May 29, 2020
Applications for Loan Forgiveness under the Paycheck Protection Program
By now, many borrowers have successfully applied for and received funding of a PPP loan. In order to obtain full or partial forgiveness of that loan, each borrower will need to make application to its lender and be prepared to provide certain documentation supporting that application. This alert offers a brief outline of the PPP loan forgiveness process. We also address the changing position of the SBA on borrower liquidity and the availability of safe harbors for borrowers who (i) returned PPP loan funds prior to May 18, 2020 and/or (ii) received PPP loans in an initial principal amount less than $2 million. The latest guidance also provides a limited safe harbor for borrowers that received a PPP loan greater than $2 million and return the loan proceeds following a demand by SBA, even if such return occurs after May 18, 2020.
Eligibility for Forgiveness. A borrower is eligible for forgiveness of a PPP loan in an amount equal to the sum of the following costs incurred and payments made during the 8-week period beginning with the loan disbursement date (the “Covered Period”) or the eight week period that begins on the first day of the first pay period following the loan disbursement date (the "Alternative Payroll Covered Period") (the term "Covered Period," as used herein, shall mean either the "Covered Period" or the "Alternative Covered Period"):
- Payroll Costs (but not including federal withholding taxes, such as an employee’s and employer’s share of FICA and income taxes required to be withheld from employees);
- Any payment of interest on any mortgage obligation in effect on February 15, 2020, to the extent they are deductible on Form 1040 Schedule C (business mortgage payments). No prepayment of or payment of principal should be included;
- Any payment on any covered rent obligation or lease of personal property pursuant to a lease in effect on February 15, 2020, to the extent they are deductible on Form 1040 Schedule C (business rent payments);
- Any covered utility payment under service agreements in force before February 15, 2020, to the extent they are deductible on Form 1040 Schedule C (business utility payments).
NOTE: The sum of items 2, 3 and 4 above may not exceed 25% percent of the amount to be forgiven.
Definition of Payroll Costs. The term “payroll costs” means the sum of payments of any compensation with respect to employees that is a:
Salary, wage, commission, or similar compensation and any cash tip or equivalent, up to $100,000 of annualized pay per employee (This equates to a maximum of $15,385 per employee for the Covered Period);
Payment for vacation, parental, family, medical, or sick leave;
Allowance for dismissal or separation;
Payment required for the provisions of group health care benefits, including insurance premiums;
Payment of any retirement benefit; or
Payment of State or local tax assessed on the compensation of employees; and
Exclusion from Payroll Costs. The term “payroll costs” expressly excludes the following:
The compensation of an individual employee in excess of an annual salary of $100,000, as prorated for the 8-week Covered Period;
Taxes imposed or withheld under chapters 21,22, or 24 of the Internal Revenue Code of 1986 during the 8-week Covered Period;
Any compensation of an employee whose principal place of residence is outside of the United States;
Qualified sick leave wages for which a credit is allowed under section 7001 of the Families First Coronavirus Response Act (FFCRA). Pursuant to FFCRA a covered employer is required to provide either (i) two weeks of paid sick leave (up to 80 hours) at the employee’s regular rate for an employee unable to work due to quarantine and/or experiencing COVID-19 symptoms and seeking medical diagnosis or (ii) two weeks of paid sick leave at two-thirds the employee’s regular rate because the employee is unable to work because of a bona fide need to care for an individual subject to quarantine or to care for a child whose school or child care provider is closed or unavailable for reasons related to COVID-19. A covered employer will qualify for a dollar for dollar reimbursement through tax credits for all qualifying wages paid under FFCRA ; or
Qualified family leave wages for which a credit is allowed under section 7003 of FFCRA. Pursuant to FFCRA, a covered employer must provide to employees that it has employed for at least 30 days, up to an additional 10 weeks of paid expanded family and medical leave at two-thirds the employee’s regular rate of pay where an employee is unable to work due to a bona fide need for leave to care for a child whose school or child care provider is close or unavailable for reasons related to COVID-19. A covered employer will qualify for a dollar for dollar reimbursement through tax credits for all qualifying wages paid under FFCRA.
Reduction in Forgiveness Related to Salary or Workforce Reductions. The forgivable amount may be reduced if, during the period beginning on February 15, 2020 and ending on the date which is 30 days after the date of enactment of the CARES Act, the following reductions apply to the borrower’s workforce:
There is a reduction, as compared to February 15, 2020, in the number of full-time equivalent employees;
There is a reduction, as compared to February 15, 2020, greater than 25% in the salary or wages of any employee(s) making less than $100,000 on an annualized basis in 2019.
NOTE: If, not later than June 30, 2020, the borrower has eliminated the reduction in the number of full-time equivalent employees and the reduction in salary or wages of such employees, then the amount of loan forgiveness shall be determined without regard to a reduction in the number of full-time equivalent employees or a reduction in the salary of such employees.
Calculation of Reduction Based Upon Reduction in Number of Employees. The employer should multiply the amount of the total loan forgiveness by a fraction. The numerator of the fraction is the average number of full-time equivalent employees of the borrower during the 8-week Covered Period. The denominator is either:
The average number of full-time equivalent employees between February 15, 2019 and June 30, 2019 (“Base Period One”); or
The average number of full-time equivalent employees between January 1, 2020 and February 29, 2020 (“Base Period Two”).
If the borrower is deemed a “seasonal employer” by the SBA, then the borrower must use Base Period One (or an alternative period from May 1, 2019 to September 15, 2019, as established by Interim Final Rule issued April 27, 2020), as the denominator. All other borrowers may choose either Base Period One or Base Period Two.
Elimination of Reduction through Rehiring and Reinstatement of Pay prior to June 30, 2020. Reductions in full-time equivalent employment or pay that occur between February 15, 2020 and April 26, 2020 can be “cured”, if by June 30, 2020, the borrower eliminates the reduction in full-time equivalent employees or the reduction in wages, as applicable. There is no requirement that the borrower rehire the same employees.
Documentation to be Submitted to Lender. The borrower seeking loan forgiveness shall submit to its lender an application which shall include:
Documentation verifying the number of full-time equivalent employees on payroll and payrates for the Covered Period and either Base Period One or Base Period Two, as applicable, including:
Payroll tax filings reported to the Internal Revenue Service, including Form 941; and
State income, payroll and unemployment insurance filings, including state quarterly wage unemployment tax reporting forms or equivalent payroll processor records that best correspond to the covered period (with evidence of any retirement and health insurance contributions).
Documentation, including cancelled checks, payment receipts, transcripts of accounts, or other documents verifying payments on covered mortgage obligations, covered lease obligations and covered utility services
Certification from a representative of the borrower, who is authorized to make such certifications, that:
The documentation presented is true and correct; and
The amount for which forgiveness is requested was used to retain employees, make interest payments on a covered mortgage obligation, make payments on a covered rent obligation, or make covered utility payments; and
Any other documentation the Administrator of the SBA determines to be necessary
Maximum Forgivable Amount. The amount of forgiveness may not exceed the principal amount of the loan together with interest thereon.
Time for Decision. Not later than 60 days after the date on which a lender receives an application for loan forgiveness, the lender shall issue a decision on an application.
Tax Treatment. For purposes of the Internal Revenue Code of 1986, any amount which would be includible in gross income of the borrower by reason of forgiveness shall be excluded from gross income.
Borrowers with other Sources of Liquidity may be denied Forgiveness. In recent guidance, the SBA questioned whether large companies with adequate sources of liquidity to support the ongoing business are truly eligible for a PPP loan. In an April 23, 2020 supplement to its Frequently Asked Questions (FAQs) guidance, the SBA answered the following question:
31. Question: Do businesses owned by large companies with adequate sources of liquidity to support the business’s ongoing operations qualify for a PPP loan?
Answer: In addition to reviewing applicable affiliation rules to determine eligibility, all borrowers must assess their economic need for a PPP loan under the standard established by the CARES Act and the PPP regulations at the time of the loan application. Although the CARES Act suspends the ordinary requirement that borrowers must be unable to obtain credit elsewhere (as defined in section 3(h) of the Small Business Act), borrowers still must certify in good faith that their PPP loan request is necessary. Specifically, before submitting a PPP application, all borrowers should review carefully the required certification that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” Borrowers must make this certification in good faith, taking into account their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business. For example, it is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith, and such a company should be prepared to demonstrate to the SBA, upon request, the basis for its certification.
Lenders may rely on a borrower’s certification regarding the necessity of the loan request. Any borrower that applied for a PPP loan prior to the issuance of this guidance and repays the loan in full by May 7, 2020 will be deemed by the SBA to have made the required certification in good faith.
NOTE: The safe harbor created by the above guidance was extended through May 14, 2020 and is referenced in Question 43 and the answer thereto, published on May 5, 2020. The safe harbor was further extended through May 18, 2020 and is referenced in Question 47 and the answer thereto, published on May 13, 2020.
The SBA made clear that the scope of its Question 31 answer also extends to private companies when, on April 28, 2020, it amended the FAQs to include the following:
37. Question: Do businesses owned by private companies with adequate sources of liquidity to support the business’s ongoing operations qualify for a PPP loan?
Answer: See response to FAQ #31.
Treasury Secretary Mnuchin has also publicly stated that all PPP loans in excess of $2 million dollars will receive a full audit before the borrower’s application for forgiveness is approved. If it is determined that the borrower made an improper certification regarding the need for the PPP loan, forgiveness may be denied and the borrower may be required to immediately return the proceeds of the PPP loan.
Safe Harbor as to Certification of Necessity for Loans under $2 million. On May 15, 2020 the SBA, in consultation with the Department of the Treasury, further clarified the safe harbor provisions first set forth in questions 31, 37 and 43 of the FAQ and created a new safe harbor for PPP loans with an original principal amount of less than $2 million. The full text of the question and answer set forth at #46 of the FAQ is set forth below:
46. Question:How will SBA review borrowers’ required good-faith certification concerning the necessity of their loan request?
Answer: When submitting a PPP application, all borrowers must certify in good faith that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” SBA, in consultation with the Department of the Treasury, has determined that the following safe harbor will apply to SBA’s review of PPP loans with respect to this issue: Any borrower that, together with its affiliates, received PPP loans with an original principal amount of less than $2 million will be deemed to have made the required certification concerning the necessity of the loan request in good faith.
SBA has determined that this safe harbor is appropriate because borrowers with loans below this threshold are generally less likely to have had access to adequate sources of liquidity in the current economic environment than borrowers that obtained larger loans. This safe harbor will also promote economic certainty as PPP borrowers with more limited resources endeavor to retain and rehire employees. In addition, given the large volume of PPP loans, this approach will enable SBA to conserve its finite audit resources and focus its reviews on larger loans, where the compliance effort may yield higher returns.
Importantly, borrowers with loans greater than $2 million that do not satisfy this safe harbor may still have an adequate basis for making the required good-faith certification, based on their individual circumstances in light of the language of the certification and SBA guidance. SBA has previously stated that all PPP loans in excess of $2 million, and other PPP loans as appropriate, will be subject to review by SBA for compliance with program requirements set forth in the PPP Interim Final Rules and in the Borrower Application Form. If SBA determines in the course of its review that a borrower lacked an adequate basis for the required certification concerning the necessity of the loan request, SBA will seek repayment of the outstanding PPP loan balance and will inform the lender that the borrower is not eligible for loan forgiveness. If the borrower repays the loan after receiving notification from SBA, SBA will not pursue administrative enforcement or referrals to other agencies based on its determination with respect to the certification concerning necessity of the loan request. SBA’s determination concerning the certification regarding the necessity of the loan request will not affect SBA’s loan guarantee.
What if an Offer of Rehire is Declined by Employee? On May 3, 2020, the SBA addressed this situation when it published the following revision to its FAQ:
40. Question: Will a borrower’s PPP loan forgiveness amount (pursuant to section 1106 of the CARES Act and SBA’s implementing rules and guidance) be reduced if the borrower laid off an employee, offered to rehire the same employee, but the employee declined the offer?
Answer: No. As an exercise of the Administrator’s and the Secretary’s authority under Section 1106(d)(6) of the CARES Act to prescribe regulations granting de minimus exemptions from the Act’s limits on loan forgiveness, SBA and Treasury intend to issue an interim final rule excluding laid-off employees whom the borrower offered to rehire (for the same salary/wages and same number of hours) from the CARES Act’s loan forgiveness reduction calculation. The interim final rule will specify that, to qualify for this exception, the borrower must have made a good faith, written offer of rehire, and the employee’s rejection of that offer must be documented by the borrower. Employees and employers should be aware that employees who reject offers of re-employment may forfeit eligibility for continued unemployment compensation.
A Seasonal Employer may Elect an Alternate Time Period for Loan Calculation. An Interim Final Rule published April 27, 2020 permits seasonal employers to use an alternate time period for PPP loan calculation of May 1, 2020 to September 15, 2020.In its May 3, 2020 revision to its FAQ, the SBA provided additional clarity to seasonal businesses by noting:
41. Question: Can 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 under the interim final rule issued by Treasury on April 27, 2020, make all the required certifications on the Borrower application form?
Answer: Yes. The Borrower Application Form requires applicants to certify that “The Applicant is eligible to receive a loan under the rules in effect at the time this application is submitted that have been issued by the Small Business Administration (SBA) implementing the Paycheck Protection Program.” On April 27, 2020, Treasury issued an interim final rule allowing seasonal borrowers to use an alternative base period for purposes of calculating the loan amount for which they are eligible under the PPP. An applicant that is otherwise in compliance with applicable SBA requirements, and that complies with Treasury’s interim final rule on seasonal workers, will be deemed eligible for a PPP loan under SBA rules. Instead of following the instructions on page 3 of the Borrower Application Form for the time period for calculating average monthly payroll for seasonal businesses, an applicant may elect to use the time period in Treasury’s final rule on seasonal workers.
Applicable Penalties. As part of the PPP loan application, each Borrower makes the following certification:
I further certify that the information provided in this application and the information provided in all supporting documents and forms is true and accurate in all material respects. I understand that knowingly making a false statement to obtain a guaranteed loan from SBA is punishable under the law, including under 18 USC 1001 and 3571 by imprisonment of not more than five years and/or a fine of up to $250,000; under 15 USC 645 by imprisonment of not more than two years and/or a fine of not more than $5,000; and, if submitted to a federally insured institution, under 18 USC 1014 by imprisonment of not more than thirty years and/or a fine of not more than $1,000,000.
In addition, the False Claims Act, 31 USC 3729 creates civil liability for any person who knowingly presents or causes to be presented a false claim for payment to the government. For False Claims Act purposes, “knowingly” can mean having actual knowledge, or acting in deliberate ignorance or reckless disregard of the truth or falsity of the information. False Claims Act fines and penalties can be substantial, as the False Claims Act allows the government to recover up to three times the amount of its actual damages (likely the full amount of the loan) plus penalties for each false claim.
Upgrade to E-Tran System. The E-Tran system is an origination/servicing software program that enables lenders to submit applications and other data to the SBA, electronically. The SBA has recently launched a new search functionality within the E-Tran Servicing section of the Capital Access Financial System (CAFS). This tool will help PPP lenders review loans in their portfolios and hopefully expedite the PPP loan forgiveness process.
Paycheck Protection Program Loan Forgiveness Application. On May 15, 2020, the SBA issued an application form which borrowers must complete and submit to their lender (or the lender servicing their loan). In most cases, borrowers may also complete the application electronically through their lender's website.
Interim Final Rules Issued May 22, 2020. On May 22, 2020, the SBA and the Department of the Treasury issued an Interim Final Rule on Loan Forgiveness together with an Interim Final Rule on SBA Loan Procedures and Related Borrower and Lender Responsibilities. These Interim Final Rules provide more guidance regarding the Loan Forgiveness process. Nonetheless, many questions remain unanswered and we anticipate the issuance of further guidance on the loan forgiveness process.
SBA Guidance. The SBA has issued guidance consisting of Interim Final Rules and explanatory FAQs. That guidance has been updated several times. We plan to update this alert as the changing guidance warrants.
DISCLAIMER: This Alert is designed to keep you aware of recent developments in the law. It is not intended to be legal advice, which can only be given after the attorney understands the facts of a particular matter and the goals of the client.