On May 15, 2020, the Small Business Administration (SBA) released the long-awaited Paycheck Protection Program (PPP) Loan Forgiveness Application. Congress established the PPP as part of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), and the PPP is a key pillar in the Government’s response to the economic consequences of the COVID-19 pandemic. The PPP allows eligible businesses to borrow up to ten weeks of payroll costs on favorable terms from private lenders, with the balance of the loan guaranteed by the SBA.
A key feature of the PPP is the opportunity for qualifying borrowers to have the loan balance forgiven provided the borrower’s use of the disbursed funds satisfies certain criteria. For weeks, lenders and borrowers alike have sought clarity on the precise contours of loan forgiveness, including calculating the “covered period” for the loan, the treatment of certain non-payroll expenses, the SBA’s threshold for auditing PPP disbursements, record-keeping requirements, and the documents that will be required in submitting an application for forgiveness.
The loan application provides significant clarity on many of these questions, which we discuss in detail below. Read in combination with existing guidance from the SBA, the application will provide borrowers with sufficient information to begin preparing to apply for forgiveness.
I. The PPP and Prior Guidance on Loan Forgiveness
From the outset, both Congress and the SBA made clear that loan forgiveness was available for PPP disbursements, if the borrowed funds were used by the borrower for certain eligible expenses. The SBA’s Frequently Asked Questions (FAQ) on the PPP allows borrowers to seek forgiveness for all payroll costs paid over eight weeks beginning on the date the SBA lender made the first disbursement on the loan. The forgiven amount may include all federal payroll taxes, applies to all full-time and part-time employees, and if a borrower laid off employees during the eight-week period, the borrower may still receive forgiveness for reduced payroll costs if the borrower laid off a full-time equivalent employee, made an offer to re-hire the employee, and the offer was declined.
The FAQ also indicates that the SBA will individually review all applications for forgiveness where the loan amount exceeded $2 million. Importantly, the FAQ makes clear that SBA review of loan files will not affect the SBA’s guarantee of the loan, provided the lender complied with its obligation to perform a “good faith” review of the borrower’s documentation for the loan, including calculations and supporting documents regarding average monthly payroll cost.
II. The PPP Loan Forgiveness Application
The PPA Loan Forgiveness Application is comprised of four sections: (1) the PPP Loan Forgiveness Calculation Form, (2) PPP Schedule A, (3) the PPP Schedule A Worksheet, and (4) the optional PPP Borrower Demographic Information Form. The Borrower must fill out the application and submit it to the lender that provided the PPP loan.
The application and its accompanying instructions clarify a number of outstanding issues regarding PPP loan forgiveness. These include:
Alternative Payroll Covered Periods
Many PPP borrowers offer biweekly or more frequent pay schedules that do not fit neatly into the SBA’s Covered Period, the eight weeks beginning on the date of loan disbursement. For such borrowers, the application indicates that in applying for loan forgiveness, the borrower may use an Alternative Payroll Covered Period, which is an eight-week period that begins with the first day of the first payroll period following the disbursement of the loan.
Eligible Non-Payroll Expenses
The application confirms prior SBA guidance that a borrower must use at least seventy-five percent of the PPP loan to support payroll costs to be eligible for forgiveness. These expenses must be paid or incurred during the eight weeks following the disbursement of the loan. Importantly, such expenses cannot be incurred during the “Alternative Payroll Covered Period” discussed above. In other words, while a business may seek forgiveness for payroll expenses that began, for example, one week after the funds were disbursed, and continued for eight weeks, non-payroll expenses must be incurred in the eight-week period beginning on the date that the loan was disbursed.
Eligible non-payroll expenses can include business mortgage interest payments, rent or lease payments for real or personal property, and business utility payments. To be eligible for forgiveness, such payments must be made during the eight-week Covered Period, or incurred during the Covered Period, and paid on or before the next billing date.
Reductions in Loan Forgiveness Due to Terminations or Layoffs
In applying for a PPP loan, borrowers are required to calculate the eligible amount, by averaging payroll costs for the past calendar year, through February 15, 2020. The PPP Schedule A and Schedule A worksheet require borrowers to provide all information related to compensation for all employees who were employed at any point during the Covered Period or Alternative Payroll Covered Period. Additionally, the Borrower must calculate the average full-time equivalency (FTE) during the Covered Period or Alternative Payroll Covered Period. The Borrower must calculate the average FTE because the actual loan forgiveness amount may be reduced depending on whether the Borrower’s average weekly number of FTE employees during the Covered Period was less than during the Borrower’s chosen reference period, due to layoffs, terminations, or an employee’s resignation.
The application also provides an “FTE Reduction Safe Harbor”. If an employer reduced the number of FTE employees between February 15, 2020 and April 26, 2020, but ultimately restores its level of FTE employees by June 30, 2020, the loan forgiveness amount will not be affected by the FTE reduction.
Supporting Documentation Requirements
The application requires borrowers seeking forgiveness to provide the lender with a number of documents. These include (1) bank statements or statements from a third-party payroll provider for the periods that overlap with the Covered Period or Alternative Payroll Covered Period; (2) payroll tax filings reported; (3) state quarterly business and individual wage reporting and unemployment insurance tax filings reported or to be reported; and (4) payment receipts, cancelled checks, or account statements that document the amount of employer contributions to employee health insurance and retirement plans that were included in the forgiveness amount.
Borrowers are also required to document (1) the average number of FTE employees on payroll per month, from February 15, 2019 to June 30, 2019; and (2) the average number of FTE employees on payroll per month, from January 1, 2020 through February 29, 2020. As to the latter requirement, if an employer is a seasonal business, an employer may substitute the average number of FTE employees for any consecutive twelve-week period between May 1, 2019 and September 15, 2019. Borrowers must also document the existence of any business mortgage payments, business rent or lease payments, and businesses utility payments, by providing statements or receipts from February, 2020, and from any payments made during the Covered Period that are included in the forgiveness amount.
Record Retention Requirements
Borrowers are also required to retain additional records. These include (1) documentation supporting the listing of each individual employee identified in the forgiveness application, (2) documentation of any employee job offers, refusals, firings for cause, voluntary resignations, or written requests for a reduced work schedule, and (3) documentation supporting the FTE Reduction Safe Harbor. Borrowers must retain these records, along with all materials submitted to the SBA, for six years from the date the loan is either forgiven, or paid in full.
Determinations of Ineligibility
The application also shines some light on how the SBA will proceed if a borrower is determined to be ineligible for loan forgiveness. The application reflects that in that event, the SBA “may direct a lender” to disapprove the request for forgiveness.
III. Key Takeaways
While the application does provide much-needed clarity on the loan forgiveness process, many questions remain unanswered. In particular, lenders continue to raise concerns about how the SBA will approach the “good faith” review standard for loans that are determined to be ineligible for forgiveness due to borrower error.
For borrowers, the application provides a timely notice of the need to maintain comprehensive documentation regarding disbursed PPP loans. Borrowers should also view the application as a reminder that while loan forgiveness is possible, it is not guaranteed; and borrowers should carefully review their original loan application materials while preparing the application for forgiveness.