The Coronavirus Aid, Relief, and Economic Security Act (the "Act") places restrictions on how borrowers can use loan proceeds from the Paycheck Protection Program ("PPP"”) and also provides for forgiveness of up to the full principal amount of a PPP loan and any interest accrued thereon, for documented, qualifying expenditures made during the specified covered period. It sets forth the qualifying expenditures, the covered period during which such expenditures must be made, the calculation to be used for determining a borrower’s forgiveness amount and certain actions and expenditures that can reduce the forgiveness amount.
This summary of the forgiveness feature of the PPP loans is based
upon a review of the Act, the SBA Interim Final Rule with respect to the PPP and other current guidance from the U.S. Department of Treasury and other sources. Additional guidance on these topics is expected to be provided by the SBA, which may alter the below summary or, at a minimum, provide additional clarity with respect to the topics addressed herein.
Usage of PPP Loan Proceeds
The proceeds of a PPP loan are to be used for:
- Payroll Costs (as defined below);
- Costs related to the continuation of group healthcare benefits during periods of paid sick, medical, or family leave, and insurance premiums;
- Mortgage interest payments (but not mortgage prepayments or principal payments);
- Rent payments;
- Utility payments;
- Interest payments on any other debt obligations that were incurred before February 15, 2020; and/or
- Refinancing an SBA EIDL loan made between January 31, 2020 and April 3, 2020.
Limitations on the Usage of PPP Loan Proceeds
At least 75% of the PPP loan proceeds must be used for Payroll Costs. For purposes of determining the percentage of use of proceeds for Payroll Costs, the amount of any EIDL refinanced will be included.
What happens if PPP loan funds are misused?
If PPP funds are used for unauthorized purposes, the borrower will have to repay those amounts. If a borrower knowingly uses the funds for unauthorized purposes, it will be subject to additional
liability such as charges for fraud.
Borrowers will not be responsible for any PPP loan payment if (i) the borrower uses all of the loan proceeds for forgivable expenditure purposes described below, including without limitation, Payroll Costs during the covered period, and (ii) employee and compensation levels are maintained.
- Cash compensation (salary, wages, commissions or similar compensation, and cash tips or the equivalent);
- Benefits (vacation, parental/family/medical or sick leave, severance costs, group healthcare coverage premiums and retirement); and
- State and local taxes assessed on employee compensation.
The Act expressly excludes the below items from Payroll Cost:
- Compensation to employees whose principal place of residence is outside the U.S.;
- Cash compensation in excess of an annual salary of $100,000;
- Federal employment taxes imposed or withheld between February 15, 2020 and June 30, 2020, including the employee’s and employer’s share of FICA and Railroad Retirement Act taxes, and income taxes required to be withheld from employees;
- Qualified sick and family leave wages for which a tax credit is allowed under the Families First Coronavirus Response Act.
The definition of "Payroll Costs" in the Act excludes "taxes imposed or withheld under Chapters 21, 22, or 24 of the Internal Revenue Code of 1986 during the covered period," defined as February 15, 2020 to June 30, 2020. However, pursuant to
additional guidance provided by the SBA in the FAQs posted on the U.S. Treasury’s website on April 10, 2020, the SBA interpreted the statutory exclusion to mean that Payroll Costs are calculated on a gross basis without regard to (i.e., not including subtractions or additions based on) federal taxes imposed or withheld, such as the employee’s and employer’s share of FICA and income taxes required to be withheld from employees. The SBA articulated that, unlike employer-side payroll taxes, employee-side taxes are ordinarily expressed as a reduction in employee take-home pay; their exclusion from the definition of Payroll Costs means Payroll Costs should not be reduced based on taxes imposed on the employee or withheld from employee wages. As a result, Payroll Costs are not reduced by taxes imposed on an employee and required to be withheld by the employer,
but Payroll Costs do not include the employer’s share of payroll tax. For example, an employee who earned $4,000 per month in gross wages, from which $500 in federal taxes was withheld, would count as $4,000 in Payroll Costs. The employee would receive $3,500, and $500 would be paid to the federal government. However, the employer-side federal payroll taxes imposed on the $4,000 in wages are excluded from Payroll Costs under the statute.
The Act identifies the expenditures listed below (the "Other Qualifying Costs"), which can be used to calculate a borrower’s forgiveness amount. Note that not more than 25% of the forgiveness amount can be attributed to these costs.
- Covered mortgage obligations (any indebtedness or debt instrument incurred in the ordinary course of business that (i) is a liability of the borrower, (ii) is a mortgage on real or personal property, and (iii) was incurred prior to February 15, 2020). Note that this cannot include any prepayment of or payment of principal on a covered mortgage obligation;
- Covered rent obligations (rent paid pursuant to a lease agreement with an effective date prior to February 15, 2020); and
- Covered utility payments (payments for electricity, gas or water, for which service began prior to February 15, 2020).
The relevant time period for purposes of calculating a borrower’s forgiveness amount is the eight-week period beginning on the date the lender makes the first disbursement of the PPP loan to the borrower (the "Covered Period"). The lender must make the first disbursement of the loan no later than 10 calendar days from the date of loan approval. In order to be included in the calculation of the forgiveness amount, the Payroll Costs and Other Qualifying Costs must be paid during the Covered Period.
Limits on Forgiveness
The Act sets forth certain actions that will reduce the forgiveness amount if taken by the borrower:
Reduction in Number of Employees – Multiply the forgiveness amount by the amount that is equal to the average number of full-time employees per month employed by the borrower during the Covered Period divided by either (i) the average number of full-time employees per month employed by the borrower during the period from February 15, 2019 to June 30, 2019, or (ii) the average number of full-time employees per month employed by the borrower during the period from January 1, 2020 to February 29, 2020¹.
Reduction in Salary/Wages – Reduce the forgiveness amount by the amount of any reduction in an employee’s total salary or wages (who has an annualized salary during the Covered Period of less than $100,000) in excess of 25% of the total salary or wages paid to that employee in the most recent full quarter during which the employee was employed prior to the Covered Period.
Exemption – These adjustments to the forgiveness amount will not apply if a reduction in the number of employees and/or salary/wages was made between February 15, 2020 and April 27, 2020, and if the borrower rehires the terminated employees and eliminates any salary/wage reductions in excess of 25% prior to June 30, 2020².
Application/Documentation/Request for Forgiveness
The Act requires borrowers to submit certain documentation in order to apply for loan forgiveness:
- Documentation verifying the number of full-time employees on payroll and pay rates for a certain time period³ including payroll tax filings reported to the IRS and state income, payroll and unemployment insurance filings;
- Documentation that verifies payments made with respect to the Other Qualifying Costs; and
- An authorized representative of the borrower must certify that the documentation is true and correct and that the forgiveness amount requested was used to retain employees and make payments for Other Qualifying Costs.
The SBA regulations indicate that lenders will not need to conduct any verification if the borrower submits this documentation and certification in support of a request for loan forgiveness.
¹The borrower has the option of choosing between these two different time periods.
²Based on our review of the Act and current guidance, it is unclear if the borrower must rehire the same employees who were terminated or if the borrower can hire new employees to replace those terminated employees.
³The relevant time period is the period the borrower chose in
Updated 04/30/2020 11:00 a.m. ET
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