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PPP Loan Forgiveness and Review: Key Observations

June 30, 2020

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PPP Loan Forgiveness IFR Revisions and Revised Application, Key Observations Part V

Once again, the SBA is doling out guidance in small doses, solving some questions, creating new questions and leaving most questions still unanswered. On June 16, 2020, the SBA issued a revised PPP Loan Forgiveness Application, along with related instructions, and new PPP Loan Forgiveness Application Form 3508EZ, also with related instructions. On June 22, 2020, the SBA issued Revisions to Loan Forgiveness Interim Final Rule and SBA Loan Review Procedures Interim Final Rule. The following is a list of our key observations on these latest developments.

1. Form 3508 EZ.

  • Form 3508 EZ is a simpler PPP Loan Forgiveness Application. It eliminates the schedules and worksheets for borrowers who do not have reductions in their forgiveness amount due to a reduction in FTE or annual salary/hourly wage rates.
  • In particular, the following groups qualify to use Form 3508 EZ.
    • Self-employed individuals, independent contractors and sole proprietors who do not have employees, OR
    • Borrowers who did not (a) reduce annual salary or hourly wages of any employee by more than 25% during the Covered Period or the Alternative Payroll Covered Period compared to the period between January 1, 2020, and March 31, 2020; AND (b) did not reduce the number of employees or the average paid hours of employees between January 1, 2020, and the end of the Covered Period, subject to certain exceptions, OR
    • Borrowers who did not (a) reduce annual salary or hourly wages of any employee by more than 25% during the Covered Period or the Alternative Payroll Covered Period as compared to the period between January 1, 2020, and March 31, 2020; AND (b) were unable to operate during the Covered Period at the same level of activity due to compliance with requirements established based on guidance issued from March 1 to December 31, 2020, by Secretary of Health and Human Services (“HHS”); Director of Center for Disease Control and Prevention (“CDC”) or Occupational Safety and Health Administration (“OSHA”), related to maintenance of standards of sanitation, social distancing or other work or customer safety requirements related to COVID-19. (See Observation No. 6).
    • For purposes of the two clauses (a) in the prior two bullets, “employees” means only those employees that did not receive, during any single pay period during 2019, wages or salary at an annualized rate of pay in an amount more than $100,000.
    • While the two clauses (b) in the prior two bullets do not reference the Alternative Payroll Covered Period, we recommend that borrowers attempt to meet the tests through the end of that period.

2. PPP Lender to Notify Borrower of First Payment Date After SBA Makes Forgiveness Determination.

  • In connection with the notice from the PPP lender to a borrower of the PPP loan amount forgiven by the SBA, the PPP lender will notify the borrower as to the date on which the borrower’s first payment on any unforgiven amount is due.
  • It will be interesting to see whether PPP lenders amend their existing Notes to reflect the required extension of the first payment date until after such notice.
  • The SBA plans to issue rules regarding the treatment of PPP loans that are under review by the SBA prior to loan maturity.
  • We recommend that borrowers who have existing credit facilities (other than the PPP loan) review the financial covenant calculations to determine if amendments are needed now that the first payment of interest and principal will likely not be due until 2021 now that the initially required six-month payment deferral window has been extended.

3. PPP Loan Forgiveness Applications Can Be Filed Any Time Prior to Maturity, Including Prior to End of Covered Period.

  • A borrower can submit a PPP Loan Forgiveness Application at any time before the maturity date of the PPP loan, including prior to the end of the applicable Covered Period, once the borrower has used all of the PPP loan proceeds for which it plans to seek forgiveness. This is as expected. However, a borrower may only apply one time and there is no indication that a filed PPP Loan Forgiveness Application can be amended, particularly once it is accepted by the PPP lender. So, borrowers need to get it right the first time.
  • It is important to note that while it is now clear that a borrower can apply prior to the end of the 24-week period, that application does not terminate the Covered Period or Alternative Covered Period. This means that the salary/wage rate reduction calculations for reductions in excess of 25% are still calculated based upon the full 24-week Covered Period (or Alternative Payroll Covered Period) or eight-week period if elected by the borrower. (For example, a borrower using a 24-week Covered Period who reduces an employee’s average weekly salary from $1,000 prior to the Covered Period to $700 during the Covered Period would have a reduction of the forgiveness amount of $1,200, (($1,000 x 0.25) - $700) x 24, even if it uses a shortened Covered Period (or Alternative Payroll Covered Period). We believe this encourages borrowers who have reduced salaries or wage rates by more than 25% to use an eight-week Covered Period (or Alternative Payroll Covered Period).
  • The SBA did not provide further clarification on how an early filing of the PPP Loan Forgiveness Application impacts the FTE reduction calculation, although we believe that, if the borrower qualifies for one of the safe harbors described in Observation 5 below, it does not matter.

4. Revised Caps on Owner-Employee and Self-Employed Individual’s Payroll Costs.

  • The SBA has continued to restrict the benefits to owners of a borrower under the Paycheck Protection Program by applying the following caps on the amount of their Payroll Costs that can be forgiven.
    • Subchapter C Corporations: 20.833%, if using a 24-week Covered Period, (15.385%, if using an eight-week Covered Period) times 2019 employee cash compensation, up to $20,833, if using a 24-week Covered Period, ($15,385, if using an eight-week Covered Period), plus their employer retirement and health insurance contributions.
    • Subchapter S Corporations: 20.833% if using a 24-week Covered Period, (15.385%, if using an eight-week Covered Period), times their 2019 employee cash compensation, up to $20,833, if using a 24-week Covered Period, ($15,385, if using an eight-week Covered Period), plus their employer retirement contributions, but not health insurance contributions.
    • Self-Employed/Schedule C Filers: 20.833% if using a 24-week Covered Period, (15.385%, if using an eight-week Covered Period) times their 2019 net profits, up to $20,833, if using a 24-week Covered Period, ($15,385, if using an eight-week Covered Period), but not for retirement or health insurance contributions.
    • General Partners: 20.833%, if using a 24-week Covered Period, (15.385%, if using an eight-week Covered Period) times their 2019 net earnings from self-employment, multiplied by 0.9235, up to $20,833, if using a 24-week Covered Period, ($15,385, if using an eight-week Covered Period), but not for retirement or health insurance contributions.
    • For non-owner employees, the caps are $46,154, if using a 24-week Covered Period, and $15,385, if using an eight-week Covered Period.
  • The SBA still has not defined “owner-employees.” The PPP Loan Application defined “owner” as anyone who owns 20% or more of the applicant, but it is not clear this applies in this context.
  • Because of the SBA’s use of the Internal Revenue Code as a basis for the rules in this area, there is reason to believe that the SBA may at least exclude owners of 2% or less of a borrower from these limitations, particularly, for shareholders of Subchapter S Corporations.  But nothing definitive on this so far.
  • So, for now, we have to assume owning even one share of stock or 0.1% of the membership or partnership interests of the borrower makes these limitations applicable to the employee.

5. Safe Harbor Exemption to FTE and Salary/Wage Loan Forgiveness Reductions Tied to Rehiring or Restoration by December 31, 2020.

  • A borrower is exempt from the reduction in the forgiveness amount due to a reduction in FTEs during the Covered Period (or Alternative Payroll Covered Period), if the borrower’s total average FTE as of the date of the PPP Loan Forgiveness Application (or, if earlier, December 31, 2020) is greater than its total average FTE for the pay period that includes February 15, 2020.
  • A borrower is exempt from the reduction in the forgiveness amount due to a reduction in salaries or hourly wage rate during the Covered Period (or Alternative Payroll Covered Period), if the employee’s average annual salary or hourly wage rate as of the date of the PPP Loan Forgiveness Application (or, if earlier, December 31, 2020) is greater than the employee’s average annual salary or hourly wage rate between February 15, 2020, and April 26, 2020.
  • The date of the PPP Loan Forgiveness Application becomes important in determining eligibility for the safe harbor, not December 31, 2020, nor June 30, 2020.

6. New Exemptions From FTE Loan Forgiveness Reductions.

  • An employee is not included in the FTE loan forgiveness reduction calculation if the borrower is unable to (i) rehire an employee who was laid-off after February 15, 2010, AND (ii) hire a similarly qualified employee for an unfilled position on or before December 31, 2020. This exemption replaces the previous exemption for employees whom the borrower offered to rehire, but refused to return to work. This is a positive development as the prior exemption had some uncertainties that do not exist in the new exemption. A borrower must inform the applicable state unemployment insurance office of the employee’s rejection of the rehire offer. The borrower must document the offer, the rejection and efforts to hire similarly qualified individuals. It is not clear how this exemption applies if the borrower files its PPP Loan Forgiveness Application prior to December 31, 2020, or prior to the end of its 24-week or eight-week Covered Period or Alternative Payroll Covered Period.
  • The exemptions for (i) employees whom the borrower offered to restore reduced hours, but refused to work the increased hours, and (ii) employees fired for cause or who voluntarily resigned or requested and received reduced hours remain in effect.
  • The SBA clarified that, if the reduction in a borrower’s FTEs during the Covered Period was due to its inability to return to pre-February 15, 2020 business activity as a result of compliance with state and local government shutdown orders based in part on CDC, HHS or OSHA guidance regarding COVID-19, the borrower is exempt from the loan forgiveness reduction relating to a reduction in FTEs. Note that this is an exemption from the entire FTE reduction calculation, irrespective of when the FTE reduction occurred (i.e. pre-February 15, 2020 FTE reductions are cleansed, as well as post-February 2020 reductions, as compared to the reference period).
  • It is not clear how this exemption applies if the borrower is permitted by applicable shutdown orders to return to pre-February 15, 2020, business activity during the Covered Period, but does not do so because orders from its customer have not returned to a level to justify such level of activity.

PPP Loan Forgiveness IFR Revisions, Key Observations Part IV

On June 11, 2020, the SBA issued Revisions to First Interim Final Rule (“IFR”) to reflect the impact of the provisions of the Paycheck Protection Program Flexibility Act of 2020 (the “Act”) on the Paycheck Protection Program (“PPP”). The revisions to the First IFR did not provide many new insights into the PPP. The following is a list of our key observations on the revisions. 

1. Loan Term is Five Years.

  • The SBA has set a loan term of five years for PPP loans made on or after June 5, 2020, and permits lenders to modify PPP loans made before June 5, 2020, to extend the term to five years.
  • The date the SBA assigns a loan number is the date the loan is “made.”

2. Existing Borrowers Must Elect to Use Eight-Week Covered Period for Loan Forgiveness

  • Borrowers are going to have to elect to use an eight-week Covered Period instead of a 24-week Covered Period. Presumably, that election will be made in a revised Loan Forgiveness Application that is yet to be released.

3. Loan Forgiveness Applications Not Due for 10 Months After End of Applicable Covered Period

  • Presently, it appears that borrowers can defer applying for forgiveness for up to 10 months after the end of their applicable Covered Period.
  • This is particularly helpful for borrowers who will not have all of their PPP loan forgiven, as this will defer the start of loan payments for at least the total of (i) the Covered Period, (ii) 10 months thereafter, (iii) the period taken by the PPP lender and the SBA to approve the Borrower’s forgiveness amount, and (iv) the time taken by the SBA to remit funds to the PPP lender.

4. Partial Forgiveness Still Permitted Even if At Least 60% of Loan Amount Is Not Used for Payroll Costs.

  • The SBA has made it crystal clear that, even if a Borrower does not use at least 60% of its PPP loan proceeds on Payroll Costs, it will still be eligible for forgiveness of a portion of its PPP loan. The 60% usage requirement is not a “threshold” for forgiveness as had at one time been a concern.
  • Instead, consistent with the original Loan Forgiveness Application and the SBA and Treasury Joint Statement issued on June 8, 2020, the requirement is at least 60% of the amount to be forgiven must be for Payroll Costs.
  • What still is not clear is what happens to the portion of the PPP loan that is not forgiven if at least 60% of the PPP loan is not used for Payroll Costs. Our guess is that as long as the PPP loan is used for one of the eligible uses, the portion of the PPP loan that is not forgiven will just have to be repaid on the program terms, but we will still have to wait for further guidance from the SBA and Treasury on this point to be sure.

5. More Guidance Promised on Loan Forgiveness and Loan Review Procedure

  • The SBA will issue revisions to the IFRs on loan forgiveness and loan review procedures to address the Act.

PPP Loan Forgiveness Expansion: Key Observations Part III

On June 5, 2020, the Paycheck Protection Program Flexibility Act of 2020 (the “Act”) was signed into law by the President. It provides for a number of liberalizations of the terms of the Paycheck Protection Program (“PPP”). For many borrowers, the Act will make many of the concerns we had regarding the details of forgiveness irrelevant, as they will now have more time (24 weeks, instead of eight) to spend their PPP loan proceeds on eligible costs and will be able to use more of the proceeds on eligible non-Payroll Costs (up to 40%, instead of 25%). The Act also makes clear that PPP loan recipients will now be able to take full advantage of the Employer Payroll Tax Deferral provisions of the CARES Act. But, as in the past, the Act raises many new questions, some of which we highlight below, including whether current PPP borrowers should continue to use the eight-week period or switch to the 24-week period. The SBA and Treasury attempted to answer some of those questions with the release of their Joint Statement on June 8, 2020, though, as in all of their previous releases, they left unanswered many questions and also indicated that they will be issuing further rules and guidance, a modified borrower loan application form and a modified loan forgiveness application. While we wait for those additional rules and guidance and for the updated applications, the following is a list of our key observations on the Act, as modified by the Joint Statement.

1. Extension of Covered Period.

  • The Covered Period during which PPP loan proceeds can be used to pay costs eligible for forgiveness has been extended from eight weeks to the earlier of (i) 24 weeks or (ii) December 31, 2020. This change is applicable to loans made on or after June 5, 2020. As discussed below in Observation 2, borrowers who have received PPP loans prior to June 5, 2020, will have the option to choose between the two Covered Period options, although the Act has conflicting language as to exactly how that will work. For non-Payroll Costs, the 24-week period still starts with loan disbursement. For Payroll Costs, although the Act does not address it specifically, we believe that the SBA will issue guidance providing that borrowers with bi-weekly or more frequent payroll periods can still elect to use an Alternative Payroll Covered Period.

2. Existing Borrowers Can Elect to Keep 8 Week Covered Period.

  • Borrowers who received loans prior to June 5, 2020, are permitted to still use the original eight-week Covered Period (or, we believe, Alternative Payroll Covered Period) or the new 24-week period. While the Act provides that it applies to loans made after June 5, 2020, which implies that for existing loans the eight-week period automatically applies, it also provides that existing borrowers can elect to continue to use the eight-week period. We will have to wait to see how and when borrowers make the election.
    • One implication of this provision of the Act is that if a borrower uses the longer coverage period, it cannot apply for forgiveness until the end of the 24-week period. If that is how the Act is applied, borrowers using the 24-week period could experience a delay in receiving a final decision on their forgiveness amount.
    • This could have potentially negative implications on reporting of the PPP loan on financial statements, and for bank loan covenant purposes, in addition to making longer-term planning more difficult and extending the uncertainty around the PPP loan for buyers of PPP borrowers.
    • We hope that logic will prevail and borrowers will be able to end their Covered Period (or Alternative Payroll Covered Period) at any time up to the end of the 24 weeks and then apply for forgiveness, not just at the end of the Covered Period (or Alternative Payroll Covered Period).
    • However, we also would expect that borrowers will only be permitted to apply for the forgiveness one time, so even if a borrower is able to end its Covered Period (or Alternative Covered Period) early, if it ends it too early, it will not be able to apply for forgiveness of later incurred eligible costs, even if some of its earlier costs are deemed ineligible by the lender or the SBA.
  • For other negative implications of using a 24 week-period, see Observation 3 and for a reason why borrowers may need to use a 24-week period see Observation 4.

 3. FTE/Salary and Wage Reductions Calculated Through End of Covered Period, Now Potentially 24 Weeks.

  • In calculating the reduction in the forgiveness amount because of a reduction in FTE’s or salaries or wages of employees, you measure the reduction for the entire Covered Period (or Alternative Payroll Covered Period), which will be either eight weeks or 24 weeks, as discussed above. We hope that the SBA will allow borrowers to end the Covered Period (or Alternative Payroll Period) at any time short of the 24 weeks and use that shortened period for calculating the reductions, although there is nothing indicating they will do so.
  • The exception to these reductions for rehires or restoration of salary or wages made not later than June 30, 2020, has been extended to include those made not later than December 31, 2020. We hope that the SBA will interpret this to mean that such rehiring or restoration can occur any time prior to December 31, 2020, or, at least, when the borrower’s Covered Period (or Alternative Payroll Covered Period) ends, and do not have to continue their employment or restoration through December 31, 2020. 

4. At Least 60% of the Forgiveness Loan Amount Must Now be Used for Payroll Costs.

  • The Joint Statement eliminates the forgiveness cliff originally created by the Act. The language of the Act provides that, in order to be eligible for any forgiveness, at least 60% of the PPP loan amount must be used for Payroll Costs and up to 40% may be used for eligible non-Payroll Costs prior to the end of the use Covered Period (which for PPP loans approved after June 5, 2020, is December 31, 2020, and for existing PPP loans that use the eight-week period, is likely to still be June 30, 2020). However, in the Joint Statement, the SBA and Treasury clarified that if a borrower uses less than 60% of the loan amount for payroll costs during the forgiveness Covered Period, the borrower will continue to be eligible for partial loan forgiveness, subject to at least 60% of the loan forgiveness amount having been used for payroll costs.
  • The focus, instead, on this provision should be the increase in eligible non-Payroll Costs permitted to be forgiven, which was originally only up to 25% of the forgiveness loan amount and now can be up to 40% rather than the potential cliff that the Act had created. 

5. No Change in Type of Costs Eligible for Forgiveness.

  • There is no change in the type of costs eligible for forgiveness, which remain as follows:
    • Payroll Costs (Salary, wage, commissions, tips, vacation, parental, family, medical or sick leave, allowance for dismissal or separation, payments of group health care benefits, payment of retirement benefits and payment of state or local employment taxes, subject to the exceptions provided in the CARES Act)
    • Non-Payroll Costs (Interest on real or personal property mortgage obligations, rent on real or personal property and qualified utilities)

 6. Changes to Loan Terms.

  • The Joint Statement provides that new PPP loans will have a term of five years.
  • Lenders can amend existing PPP loans to extend the current two-year terms to five years.
  • PPP loan payments, on new and existing PPP loans, will now be deferred until the date the forgiveness amount on the PPP loan is remitted to the lender. This likely will require modifications to the PPP loan documents and any related PPP loan consents relating to borrowers’ other existing indebtedness.
  • However, if the borrower fails to apply for forgiveness within 10 months of the last day of the Covered Period (or Alternative Covered Period), the borrower is required to start making payments at that time.

7. FTE Reduction Calculation Not Impacted Due to Unavailability of Employees.

  • We believe the Act is intended to permit a borrower’s loan forgiveness amount due to a reduction in FTE’s during the Covered Period (or Alternative Payroll Covered Period) to be calculated without considering any reductions the borrower, in good faith, is able to document was caused by any of the following:
  1. (A) Inability to rehire individuals who were employees on February 15, 2020, and (B) Inability to hire similarly qualified employees for unfilled positions on or before December 31, 2020; OR
  2. Inability to return to the same level of business activity as prior to February 15, 2020, due to requirements or guidance of HHS, CDC, or OSHA, from March 1 to December 31, 2020, related to COVID-19 sanitation, social distancing or other worker or customer safety requirements.
  • The Act is inartfully drafted and so we will need clarification from the SBA on this provision.
  • Note that the list of bodies covered by requirements and guidance does not include state and local bodies or orders, so it may be important whether those orders rely on HHS, CDC, or OSHA requirements for this purpose.
  • These are intended to cover situations in which (i) employees refuse to return to work and replacements cannot be found, which seems somewhat unlikely in the current environment, or (ii) social distancing, etc. makes it impossible to resume full business activities. For instance, if restaurant tables have to be set up so customers are six feet apart, then restaurants may not be able to return to full capacity and employment. We will have to wait and see if the restrictions from those bodies continue long enough to make this provision helpful to borrowers.

8. PPP Loan Application Deadline.

  • The Joint Statement indicated that the deadline to apply for a PPP loan is June 30, 2020.

9. PPP Loan Borrowers Who Receive Loan Forgiveness Can Fully Use Employer Payroll Tax Deferral Provisions of the CARES Act.

  • The restriction in the CARES Act prohibiting PPP loan borrowers, once they receive forgiveness on their PPP loans, from deferring further payments of their 2020 federal payroll taxes until December 31, 2021, and December 31, 2022, has been eliminated. See the Dykema Alert on this deferral program.

PPP Loan Forgiveness and Review: Key Observations, Part II

The SBA issued an Interim Final Rule (“IFR”) regarding PPP loan forgiveness on May 22, 2020, to supplement the PPP Loan Forgiveness Application and instructions issued one week earlier. While the new IFR did not provide a great deal of new guidance, below is a list of our key observations, which supplements our prior observations on the application itself, which are repeated at the end of this Alert.

We understand that the SBA plans to issue additional FAQs regarding loan forgiveness that hopefully will address some of our open questions. 

On May 22, 2020, the SBA also issued an IFR on the review process for PPP loans by the SBA, which we also address below. 

1. Alternative Payroll Covered Period.

  • The IFR reiterates that the borrower must use a bi-weekly or more frequent payroll schedule to use the Alternative Payroll Covered Period (the first day of borrower’s first pay period following loan disbursement). Borrowers using a monthly or bi-monthly payroll schedule must use the Covered Period (eight-week period beginning on loan disbursement date).

2. Paid or Incurred

  • The IFR makes it clear that, for non-Payroll Costs, the forgivable amount includes all eligible non-Payroll Costs (i) paid OR (ii) incurred OR (iii) paid and incurred during the Covered Period, so that borrowers can have more than eight weeks of such costs forgiven. For instance, if the borrower’s Covered Period runs June 1 - July 26, and it pays its May and June electricity bills during the Covered Period and pays its July electricity bill by the next regular billing date after the end of the Covered Period, the borrower can include its electricity costs for May, June and July through July 26, the end of the Covered Period, in the forgiven amount.
  • However, advance payments of interest on mortgage obligations are not eligible for forgiveness.
  • While the IFR is not quite as clear on the treatment of Payroll Costs, it appears to us that it may work in the same fashion, permitting borrowers to have more than eight weeks of Payroll Costs forgiven, but not more than $15,385 for any one employee. Forgiven Payroll Costs will be Payroll Costs (i) paid OR (ii) incurred OR (iii) paid and incurred during the Covered Period or Alternative Payroll Covered Period, as applicable. For instance, if we are correct, if the borrower’s Alternative Payroll Covered Period runs June 1 - July 26, and it pays Payroll Costs for (i) the pay period ending May 31 in June, (ii) all pay periods through July 19 prior to July 26 and (iii) the pay period that ends July 26 on the regular payroll payment date later in July, the borrower’s forgiveness amount will cover all those payments, which is 10 weeks of Payroll Costs. Hopefully, the FAQs will provide more clarity on this.
  • But borrowers can only count eligible costs once, either when paid or when incurred.
  • For employees who are not performing work, but are being paid, Payroll Costs are incurred based on the schedule established by the borrower, typically each day the employee would have performed work.

3. Accrued Interest on Forgiven Amounts is Forgiven.

  • The IFR makes clear that the accrued interest on the forgiven amount also is forgiven.

4. Payroll Costs Includes Bonuses/Hazard Pay.

  • Forgiven Payroll Costs includes supplements to salary or wages paid to employees during the Covered Period or Alternative Payroll Covered Period, including so-called “hazard” pay, incentive pay or bonuses, to the extent they do not cause the employee’s pay for the payroll period to exceed $100,000 on an annualized basis. Before paying out bonuses during this period in a lump sum, borrowers need to be sure the lump sum does not cause the employee’s compensation to annualize above $100,000 for the pay period.
  • As expected, forgiven Payroll Costs include amounts paid to furloughed workers, subject to the $100,000 annualized salary cap.

5. Owner-Employee Payroll Cost Forgiveness Limited to 2019 Levels.

  • For owner-employees, the Payroll Cost forgiveness amount is limited to 8/52 of their 2019 cash compensation, up to $15,385, and employer retirement and health care contributions made on their behalf, even if they are paid more during the Covered Period or Alternative Payroll Covered Period. Unlike other employees, it appears the forgiveness amount for owner-employees cannot cover so-called “hazard” pay, bonuses, or other increases in cash compensation if it increases their cash compensation above 2019 levels.

6. Health Care/Retirement Benefits for Self-Employed Individuals Not Forgiven.

  • For self-employed individuals who file IRS Schedule C, the Payroll Cost forgiveness amount is limited to 8/52 of their owner compensation replacement, calculated based on 2019 net profit, as provided in a prior IFR, up to $15,385, and does not include retirement or health care contributions for such individuals.
  • For general partners, the Payroll Cost forgiveness amount is limited to 8/52 of their 2019 net earnings from self-employment, less unreimbursed partnership expenses and certain other items, multiplied by .9235, up to $15,385, and does not include retirement or healthcare contribution for such individuals.

7. FTE Reduction Exception

  • Generally, employees whom the borrower offered to rehire, but refused to return to work, are exempt from the FTE forgiveness calculation. However, the IFR requires the offer to be at the same salary or wages and the same number of hours earned by the employee in the last pay period prior to separation or reduction in hours. It appears that the borrower cannot reduce the salary or wages for such employee by up to 25%, as it could have done for other employees, without losing the exception. We will look for more guidance on this point as it does not makes sense to force a borrower to restore full salary or wages for rehired workers, when the borrower has instituted a permitted across the board 25% (or less) reduction in salary or wages for its employees.
  • Borrowers must inform state unemployment insurance offices that an employee rejected an offer of reemployment within 30 days of the rejection. The SBA will issue more information regarding this process on its website.

8. PPP Loan Forgiveness Process.

  • To apply for forgiveness, the borrower must complete and submit Loan Forgiveness Application (SBA Form 3508 or the lender’s form) to the lender.
  • Lender has 60 days to issue decision on forgiveness to the SBA once it has a complete package from the borrower.
  • If the lender approves the requested forgiveness, the SBA will pay the forgiveness amount, plus accrued interest on that amount, to the lender within 90 days, unless the loan is otherwise under review by the SBA.
  • The lender will notify the borrower if the SBA or the lender denies any portion of the requested forgiveness.

9. PPP Loan Review Process.

  • The SBA may review a PPP loan of any size at any time at its discretion. If it does, it will notify the lender in writing, who has to notify the borrower in writing within 5 business days. At that time, the lender will provide the SBA with all documentation received by the lender from the borrower.
  • Borrowers must maintain PPP loan records for six years after the PPP loan is forgiven or repaid and permit representatives of the SBA to access such records on request.
  • Borrowers will be permitted to respond to the SBA’s questions in a review either directly or through the lender. Failure to respond to an SBA inquiry may result in denial of forgiveness.
  • The SBA intends to issue a separate IFR addressing the process to appeal a decision that the borrower was ineligible for a PPP loan or denying forgiveness.
  • The lender will review the Loan Forgiveness Application form, confirm receipt of required back-up documentation, confirm the borrower’s calculations on the form by reviewing the documentation submitted and confirming that the Payroll Costs are at least 75% of the forgiven amount. A lender is required to perform a good-faith review. If payroll information is provided by a recognized third-party payroll processor, the lender’s review will be minimal, as compared to the level of review if the information is prepared by the borrower. The lender generally does not have to verify the accuracy of the information submitted.
  • The lender will either (i) approve (in whole or part); (ii) deny; or (iii) deny without prejudice due to pending SBA review of the loan. The lender submits to the SBA only the Loan Forgiveness Application and related Schedule A and demographic information, not the back-up documentation provided to the lender by the borrower, unless the PPP loan is under review by the SBA.
  • The lender must provide the SBA with the reason for any denial of forgiveness and notify the borrower that it has denied the loan. The borrower may request the SBA review the lender’s denial within 30 days of its receipt of the lender’s notice.
  • Once the lender is notified of a review of a PPP loan by the SBA, the lender cannot approve the forgiveness of the loan until the SBA notifies the lender in writing that it has completed its review.

PPP Loan Forgiveness Application: Key Observations, Part I

The SBA, in consultation with the U.S. Department of Treasury, issued the Paycheck Protection Program Loan Forgiveness Application and related instructions on May 15, 2020. While the application and instructions answer many of our questions about PPP loan forgiveness, it leaves many others open. The following is a list of our key observations based upon the application and instructions released on May 15, 2020. 

1. Alternative Payroll Covered Period

  • Borrowers who use a biweekly (or more frequent) payroll schedule may elect to use an Alternative Payroll Covered Period that starts on the first day of their first pay period following PPP Loan Disbursement Date.
  • If a borrower uses a bi-monthly or monthly payroll schedule, unless subsequent guidance is released changing the application, borrowers cannot use an Alternative Payroll Covered Period and must use the Covered Period (eight-week period beginning on loan disbursement date).
  • Alternative Payroll Covered Period only is used for calculating Payroll Costs. Borrowers must use the standard Covered Period for calculating non-Payroll Costs.

2. Paid or Incurred.

  • Eligible Payroll Costs to be forgiven are those paid OR incurred during the applicable Covered Period or Alternative Payroll Covered Period, provided incurred costs are paid on or before the next regular payroll or billing date.
  • Eligible non-Payroll Costs must be (1) paid during the Covered Period OR (2) incurred during the Covered Period and paid on or before the next regular billing date.
  • Borrowers can mix and match paid and incurred costs, so long as they do not double count costs. 
  • Payroll Costs are considered incurred on the day that the employee’s pay is earned.

 3. Additional Guidance

  • U.S. Department of Treasury indicated that the SBA also would soon issue regulations and guidance to further assist borrowers and lenders regarding PPP loan forgiveness matters.

 4. Use of Loan Proceeds.

  • There is no requirement in the application that the borrower certify that it used 75% of original loan proceeds for Payroll Costs as a condition to forgiveness. The only requirement is that at least 75% of the forgiven amount must be for Payroll Costs.
  • However, that does not mean borrowers can use more than 25% of PPP loan proceeds for purposes other than Payroll Costs. The Interim Final Rule (“IFR”) containing such requirement still remains in effect. Promised additional guidance from the SBA may address this question, as well as how borrowers may use excess loan proceeds that do not satisfy this requirement.

 5. Mortgage Obligations and Rent Obligations.

  • Covered mortgage obligations include interest paid or incurred during the Covered Period on business mortgage loans on real and/or personal property in effect prior to February 15, 2020.
  • Covered rent obligations include business rent or lease payments paid or incurred during the Covered Period on real and/or personal property leases in force before February 15, 2020.

6. No Further Guidance Yet on Covered Utility Payments

  • The application merely repeats the CARES Act’s utility categories of electricity, gas, water, transportation, telephone or internet service that began before February 15, 2020.
  • Open question as to whether the IFR on Requirements for Promissory Notes, Authorizations, Affiliation, and Eligibility (originally posted April 24, 2020), which lists gas for a business vehicle as an example of a utility payment, applies for all businesses, not just independent contractors or self-employed individuals.

7. No Further Guidance Yet on Payroll Costs Definition.

  • The application merely repeats the CARES Act’s list of expenses included in the definition of Payroll Costs, in addition to salaries and wages, and arguably is slightly narrower than the statute.

8. FTE Definition and Calculation

  • Full-time equivalency (“FTE”) employee calculation is based upon a 40-hour work week. However, because calculated on a consistent basis in each relevant period, we do not expect this to adversely impact borrowers.
  • FTE can be calculated, at the election of the borrower, by either: (1) for each employee, dividing the average number of hours the employee was paid per week by 40 hours, rounding to the nearest tenth, with the maximum being 1.0 FTE, or (2) using an alternative method assuming employees who work 40 hours or more per week are 1.0 FTE and employees who work fewer hours are 0.5 FTE. Borrowers should calculate FTE’s both ways to determine which is more favorable. The same calculation method must be used for all FTE calculations.
  • The FTE reduction is determined based upon total FTE’s in each period so that new employees included in the Covered Period or Alternative Payroll Covered Period offset employees included in the earlier comparative period who have since left employment. 

9. FTE Reduction Exceptions

  • The following reductions in FTE’s do not reduce the borrower’s loan forgiveness: (1) any positions for which the borrower made a good-faith, written offer to rehire an employee during the Covered Period or the Alternative Payroll Covered Period which was rejected by the employee; and (2) any employees who during the Covered Period or the Alternative Payroll Covered Period (a) were fired for cause, (b) voluntarily resigned, or (c) voluntarily requested and received a reduction of their hours.
  • However, if the position was filled by a new employee, then the borrower does not need to (and cannot) use this exception because the new employee is counted in the FTE count already. 

10. FTE Reduction Safe Harbor.

  • The borrower is exempt from the reduction in loan forgiveness based on a reduction in FTE employee levels if both of the following conditions are met: (1) the borrower reduced its FTE employee levels in the period beginning February 15, 2020, and ending April 26, 2020; and (2) the borrower then restored its FTE employee levels by not later than June 30, 2020, to its FTE employee levels in effect for the borrower’s pay period that included February 15, 2020.
  • The calculation is done as of June 30, 2020, so employees rehired prior to June 30, 2020 must continue to be employed through June 30, 2020.

 11. Salary/Hourly Wage Reduction

  • When calculating the salary/hourly wage reduction, the reduction is calculated for each employee who did not have annualized compensation for any pay period in 2019 in excess of $100,00 and then aggregated. There will be a reduction in forgiveness if any such employee has a reduction in their average annual salary or hourly wage during the Covered Period or Alternative Payroll Covered Period by more than 25%, even if other employees do not experience such a reduction.
  • The calculation compares the annual salary or hourly rate during the Covered Period or Alternative Payroll Covered Period to the annual salary or hourly rate from January 1, 2020, to March 31, 2020.
  • Only the reduction in annual salary or hourly rate in excess of 25% results in a reduction of forgiveness.
  • For hourly workers, the reduction in forgiveness is calculated based upon the average number of hours the employee worked each week during the period from January 1, 2020, to March 31, 2020, not the period the employee worked during the Covered Period or Alternative Payroll Covered Period. If hourly employees are not brought back until late in the Covered Period, or Alternative Payroll Covered Period, it is possible that a significant portion of the wages paid to them will not be forgiven if their hourly rate is not at least 75% of their hourly rate as of February 15, 2020, by June 30, 2020.
  • PPP Schedule A Worksheet requires borrowers to separate employees into different tables based on whether their annualized compensation for any pay period in 2019 was more than $100,000. Borrowers can reduce the salary or wages of employees with annualized compensation for any pay period in 2019 of more than $100,000 by more than 25% without causing a reduction in forgiveness. The application measures an employee’s compensation status for this purpose based upon 2019, not 2020, as provided in the CARES Act. Employees whose compensation in 2020 would annualize to a different threshold than in 2019 will still be categorized based upon 2019 compensation.

12. Loans in Excess of $2 million

  • Borrowers who, together with their affiliates (as defined by SBA rules), received PPP loans “with an original principal amount in excess of $2 million” must check a box on the application. Presumably, this will make it easier for the SBA to identify these borrowers for further review. We would advise borrowers who “received” PPP loans in excess of $2 million, and then returned a portion of the loan proceeds to get below $2 million, to check the box in the absence of further guidance from the SBA.

13. Documents that Must Be Submitted with Application.

  • Payroll: Documentation verifying the eligible cash compensation and non-cash benefit payments from the Covered Period or the Alternative Payroll Covered Period consisting of each of the following:
    • Bank account statements or third-party payroll service provider reports documenting the amount of cash compensation paid to employees.
    • Tax forms (or equivalent third-party payroll service provider reports) for the periods that overlap with the Covered Period or the Alternative Payroll Covered Period:
    • IRS Payroll tax filings reported (typically, Form 941). Note that Form 941 covers a quarterly period, while the Covered Period or Alternative Payroll Covered Period only covers an eight-week period; and
    • State quarterly business and individual employee wage reporting and unemployment insurance tax filings.
    • Payment receipts, canceled checks, or account statements documenting the amount of any employer contributions to employee health insurance and retirement plans that the borrower included in the forgiveness amount.
  • FTE: Documentation showing the average number of FTE employees during the comparative period selected by the borrower.
    • Documents may include IRS payroll tax filings (typically, Form 941) and state quarterly business and individual employee wage reporting and unemployment insurance tax filings.
    • Documents submitted may cover periods longer than the specified time period.
  • Nonpayroll: Documentation verifying the existence of the obligations/services prior to February 15, 2020, and eligible payments from the Covered Period.
    • Business mortgage interest payments: Copy of lender amortization schedule and receipts or canceled checks verifying eligible payments from the Covered Period; or lender account statements from February 2020 and the months of the Covered Period through one month after the end of the Covered Period verifying interest amounts and eligible payments.
    • Business rent or lease payments: Copy of current lease agreement and receipts or canceled checks verifying eligible payments from the Covered Period; or lessor account statements from February 2020 and from the Covered Period through one month after the end of the Covered Period verifying eligible payments.
    • Business utility payments: Copy of invoices from February 2020 and those paid during the Covered Period and receipts, canceled checks, or account statements verifying those eligible payments.

14. Documents that Must be Maintained But Not Submitted with Application.

  • Documentation supporting the listing of each individual employee in the application.
  • Documentation regarding any employee job offers and refusals, firings for cause, voluntary resignations, and written requests by any employee for reductions in work schedule.
  • Documentation supporting the “FTE Reduction Safe Harbor” calculation.
  • All records relating to the borrower’s PPP loan, including documentation submitted with its PPP loan application, documentation supporting the borrower’s certifications as to the necessity of the loan request and its eligibility for a PPP loan, documentation necessary to support the Borrower’s loan forgiveness application, and documentation demonstrating the Borrower’s material compliance with PPP requirements.
  • The borrower must retain all such documentation in its files for six years after the date the loan is forgiven or repaid in full.

15. Optional Information Requested.

  • The application requests voluntary disclosure of the name and position of each “Principal” of the borrower, their gender, race, ethnicity and whether they are a veteran.
  • “Principal” includes all 20% or greater owners (including limited partners), officers, directors, individuals hired to manage day-to-day operations, managing partners.
  • The application indicates that the information will have no bearing on the loan forgiveness decision. Disclosing the names of all Principals only has risk for the borrower, without any perceived benefit, and so many borrowers are likely to be unwilling to provide this information.

16. Lender Specific Requirements

  • Similar to the PPP loan application process, the PPP loan forgiveness application may be modified by a PPP lender to include additional lender specific requirements. Borrowers should be prepared that they may need to provide additional information to their PPP lender when applying for forgiveness, including the documents that the SBA is requiring be maintained, but not necessarily submitted.

For more information, please contact Alexis Schostak (248-203-0598 or aschostak@dykema.com), Thomas Vaughn (313-568-6524 or tvaughn@dykema.com), or your Dykema relationship attorney.

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