The Small Business Administration Releases Paycheck Protection Program Loan Forgiveness Application and Instructions

Corporate & Capital Markets

The Coronavirus Aid, Relief and Economic Security Act (the “Act”) provides for forgiveness of up to the full principal amount of a Paycheck Protection Program (“PPP”) loan, for documented, qualifying expenditures made or incurred during the eight-week period following receipt of PPP loan proceeds (subject to the Alternative Payroll Covered Period described below). On May 15, the SBA released the form forgiveness application (the “Application”) and related instructions, which include new information and clarify some previous guidance. The Application and instructions are not part of an official rule, however, and the Small Business Administration ("SBA") and U.S. Department of Treasury indicated that additional regulations and guidance for borrowers and lenders are forthcoming.

The Application includes a detailed calculation form and worksheets that a borrower must complete to determine its forgiveness amount.

  • Maximum Forgiveness Amount. The Application clarifies that the maximum forgiveness amount is limited to the principal amount of the loan; any interest accrued must be paid and is not eligible for forgiveness.
  • Covered Period and Alternative Payroll Covered Period. The relevant time period for purposes of calculating a borrower’s forgiveness amount is the eight-week period following the loan disbursement date (the “Covered Period”). The Application permits borrowers that use biweekly or more frequent pay periods to calculate eligible payroll expenditures using the eight-week period beginning on the first day of the first pay period following the loan disbursement date (the “Alternative Payroll Covered Period”). If the Borrower elects to use the Alternative Payroll Covered Period, it must consistently apply that throughout the Application, but the Borrower must apply the Covered Period wherever the Application references only the Covered Period. It is not clear based on the Application and instructions whether a Borrower that uses several different pay periods can use the Alternative Payroll Covered Period for all employees or only those employees on the more frequent pay period schedule.
  • Eligible Expenditures Paid vs. Incurred During the Covered Period (or Alternative Payroll Covered Period). The Application allows borrowers to include eligible payroll and non-payroll expenditures paid or incurred during the Covered Period (or Alternative Payroll Covered Period only with respect to payroll expenditures) when calculating the forgiveness amount. This suggests that qualifying expenditures outside of the eight-week period are eligible for forgiveness if they were incurred during the applicable period but paid after the end of the applicable period (but before the next scheduled payment or payroll date) or if they were incurred prior to the applicable period but paid some time during the applicable period. Payroll costs are considered paid on the day that paychecks are distributed or on the day 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. Otherwise, payroll costs must be paid during the Covered Period or Alternative Payroll Covered Period. The Application explicitly excludes prepayments of interest on qualifying mortgage expenditures that are incurred or paid outside of the Covered Period.
  • Eligible Payroll Expenditures. Borrowers are generally eligible for forgiveness for payroll costs (cash compensation, vacation, leave and healthcare benefits, and state and local taxes assessed on employee compensation) paid and incurred during the Covered Period or Alternative Payroll Covered Period. The Application clarifies that the cap on forgivable cash compensation per employee is $15,385 but non-cash compensation in excess of that amount is forgivable. The Application does not require special treatment for bonuses (or any other nonrecurring payments) in the calculation of cash compensation. The Act expressly excludes certain expenditures from forgiveness: 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, and qualified sick and family leave wages for which a tax credit is allowed under the Families First Coronavirus Response Act.
  • Eligible Non-Payroll Expenditures. Certain non-payroll expenditures (mortgage interest, rent and utility payments) are eligible for forgiveness, so long as the expenditures are paid or incurred during the Covered Period and the expenditures are made pursuant to agreements that were in effect prior to February 15, 2020. Borrowers cannot use the Alternative Payroll Covered Period to calculate forgivable non-payroll expenditures. The Application does not provide any clarity on the types of utility payments that are eligible for forgiveness but does clarify that mortgage interest and rent payments can include those made for both real and personal property, which would indicate that lease payments for personal property (e.g. equipment leases) can be included in the forgiveness amount. However, the Application does not provide clarity as to whether mortgage obligations also include those secured by real or personal property where the mortgage proceeds were used for something other than purchasing the real or personal property. Note that these non-payroll expenditures cannot exceed 25% of the total forgiveness amount.
  • Forgiveness Limitations. The application adds clarity around some of the limitations on the forgiveness amount based on reductions in salary or wages and/or the average number of full-time equivalent employees during the Covered Period. The Application includes detailed work sheets that the Borrower must use to calculate these amounts. Note that any reductions in salary or wages are first applied to the forgiveness amount dollar for dollar, and the forgiveness amount is further reduced by any reduction in the average number of employees. To avoid a reduction in the forgiveness amount, the borrower must show that (i) the average number of full-time equivalent employees during the Covered Period or Alternative Payroll Covered Period was not less than that during the chosen reference period (February 15, 2019 to June 30, 2019 or January 1, 2020 to February 29, 2020) and (ii) the salary or hourly wages of employees during the Covered Period or Alternative Payroll Covered Period was not less than that during the period from January 1, 2020 to March 31, 2020. Note that if a borrower made a written offer to rehire an employee during the applicable period, an employee was fired for cause or an employee voluntarily resigned or requested a reduction in hours, those employees are not to be included in the formula used to calculate the average number of employees. Because of that, it is extremely important that borrowers maintain written records to document such circumstances. In addition to these exceptions, there are safe harbors for Borrowers that correct reductions in number of employees and wages or salary. A safe harbor is available to Borrowers that reduced the average number of employees between February 15, 2020 and April 26, 2020 and restore the number of employees by June 30, 2020 to the same level as that during the pay period that included February 15, 2020. Similarly, there is a safe harbor for Borrowers that reduced salaries or wages of employees making less than $100,000 from February 15, 2020 to April 26, 2020 if those reductions are eliminated before June 30, 2020.

Borrowers must indicate whether the original principal amount of a loan or the aggregate principal amount of affiliated loans is $2 million or greater.

The Application requires Borrowers to disclose the original principal amount of the loan received and check a box if the Borrower and its affiliates received loans, that in the aggregate, had an original principal amount in excess of $2 million. This appears to clarify that the intent is to review not only individual loans in excess of $2 million but also groups of affiliated loans that are in excess of $2 million. This indicates that returning a portion of the loan (or loans) in an effort to lower the outstanding principal amount under the $2 million threshold will not avoid review.

Borrowers must submit certain supporting documentation with the Application and retain records for six years.

Borrowers must submit certain documentation in addition to a completed Application to its PPP lender in order to verify (i) qualifying expenditures made during the Covered Period (or Alternative Payroll Covered Period, if applicable), (ii) the average number of employees on payroll during specified periods in 2019 and 2020, and (iii) the existence of contracts prior to February 15, 2020 pursuant to which qualifying non-payroll expenditures were made and included in the forgiveness amount calculation. The Application identifies specific supporting documentation that must be submitted but note that lenders may require additional documentation and records as part of the forgiveness application process. Borrowers must maintain the documentation submitted with the Application and certain employee records for six years after the date the loan is forgiven or repaid in full. During that six-year period, the Borrower must permit the SBA to inspect those records upon request. See page 10 of the Application for a detailed list of the documentation that Borrowers are required to submit and maintain.

The Application requires a number of representations and certifications.

An authorized representative of the Borrower is required to make certain representations and certifications to certify that the Borrower was eligible to for a PPP loan, the loan proceeds were used properly and the information and calculations included in the completed Application are accurate. This is consistent with the regulations that indicate that lenders will not need to conduct independent verification of information and documentation submitted in connection with a forgiveness application if the Borrower makes certain required certifications. The last paragraph of the Application states that the Application “will be evaluated in accordance with the PPP regulations and guidance issued by SBA through the date of this application,” which may have implications for the temporal scope of the necessity review.

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