The Small Business Administration (SBA) has released the first major guidance regarding the forgiveness of loans made under the Paycheck Protection Program (PPP) by publishing the PPP loan forgiveness application. These loans were established to provide working capital to borrowers so they could continue to pay their employees during the pandemic. Hence, the much anticipated application provides additional clarity into the already existing guidance contained in Interim Final Rules and FAQs.
A key feature of the PPP loans was loan forgiveness, if the loan borrowings were spent on certain items during an eight-week period. Congress dictated that the PPP loan must be spent on the following items to obtain loan forgiveness:
Interest on business loans;
Lease payments; and
Of these items, Congress felt that payroll should be the focus to permit forgiveness for the borrower. The SBA established a limitation that 75% of the loan amounts must be used for payroll costs, and no more than 25% could be used for non-payroll costs (interest, rent, and utilities). These were the general parameters; however, borrowers wanted more specifics.
The loan forgiveness application form provides much details for borrowers assisting them in navigating the eight-week period to maximize their loan forgiveness. Here are some highlights of what the SBA provided in this loan forgiveness application form:
The application form, SBA Form 3508, consists of three parts:
the PPP Loan Forgiveness Calculation Form;
PPP Schedule A; and
the PPP Schedule A Worksheet.
Each of these forms involve detailed calculations with specific instructions to follow, and the forms flow from one to the other.
The part of the CARES law dealing with loan forgiveness indicated that it applied for “costs incurred and payments made during the covered period” for the above indicated expenses. There was uncertainty how this would be interpreted by the SBA. In the forgiveness application form, the SBA defined “incurred and paid” to allow, with certain limitations, both expenses paid and incurred in this eight-week period.
The application form introduced a new “Alternative Payroll Covered Period” that permits a borrower to sync up the eight-week period with their own borrower’s payroll period.
The application form deals with a key aspect of the payroll factor involving definition and treatment of FTEs (full-time equivalent employees). The form established 40 hours as the level for a full-time employee. The calculations related to the adjustments: (1) for full-time equivalent employees; and (2) for the comparable wages are involved, but provide some options to help borrowers in some situations when trying to maximize their loan forgiveness.
Borrowers hoping to pay bonuses to owners (or employees with annual compensation above $100,000) to maximize their loan forgiveness will find there are certain restrictions and limitations in the worksheets.
The application form also indicates that for rent (a non-payroll cost), this expense is allowed for leases of both real and personal property. Remember, however, this applies only to leases that were in effect as of February 15, 2020. It is unclear how a lease renewal or modification will be treated.
The application also contains a number of borrower certifications and outlines the extent of the documentation that borrowers will be required to reference in calculating the forgiveness amount.
In general, borrowers are eligible for loan forgiveness in the aggregate amount of certain qualifying expenses paid or incurred during the eight-week period commencing on the date that the borrower first received PPP loan proceeds from its lender (the Covered Period). For payroll costs only, borrowers with a biweekly (or more frequent) payroll schedule may elect to use an “Alternative Payroll Covered Period” beginning on the first day of the first pay period commencing after the date of loan disbursement in lieu of the standard Covered Period, but the borrower must use either the Covered Period or the Alternative Payroll Covered Period consistently for all payroll costs.
Application Process and Certifications
The PPP loan forgiveness application requires the borrower to certify, among other things, that
the dollar amount for which forgiveness is requested was used to pay costs eligible for forgiveness in accordance with the application instructions,
that the borrower has accurately verified the payments for the eligible payroll and non-payroll costs for which it is requesting forgiveness, and
that the information provided in the application and in all supporting documents and forms (e.g., the attached worksheets) is true and correct in all material respects.
The borrower will also be required to indicate whether the borrower, together with its affiliates (as determined consistent with the SBA’s interim final rule on affiliates, published April 15, 2020), received PPP loans with an original principal amount in excess of $2 million.
Each borrower will be required to submit with its forgiveness application detailed documentation verifying
the eligible cash compensation and non-cash benefit payments from the Covered Period or Alternative Payroll Covered Period;
the average number of FTE employees on payroll during the reference period applicable to determining the borrower’s FTE Reduction; and
with respect to any non-payroll costs for which the borrower seeks forgiveness, the existence of any the applicable obligations and/or services prior to February 15, 2020 and eligible payments from the Covered Period.
The forgiveness application also includes attached worksheets that require detailed payroll cost data on a per-employee basis. The SBA does not require these worksheets to be submitted with the application, but borrowers must retain these worksheets and the back-up documentation supporting their accuracy (together with “all [other] records relating to” the borrower’s PPP loan) in its files for six years after the date the loan is forgiven or repaid in full. The borrower must permit authorized representatives of the SBA, including representatives of its Office of Inspector General, to access such files upon request.
There are many other items found in this forgiveness application for borrowers to consider. There will be some situations that are not clearly defined or addressed in the application, and hopefully the SBA will offer additional guidance to clarify these matters. Borrowers should be diligent to learn the rules spelled out in the application and then gather the required documentation that must be submitted with the application.
Audits of PPP Loans
The application contains a box borrowers must check if they received a loan, in combination with their affiliates, in excess of US$2 million. The SBA has repeatedly stated that it will audit all loans of US$2 million or more after the borrower submits a forgiveness application to determine compliance with the requirements of the CARES Act.
It is also likely that the SBA will conduct risk-based testing of loans below the US$2 million threshold. According to the SBA’s most recent report, there are approximately 30,000 loans greater than US$2 million and another 50,000 loans between US$1 million and US$2 million.
The SBA will likely apply greater scrutiny to certain loans based on particular risk factors. Borrowers should be mindful of the likelihood their situation will draw scrutiny and have solid documentation that supports their loan applications. To identify higher-risk loans, the SBA may rely on the following:
Borrower’s public profile: A public profile can identify borrower’s financial health, time of operations, and potential risks based on negative news;
Loan amount: The SBA will likely focus on higher dollar loans. Loans modified to be just below the US$2 million threshold may also be scrutinized to the extent they suggest a borrower’s intent to avoid scrutiny.
Suspicious Activity Reports: As a financial institution regulator, the SBA may be able to access FinCEN’s Bank Secrecy Act database, including reports from lenders on potential suspicious activity by borrowers.
While the SBA’s issuance of the PPP forgiveness application was welcomed by borrowers as it provides some needed clarity surrounding the process and content required for forgiveness requests, we expect additional guidance will continue to be issued as borrowers, lenders, and the SBA identify other open questions. There are still many uncertainties, hopefully the SBA will offer additional guidance soon.
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This information was sourced from www.sikich.com