SBA Releases Loan Forgiveness Application - Key Development for PPP Borrowers

Chambliss, Bahner & Stophel, P.C.Late Friday night, the Small Business Administration (SBA) released its first phase of long-awaited guidance to assist borrowers and lenders with calculating and applying for the forgiveness of loans issued by the SBA under the Paycheck Protection Program (PPP). Specifically, the SBA made available the PPP Loan Forgiveness Application and detailed instructions for the application.

The PPP application and instructions are available here. The application and instructions provide direction to PPP borrowers on a variety of issues and set forth specific instructions on how to calculate loan forgiveness amounts under the PPP. While the application and instructions provide clarity on a number of open items, it should be noted that additional guidance and regulations will be forthcoming to further assist borrowers and lenders.

The application and instructions address several key issues and clarify some important questions:

  • Borrowers are provided more flexibility to align the eight-week covered period with the dates that their payrolls are incurred and paid. Specifically, borrowers with biweekly (or more frequent) payrolls may elect to calculate payroll costs using an “alternative payroll covered period” that aligns with borrowers’ regular payroll cycles.
  • The SBA has added guidance to permit the borrower to include eligible payroll and non-payroll expenses paid or incurred during the applicable eight-week covered period. This guidance has the potential to be a significant benefit to borrowers.
  • Notably, the SBA has clarified that a full-time equivalency (FTE) employee will be calculated based on a 40-hour workweek. Some commentators had been hoping for a 30-hour workweek test. To simplify the calculation, borrowers are given the option to assign 1.0 to employees who work 40 hours or more and 0.5 to employees who work fewer than 40 hours.
  • The PPP application and instructions include detailed steps to calculate numbers of employees during relevant periods, the FTE Reduction Quotient, and the reductions in wages for employees whose salaries or hourly wages were reduced by the covered payroll period or alternative covered payroll period. 
  • For the wage reduction calculation, the SBA has clarified that borrowers should compare the average wages (not the total paid wages) of the relevant employee in the first quarter of 2020 against those paid in the covered payroll period or alternative covered payroll period. This guidance aligns with how most commentators had been viewing this issue.
  • In addition to the existing exemption for situations in which an employee declines a borrower’s good-faith, written offer to rehire, there is an additional new exemption that borrowers can utilize for employees (a) that voluntarily quit, (b) were fired for cause, or (c) voluntarily requested a reduction in hours.
  • There is a “check the box” feature for borrowers with loans over $2 million, which again reinforces the SBA’s intent to identify and audit such borrowers, who should already be taking steps to document and prepare for such audit with their legal team.
  • Borrowers will be required to maintain documentation, including documentation supporting the necessity of their loan request and eligibility for six years after the loan is forgiven or repaid in full. Consistent with recent Treasury FAQs, the forgiveness application reiterates 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.

Chambliss will be reviewing and providing a more thorough analysis of key issues in the days to come. However, as an initial impression, the new PPP application and instructions provide clarity on many key points and will likely be viewed as “borrower-friendly.” 

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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