June 1st, 2020

PPP Loan Program Update: The New SBA Loan Forgiveness Application

On May 15, 2020, the SBA released its Paycheck Protection Program (PPP) Loan Forgiveness Application and instructions for its completion. This application must be completed and submitted by PPP borrowers to their lenders at the end of the eight-week covered period in order to obtain forgiveness of their loans.

The Loan Forgiveness Application and accompanying instructions provide several important modifications and clarifications relating to PPP loan amounts eligible for forgiveness:

  • Alternative payroll covered period. For administrative convenience, PPP borrowers may elect to calculate eligible payroll costs during the eight-week period beginning on the first day of the first pay period following the loan disbursement date (instead of the eight-week period beginning on the loan disbursement date) (an “alternative covered period”). This is a welcome clarification, although the treatment of expenses incurred by borrowers with a covered period ending after June 30, 2020 (the statutory end of the PPP) remains unclear.
  • Costs “paid or incurred”. The statutory language allowing forgiveness for “costs incurred and payments made during the covered period” had engendered confusion regarding costs paid or incurred just outside the covered period.  The application instructions clarify that eligible payroll costs paid or incurred during the covered period (or alternative covered period) are eligible for forgiveness, thus allowing forgiveness for payroll costs (a) incurred before the loan disbursement date but paid during the covered period (or alternative covered period), and (b) incurred during the covered period (or alternative covered period) but paid after the covered period (or alternative covered period). For this purpose, payroll costs are paid on the day the employer/borrower distributes paychecks or originates an automated clearing house (ACH) credit transaction and are incurred on the day the employee’s pay is earned.  Eligible nonpayroll costs must be (a) paid during the covered period, or (b) 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.
  • Forgiveness calculations, penalties and relief. Schedule A of the Loan Forgiveness Application and the related worksheets clarify and provide computational guidance regarding such key metrics as average full-time equivalency (FTE) employees, forgiveness penalties, penalty relief and safe harbors to eliminate workforce reduction penalties. For example, loan forgiveness will not be reduced if the borrower (a) reduced its FTE employee levels between February 15, 2020 and April 26, 2020, and (b) then restored its FTE employee levels by June 30, 2020 to its FTE employee levels in the pay period that included February 15, 2020. In addition, the calculation of loan forgiveness reduction provides exceptions for (a) situations in which a borrower has made a good-faith written offer to rehire an employee during the covered period that was rejected by the employee, and (b) situations in which employees, during the covered period, (i) were fired for cause, (ii) voluntarily resigned, or (iii) voluntarily requested and received a reduction of their hours. Loan forgiveness penalties apply to salary or wage reductions with respect to employees whose average annual salary or average wage was under $100,000 in 2019. The reduction in forgiveness is required if the reduction in wages over the eight-week period exceeds 25% of the total salary or wages of the employee between January 1 and March 31, 2020, unless the annualized average salary or wage of the employee is restored by June 30, 2020.
  • Compensation caps. Consistent with previous SBA guidance, the instructions provide that the compensation of an individual employee earning in excess of $100,000 annually cannot exceed a covered period prorated amount of $15,385.
  •  Documentation. Schedule A of the Loan Forgiveness Application also lists the payroll, FTE and nonpayroll documents that must be submitted in support of the application. Required payroll documentation includes bank account statements or third-party payroll service provider reports documenting cash compensation payments, tax forms and payment receipts, cancelled checks or account statements documenting any contributions to employee health insurance and retirement plans.  To support its FTE calculation, the borrower must submit documentation showing, at its election, the average number of FTE employees on payroll per month employed during February 15 - June 30, 2019, the average number of FTE employees on payroll per month employed during January 1 - February 29, 2020 or, in the case of a seasonal employer, the average number of FTE employees on payroll per month employed during the applicable covered period for a seasonal employer. Required nonpayroll documentation includes (a) for business mortgage interest payments, a copy of the lender amortization schedule and receipts or cancelled checks verifying eligible payments or lender account statements verifying interest amounts and eligible payments, (b) for business rent or lease payments,  a copy of the current lease agreement and receipts or cancelled checks verifying eligible payments or lessor account statements verifying eligible payments, and (c) for business utility payments, copies of invoices and receipts, cancelled checks or account statements verifying eligible payments.  We note, with regard to the definition of “rent” for PPP purposes, that it remains unclear whether additional rent costs such as common area maintenance charges, property taxes or late fees are eligible payments.

The SBA has advised that additional guidance will be issued to assist borrowers in completing their applications and lenders in fulfilling their responsibilities.

If you have questions about the PPP loan forgiveness application, or other CARES Act developments, please contact Jeffrey Marks at 212 826 5536 or jmarks@fkks.com, or any other member of the Frankfurt Kurnit Corporate and Employment Groups.