Ten Things to Know About the PPP Loan Forgiveness Applications - Update #3

Schwabe, Williamson & Wyatt PC

Below are the top ten things to know about the Paycheck Protection Program (“PPP”) Loan Forgiveness Applications and the detailed instructions for the applications posted on June 16, 2020. There are two forms and two sets of instructions: (a) PPP Loan Forgiveness Application Form 3508EZ (“Form EZ”), and and PPP Loan Forgiveness Application Form 3580EZ Instructions for Borrowers/Checklist for Using SBA Form 3508EZ (“Form EZ Instructions”); and (b) Forgiveness FormsPPP Loan Forgiveness Application Form Revised June 16, 2020 (“SBA Form 3508”) and Loan Forgiveness Application Instructions for Borrowers (“SBA Form 3508 Instructions”). The forms and the instructions DO NOT ANSWER all questions on forgiveness. We expect that these forms may change, especially given legislative proposals to reduce the paperwork for loans under $150,000 and for loans between $150,000 and $2 million.

On August 4, 2020, the SBA posted the Paycheck Protection Program Frequently Asked Questions (FAQS) on PPP Loan Forgiveness (“FAQs”) with some helpful information and examples, and some of that information is included in this article. However, there are still open questions, and we expect the SBA to issue additional regulations and guidance to further assist borrowers as they complete their applications, and to provide lenders with guidance on their responsibilities. Please also see our article Why You May Want to Wait to File for PPP Loan Forgiveness and Other Tips.

PPP Loan Forgiveness Applications Updates:

1. COVERED PERIOD AND ALTERNATIVE PAYROLL COVERED PERIOD AND PARTIAL PAY PERIODS: The Covered Period is either (1) the 24-week (168-day) period beginning on the PPP loan disbursement date, or (2) if the borrower received its PPP loan before June 5, 2020, the borrower may elect to use an eight-week (56-day) Covered Period. In no event may the Covered Period extend beyond December 31, 2020.There are options for borrowers to calculate payroll costs using an “alternative payroll covered period” under certain circumstances. Borrowers with a biweekly (or more frequent) payroll schedule may elect to calculate eligible payroll costs using the 24-week (168-day) period (or for loans received before June 5, 2020 at the election of the borrower, the eight-week (56-day) period) that begins on the first day of their first pay period following their PPP loan disbursement date. Borrowers that elect to use the Alternative Payroll Covered Period must apply the Alternative Payroll Covered Period wherever there is a reference in the application to “the Covered Period or the Alternative Payroll Covered Period.” However, borrowers must apply the Covered Period (not the Alternative Payroll Covered Period) wherever there is a reference in the application to “the Covered Period” only. If a borrower pays twice a month or less frequently, it will need to calculate payroll costs for partial pay periods. In no event may the Alternative Payroll Covered Period extend beyond December 31, 2020.

  • Seasonal Employers: A seasonal employer that elects to use a 12-week period between May 1, 2019, and September 15, 2019, to calculate its maximum PPP loan amount must use the same 12-week period as the reference period for calculation of any reduction in the amount of loan forgiveness.

2. TIMELINE FOR SUBMITTING APPLICATION AND DEFERRAL: A borrower may submit a loan forgiveness application any time on or before the maturity of the loan—including before the end of the covered period—if the borrower has used all of the loan proceeds for which the borrower is requesting forgiveness. However, if the borrower applies before the end of the Covered Period, and has reduced any employee’s salary or wages in excess of 25%, the borrower must account for the excess salary reductions for the full Covered Period. If the borrower does not apply for loan forgiveness within 10 months after the last day of the covered period, or if the SBA determines that the loan is not eligible for forgiveness (in whole or in part), the PPP loan is no longer deferred and the borrower must begin paying principal and interest. If this occurs, the lender must notify the borrower of the date the first payment is due.

  • Planning Tip: The FAQs made clear that borrowers do not make payments while they wait for forgiveness decisions. As long as the borrower submits a loan forgiveness application within 10 months of the Covered Period and the loan is fully forgiven, the borrower will not be responsible for any payments. If, however, the loan is not fully forgiven, the borrower must repay the unforgiven portion over the term of the loan (5 years for loans made on or after June 5, and for loans made before June 5, the 2-year minimum maturity remains in effect unless both the borrower and the lender agree to extend it to 5 years). The borrower is also responsible for paying the accrued interest on any amount not forgiven.
  • Open Items: There are still open questions on what adjustments may be needed if there are FTE reductions and the forgiveness application is submitted before the end of the Covered Period. If the borrower is relying on FTE Reduction Safe Harbor 2, then the borrower uses the borrower’s total FTE as of the earlier of December 31, 2020 and the date the application is submitted. However, if the borrower is relying on FTE Reduction Safe Harbor 1 or the FTE Reduction Exceptions, those are determined as of the end of the Covered Period or on or before December 31, 2020, and we await further guidance, as these are open items at this time.

3. ELIGIBLE PAYROLL COSTS:

  • Paid or Incurred: Borrowers are generally eligible for forgiveness for the payroll costs paid and payroll costs incurred during the 24-week (168-day) or 8-week (56-day) Covered Period (or Alternative Payroll Covered Period) (“payroll costs”). Payroll costs are considered paid on the day that paychecks are distributed or the borrower originates an ACH credit transaction. Payroll costs are considered incurred on the day that the employee’s pay is earned. 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 after the end of the Covered Period (or Alternative Payroll Covered Period). Payroll costs that were incurred before the Covered Period but paid during the Covered Period are eligible for loan forgiveness. Otherwise, payroll costs must be paid during the Covered Period (or Alternative Payroll Covered Period). For each individual employee, the total amount of cash compensation eligible for forgiveness may not exceed an annual salary of $100,000, as prorated for the Covered Period. Count payroll costs that were both paid and incurred only once. Include only payroll costs for employees whose principal place of residence is in the United States.
  • Cash Compensation:
    • For purposes of calculating cash compensation, borrowers should use the gross amount before deduction for taxes, employee benefits payments, and similar payments.
    • All forms of cash compensation paid to employees should be included, such as tips, commissions, bonuses, and hazard pay. It also includes costs for vacation, parental, family, medical, or sick leave (except that qualified sick and family leave wages for which a credit is allowed under FFCRA is excluded), allowances for separation or dismissal, and housing stipends/allowances. Note that forgivable cash compensation per employee is limited to $100,000 on an annualized basis.
  • Group Health Care Benefits: Employer expenses for employee group health care benefits that are paid or incurred by the borrower during the Covered Period (or the Alternative Payroll Covered Period) are payroll costs eligible for loan forgiveness. However, payroll costs do not include expenses for group health care benefits paid by employees (or beneficiaries of the plan) either pre-tax or after tax, such as the employee share of their health care premium. Forgiveness is not provided for expenses for group health benefits accelerated from periods outside the Covered Period (or Alternative Payroll Covered Period). If a borrower has an insured group health plan, insurance premiums paid or incurred during the Covered Period (or Alternative Payroll Covered Period) qualify as “payroll costs,” as long as the premiums are paid during the applicable period or by the next premium due date after the end of the applicable period. Only the portion of the premiums paid by the borrower for coverage during the applicable Covered Period (or Alternative Payroll Covered Period) is included, not any portion paid by employees or beneficiaries or any portion paid for coverage for periods outside the applicable period. Note that there is another rule that applies to owner health insurance. Payments for the provision of group health care benefits, including insurance premiums, include vision and dental benefits.
    • Planning Tip: it appears that pre-paying health care benefits during the covered period will not be allowed to maximize forgiveness.
  • Retirement Benefits. Generally, employer contributions for employee retirement benefits that are paid or incurred by the borrower during the Covered Period (or Alternative Payroll Covered Period) qualify as “payroll costs” eligible for loan forgiveness. The employer contributions for retirement benefits included in the loan forgiveness amount as payroll costs cannot include any retirement contributions deducted from employees’ pay or otherwise paid by employees. Forgiveness is not provided for employer contributions for retirement benefits accelerated from periods outside the Covered Period (or Alternative Payroll Covered Period). We expect further guidance with respect to retirement plan contributions paid during the Covered Period but calculated for periods before the commencement of the Covered Period. Note that there is another rule for the treatment of retirement benefits for owners.
  • Owner Compensation: The amount of compensation of owners who work at their business that is eligible for forgiveness depends on the business type and whether the borrower is using an 8-week or 24-week covered period. In addition to the specific caps based on business types described in the FAQs, the amount of loan forgiveness requested for owner-employees and self-employed individuals’ payroll compensation is capped at $20,833 per individual in total across all businesses in which he or she has an ownership stake. For borrowers that received a PPP loan before June 5, 2020, and elect to use an 8-week covered period, this cap is $15,385. If the owner’s total compensation across businesses that receive a PPP loan exceeds the cap, owners can choose how to allocate the capped amount across different businesses. The FAQs provide examples for C corporations, S corporations, self-employed Schedule C or Schedule F filers, general partners, and LLC owners. Because the amount of owner compensation varies depending on business types, we recommend seeking specific guidance applicable to each borrower’s business type.

4. NONPAYROLL COSTS:

  • In General: Nonpayroll costs eligible for forgiveness consist of: (a) business mortgage interest payments: payments of mortgage interest (not including any prepayment or payment of principal) on any business mortgage obligation on real or personal property incurred before February 15, 2020; (b) business rent or lease payments: business rent or lease payments pursuant to lease agreements for real or personal property in force before February 15, 2020; and (c) business utility payments: business payments for a service for the distribution of electricity, gas, water, telephone, transportation, or internet access for which service began before February 15, 2020. An eligible nonpayroll cost 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. A borrower cannot elect to use the Alternative Payroll Covered Period for nonpayroll costs. Eligible nonpayroll costs cannot exceed 40% of the total forgiveness amount. Count nonpayroll costs that were both paid and incurred only once.
  • Interest: Payments of interest on business mortgages on real or personal property (such as an auto loan) are eligible for loan forgiveness. Interest on unsecured credit is not eligible for loan forgiveness because the loan is not secured by real or personal property. Note that interest on unsecured credit incurred before February 15, 2020, is a permissible use of PPP loan proceeds, but this expense is not eligible for forgiveness. The FAQs also provide that interest payments on a refinanced mortgage loan during the Covered Period are eligible for loan forgiveness if the mortgage loan was on real or personal property that existed prior to February 15, 2020, and is refinanced on or after February 15, 2020.
  • Rent and Leases: See item 5.
  • Utilities: Business utility payments includes business payments for a service for the distribution of electricity, gas, water, telephone, transportation, or internet access for which service began before February 15, 2020. The FAQs provide that: (a) services for the distribution of transportation refers to transportation utility fees assessed by state and local governments and payment of these fees by the borrower is eligible for loan forgiveness; and (b) the entire electricity bill payment is eligible for loan forgiveness (even if charges are invoiced separately), including supply charges, distributions changes, and other charges such as gross receipts taxes.

5. RENTS AND LEASES: Both instructions clarify that rent includes business rent or lease payments for real and personal property during the Covered Period, pursuant to lease agreements in force before February 15, 2020. The FAQs also provide that lease payments made pursuant to a renewed lease during the Covered Period are eligible for loan forgiveness if the lease existed prior to February 15, 2020, and expired on or after February 15, 2020, and is renewed.

6. FORM EZ ELIGIBILITY: A borrower may use the Form EZ if the borrower can check one of the three boxes described in the bulleted list below. All other borrowers must use the SBA Form 3508 or lender equivalent.The three boxes are:

  • Borrower is a self-employed individual, independent contractor, or sole proprietor who had no employees at the time of the PPP loan application and did not include any employee salaries in the computation of average monthly payroll in the Borrower Application Form (SBA Form 2483).
  • Borrower did not reduce annual salary or hourly wages of any employee by more than 25% during the Covered Period or the Alternative Payroll Covered Period compared to the period between January 1, 2020 and March 31, 2020 (for purposes of this statement, “employees” means only those employees that did not receive, during any single period during 2019, wages or salary at an annualized rate of pay in an amount more than $100,000); AND the borrower did not reduce the number of employees or the average paid hours of employees between January 1, 2020 and the end of the Covered Period. (ignoring reductions: (i) that arose from an inability to rehire individuals who were employees on February 15, 2020 if the borrower was unable to hire similarly qualified employees for unfilled positions on or before December 31, 2020; and (ii) in an employee’s hours that the borrower offered to restore and the employee refused).
  • Borrower did not reduce annual salary or hourly wages of any employee by more than 25% during the Covered Period or the Alternative Payroll Covered Period compared to the period between January 1, 2020 and March 31, 2020 (for purposes of this statement, “employees” means only those employees that did not receive, during any single period during 2019, wages or salary at an annualized rate of pay in an amount more than $100,000); AND the borrower was unable to operate during 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 (includes both direct and indirect compliance with COVID-19 requirements and guidance, such as state and local government shutdown orders that are based in part on guidance from the three federal agencies [based on the Interim Final Rule posted June 22, 2020]), related to the maintenance of standards of sanitation, social distancing, or any other work or customer safety requirement related to COVID-19.

7. FORGIVENESS CALCULATION:

  • FORM EZ:Borrowers and other interested parties can use the Form EZ and the Form EZ Instructions to calculate the forgiveness amount, by adding all payroll and nonpayroll costs to calculate the potential forgiveness amount and then adjusting that amount by the payroll cost 60% requirement to arrive at the forgiveness amount. 
  • FORGIVENESS APPLICATION: Borrowers and other interested parties may use the SBA Form 3508 and the SBA Form 3508 Instructions to calculate the amount of forgiveness by adding all payroll and nonpayroll costs to calculate the potential forgiveness amount and then adjusting that amount for full-time equivalency (FTE) and salary/hourly wage reductions and the payroll 60% requirement to arrive at the forgiveness amount.

8. FORGIVENESS REDUCTIONS BASED ON HEAD COUNT, SAFE HARBORS AND REHIRING FORGIVENESS GUIDANCE: There is some guidance in the SBA Form 3508 Instructions and the FAQs on implementation of statutory exemptions from loan forgiveness reduction based on reductions in full-time equivalent employees, including the calculation of the average full-time equivalency (FTE) (40 hour week), the FTE Reduction Safe Harbors and the FTE Reduction Exceptions.

  • FTE Reduction Safe Harbors: There are two separate safe harbors that exempt certain borrowers from any loan forgiveness reduction based on a reduction in FTE employee levels: 
  1. Safe Harbor 1: If the borrower, in good faith, is able to document that it 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 (includes both direct and indirect compliance with COVID requirements and guidance, such as state and local government shutdown orders that are based in part on guidance from the three federal agencies [based on the Interim Final Rule posted June 22, 2020]), related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID-19.
  2. Safe Harbor 2: If both of the following conditions are met: (1) the borrower reduced its FTE employee level in the period beginning February 15, 2020, and ending April 26, 2020; and (2) the borrower then restored its FTE employee levels as of the earlier of December 31, 2020 or the date of the forgiveness application to its FTE employee levels in the borrower’s pay period that included February 15, 2020.
  • FTE Reduction Exceptions: Any FTE reductions in the following cases do not reduce the borrower’s loan forgiveness: the FTE of (1) any positions for which the borrower made a good-faith, written offer to rehire an individual who was an employee on February 15, 2020 and the borrower was unable to hire similarly qualified employees for unfilled positions on or before December 31, 2020; (2) any positions for which the borrower made a good-faith, written offer to restore any reduction in hours, at the same salary or wages, during the Covered Period (or the Alternative Payroll Covered Period) and the employee rejected the offer, and (3) 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. In all of these cases, include the FTE on the form only if the position was not filled by a new employee.
    • Employee Declines the Offer to Rehire: The FAQs emphasize that the borrower is required to inform the applicable state unemployment insurance office of any employee’s rejected rehire offer within 30 days of the employee’s rejection of the offer. The documents that the borrower should maintain to show compliance with this exemption include the written offer to rehire an individual, a written record of the offer’s rejection, and a written record of efforts to hire a similarly qualified individual.
    • Include Employees Who Made More Than $100,000: The FTE Reduction Exceptions apply to all employees, not just those who would be listed in Table 1 of the SBA Form 3508 or lender equivalent. A borrower must include employees who made more than $100,000 in the FTE Reduction Exception line in Table 1 of the PPP Schedule A.

9. FORGIVENESS REDUCTIONS BASED ON SALARY/HOURLY WAGES: The SBA Form 3508 Instructions and the FAQs provide some direction on implementation of the statutory requirement concerning reductions in employee salary and wages. The actual amount of loan forgiveness depends on whether the salary or hourly wages of certain employees (those employees whose salaries or hourly wages were reduced by more than 25% during the Covered Period or the Alternative Payroll Covered Period) was less than during the period from January 1, 2020 to March 31, 2020. If the borrower restored salary/hourly wage levels, the borrower may be eligible for elimination of the salary/hourly wage reduction amount. 

  • Examples of How to Calculate the Reduction in Loan Forgiveness Amount Arising From Reductions in Employee Salary or Hourly Wage: Certain pay reductions during the Covered Period or the Alternative Payroll Covered Period may reduce the amount of loan forgiveness a borrower will receive. If the salary or hourly wage of a covered employee is reduced by more than 25% during the Covered Period or the Alternative Payroll Covered Period, the portion in excess of 25% reduces the eligible forgiveness amount unless the borrower satisfies the Salary/Hourly Wage Reduction Safe Harbor (as described in SBA Form 3508 or lender equivalent). The FAQs contain three examples and assume that each employee is a “covered employee.”
  • Only Salaries and Wages: For purposes of calculating the loan forgiveness reduction required for salary/hourly wage reductions in excess of 25% for certain employees, the borrower should only take into account decreases in salaries or wages.

10. DOCUMENTS: The forgiveness applications issued by the SBA require that they be accompanied with detailed documentation and that additional documents be retained by the borrower. If the lender identifies errors in the borrower’s calculations or material lack of substantiation in the borrower’s supporting documents in the loan forgiveness applications, the lender is to work with the borrower to remedy the issue. Borrowers should take the time to make sure they have both the accompanying documentation and the documents to be retained available at the time of the submission. A borrower should not put off getting the “retained” documents together. The SBA has a right to request that information as part of its review. If the borrower does not promptly provide documents, this may cause delays and possibly denial of forgiveness. In addition, certain documents are required for appeals of certain SBA decisions. See “Key Considerations for PPP Documentation” and “A Guide to the SBA PPP Loan Forgiveness Review Process.”

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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