Key Initial PPP Regulatory Guidance on Loan Forgiveness
/The Small Business Administration has now released its initial Paycheck Protection Program (“PPP”) forgiveness application as well as an interim final rule pertaining to forgiveness and an interim final rule pertaining to their investigation of PPP loan files. While questions still remain, these documents have laid the groundwork for the forgiveness of PPP loans.
Here are some of the key takeaways from our early review of these documents:
The application uses the words “paid and incurred” and the regulations use the words “paid or incurred,” in relation to both the payroll costs and the non-payroll costs during the eight-week covered period. This means two things:
Employers can “fit” more than just fifty-six days of wages into the PPP forgiveness application. Even if the wages were incurred prior to disbursement of the loan, if they were paid during the covered period, they can be included in the calculations. And, wages incurred during the covered period which are paid normally during the next payroll can be included in the calculation.
The same is true for non-payroll costs, such as rent and utilities, where the guidance makes clear that so long as the rent and utilities are paid during the covered period, it does not matter if they were incurred during the covered period.
Some have speculated that rent or utilities could even be prepaid under this language.
Of course, the same cannot be said of mortgage interest, which expressly cannot be prepaid.
Remember, though, that there is the cap that no less than 75% of the forgiven amount can be for payroll costs.
Businesses that use a biweekly or more frequent pay schedule can elect to use an “alternative” payroll covered period that matches their payroll schedule. This would make record keeping more simple for these businesses, but there would be an impact on the possible loan forgiveness amount.
Mortgage interest and/or lease payments can be for either real or personal property that was covered under an agreement that was in place before February 15, 2020.
Utilities include electricity, gas, water, transportation, telephone, or internet access, but only for service which began before February 15, 2020. It still isn’t entirely clear what “transportation” is, but it may possibly capture fuel expenses for company vehicles, and possibly mileage reimbursements.
Full-time equivalency (“FTE”) is deemed to be 40 hours, not 30 hours, which is typically the case for SBA programs.
The SBA stated that “40 hours or more of work each week better reflects what constitutes full-time employment for the vast majority of American workers.”
There is a FTE safe harbor for certain reductions in staffing that covers employees that:
Were given a good-faith written offer to return to work and declined it;
This is because “it is reasonable to anticipate that most laid-off employees will accept the offer of reemployment in light of current labor market conditions.”
However, you must inform the applicable state unemployment insurance office of the rejected offer of reemployment.
Were fired for cause;
Voluntarily resigned; or
Voluntarily requested a reduction in hours.
Owner compensation is capped at 8/52 of 2019 wages with a cap of $15,385 per individual “in total across all businesses.”
To the extent that there was both a reduction in FTE and a corresponding cut in wages for the same employee, there is no “double penalty,” instead only the FTE reduction is applied.
“To ensure that borrowers are not doubly penalized, the salary/wage reduction applies only to the portion of the decline in employee salary and wages that is not attributable to the FTE reduction.”
You must maintain documentation related to the PPP in your files for six years after the loan is forgiven and permit the SBA to inspect these documents at any time in those six years.
Once forgiveness is applied for, a lender must issue a decision to the SBA regarding the application within 60 days.
The SBA reserves the right to review any PPP loan at any time. If they are auditing a loan, they will notify the lender and the lender must notify the borrower within five business days.
If the SBA determines that a business was not eligible for a PPP loan, the loan is automatically barred from forgiveness. However, unless the SBA finds evidence of fraud, they have indicated that they will seek repayment of the loan only.
There is still additional guidance to come, including the procedure by which someone will be able to appeal an adverse determination by the SBA. And, while Congress was not able to reach a deal to extend the eight-week period prior to the Memorial Day recess, there is still reportedly bipartisan support to extend the eight-week period in which the funds sought to be forgiven must be spent—reportedly as long as 16 weeks or 24 weeks.
That said, with this guidance in hand, all PPP borrowers that plan to seek forgiveness should carefully review the loan forgiveness application and work preliminary numbers to see where they stand for forgiveness in order to maximize their possible forgiveness before their eight weeks expire.