are as follows:

• 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.
• Business rent or lease payments: Copy of 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.
• Business utility payments: Copy of invoices from February 2020 and those paid during the covered period and receipts, cancelled checks or account statements verifying those eligible payments.

Documents to be Maintained but Not Submitted
A borrower must maintain records of the PPP Schedule A Worksheet used to calculate loan forgiveness or its equivalent, and records sufficient to verify that the submitted Worksheet information is accurate. This includes records related to categorization based on the $100,000 cap on employee cash compensation. Borrowers must also maintain documentation related to any employee job offers and refusals, firings for cause, voluntary resignations and written requests by any employee for reductions in work schedule. Finally, if an employer is claiming the “FTE Reduction Safe Harbor” for rehiring employees prior to June 30, the employer must maintain documentation supporting those rehiring efforts.

The PPP requires a borrower to retain all documents related to the PPP loan for 6 years after the date the loan is forgiven or repaid in full, and permit authorized representatives of the SBA to inspect the files upon request. As such, borrowers must retain all application documentation, documentation supporting certifications as to the necessity of the loan request and eligibility for a PPP loan, documentation necessary to support the borrower’s loan forgiveness application as discussed above, and documentation demonstrating the borrower’s material compliance with general PPP requirements.

Key Takeaways, Clarifications and Distinctions
Modifications to the Covered Period
The newly provided option for a borrower to calculate payroll costs as paid or incurred during the “Alternative Payroll Covered Period” is perhaps the most important development for many businesses. By allowing businesses to begin the covered period on the first day of the first pay period following disbursement of the loan, borrowers are able to ensure partial pay periods are not excluded from the ultimate loan forgiveness amount and will face fewer challenges documenting payroll costs. Additionally, the application clarified that payroll costs incurred during the covered period are forgivable even if paid in the following pay period after the covered period, which is a point that had not been clarified by the SBA until now.

Eligible Non-Payroll Costs
The Loan Forgiveness Application clarifies that rent and mortgage obligations for personal property are forgivable, which was unclear previously, as many interpreted the PPP as limiting rent and mortgage forgiveness to real estate obligations. Borrowers now have guidance that permits them to seek forgiveness for personal property obligations (such as office or manufacturing equipment) so long as those obligations were in place prior to Feb. 15, 2020, and the overall non-payroll costs do not exceed 25 percent of the total requested forgiveness amount. The application also more clearly defines the types of utility costs that are eligible for forgiveness by clarifying that businesses can request forgiveness of payments for the distribution of electricity, gas, water, transportation, telephone or Internet access for which service began before Feb. 15, 2020. Transportation costs had not previously been confirmed as a reimbursable utility cost, but it is still unclear if what transportation costs really means.

FTE Calculations
The application now provides two methods to calculate the average FTEs during a reference period and the covered period, though each method should be calculated by borrowers for their individual case to choose the one most advantageous. Once chosen, the same method must be used when comparing the prior and current FTEs. Further, the application provides critical guidance regarding how borrowers should handle FTE reductions that were no fault of their own. As discussed above, there are strict record keeping requirements for documenting excused FTE reductions, so employers must ensure they maintain records documenting offers for re-hire, employee requests for reduced hours, resignations, and any other potentially excused FTE reductions.

Timeline for Application Approvals
Borrowers will be required to submit their forgiveness application and supporting documentation to their lender by Oct. 31, 2020. Lenders will have 60 days from receipt of the application to approve or reject the forgiveness request, after which time the lender will forward the application documentation to the SBA. The SBA will then have 90 days to remit the forgiven amount to the lender, who will in turn cancel the applicable portion of the loan obligation.

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