Things you should know to get the principal of your business’s SBA PPP loan forgiven. Here are the key points from the CARES Act and associated guidance for achieving forgiveness.
The myriad of updates and issues raised regarding the SBA’s PPP and forgiveness of those loans are predictably difficult to follow. The transitory nature of the current circumstances offers little certainty that today’s FAQs and regulatory guidance will emplace the systems ultimately governing the program, but the statutory language is set and while the SBA and Treasury have great latitude for implementation of further guidance and rules, there is language that they cannot alter and some of the guidance comments have taken on the proportions of mythic folklore. Taking a look at the language of the CARES act, there are some measures to prepare for and guidelines to adhere to in order to best ensure qualification for forgiveness. And there’s that weird 75% of the funds for payroll guidance from back in April.
We’ll do our best with this notation of the source material so you know what sections people are citing when they talk about different allowable expenses and methods and criteria for determining forgiveness of these loans without quoting the text directly, and we’ll try to keep it updated as new guidance comes out to help borrowers under the Paycheck Protection Program understand what the regulations, statutes, and other guidance are saying about how borrowers can get their PPP loans forgiven.
As the statutory language of the CARES Act details, you will be filing your application for forgiveness with the lender controlling your loan following your 8-week period. Under the Act, the lender needs to make a determination regarding your eligibility for forgiveness of the your PPP loan principal within 60 days of your application for forgiveness.
You will be certifying in the application that you have spent the funds on allowed uses. You will likely also be certifying that 75% or more of your loan was spent on payroll.
As stated in the statutory language below, you will need to document the use of the funds as part of the proof for the application and the certification. This will involve proving things like confirming the amount of full-time employees during the period and their wages, and payments of items like your rent, mortgage interest, utilities. So collect receipts and copies of your checks and other things like credit card statements and payroll information.
But we’ll get to that. The first issue you should concern yourself with is what are the allowable expenses under the SBA’s PPP.
Here is the definition of allowable uses from the CARES Act:
(F)Allowable uses of covered loans
(i)In general – During the covered period, an eligible recipient may, in addition to the allowable uses of a loan made under this subsection, use the proceeds of the covered loan for—
- (I)payroll costs;
- (II)costs related to the continuation of group health care benefits during periods of paid sick, medical, or family leave, and insurance premiums;
- (III)employee salaries, commissions, or similar compensations;
- (IV)payments of interest on any mortgage obligation (which shall not include any prepayment of or payment of principal on a mortgage obligation);
- (V)rent (including rent under a lease agreement);
- (VI)utilities; and
- (VII)interest on any other debt obligations that were incurred before the covered period.
But that’s not the total calculus as you’ll need to keep your employees at pre-crisis levels (more on that below, as well as their wages or salaries above 75% of pre-COVID compensation to ensure the forgivable amount of your principal is not reduced. The calculation for the amount of loan forgiveness is based on two factors that can impact the forgivable percentage of the principal, the number of employees kept on/re-hired during the period up to June 30, 2020, and the reductions in salary or wages paid to employees during the covered period:
(2)Reduction based on reduction in number of employees
The amount of loan forgiveness under this section shall be reduced, but not increased, by multiplying the amount described in subsection (b) by the quotient obtained by dividing—
(i)the average number of full-time equivalent employees per month employed by the eligible recipient during the covered period; by
(I)at the election of the borrower—
(aa)the average number of full-time equivalent employees per month employed by the eligible recipient during the period beginning on February 15, 2019 and ending on June 30, 2019; or
(bb)the average number of full-time equivalent employees per month employed by the eligible recipient during the period beginning on January 1, 2020 and ending on February 29, 2020; or
(II)in the case of an eligible recipient that is seasonal employer, as determined by the Administrator, the average number of full-time equivalent employees per month employed by the eligible recipient during the period beginning on February 15, 2019 and ending on June 30, 2019.
(B)Calculation of average number of employees
For purposes of subparagraph (A), the average number of full-time equivalent employees shall be determined by calculating the average number of full-time equivalent employees for each pay period falling within a month.
(3)Reduction relating to salary and wages
The amount of loan forgiveness under this section shall be reduced by the amount of any reduction in total salary or wages of any employee described in subparagraph (B) during the covered period that is in excess of 25 percent of the total salary or wages of the employee during the most recent full quarter during which the employee was employed before the covered period.
An employee described in this subparagraph is any employee who 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.
Additionally, you need to know that the reason everyone keeps talking about the fact that 75% of your loan must be spent on payroll expenses is that in the April 15 guidance, the SBA stated (see subsection “r” in that link) that this was a threshold they’d adopted:
However, at least 75 percent of the PPP loan proceeds shall be used for payroll costs. For purposes of determining the percentage of use of proceeds for payroll costs, the amount of any EIDL refinanced will be included. For purposes of loan forgiveness, however, the borrower will have to document the proceeds used for payroll costs in order to determine the amount of forgiveness. While the Act provides that PPP loan proceeds may be used for the purposes listed above and for other allowable uses described in section 7(a) of the Small Business Act (15 U.S.C. 636(a)), the Administrator believes that finite appropriations and the structure of the Act warrant a requirement that borrowers use a substantial portion of the loan proceeds for payroll costs, consistent with Congress’ overarching goal of keeping workers paid and employed. As with the similar limitation on the forgiveness amount explained earlier, the Administrator, in consultation with the Secretary, has determined that 75 percent is an appropriate percentage that will align this element of the program with the loan amount, 75 percent of which is equivalent to eight weeks of payroll. This limitation on use of the loan funds will help to ensure that the finite appropriations available for these loans are directed toward payroll protection, as each loan that is issued depletes the appropriation, regardless of whether portions of the loan are later forgiven.
So do. Yourself a favor and comply. The benefits of complying also likely mean that you won’t be dipping down on the other two criteria, the number of employees and the amount of their total salary/wages in proportion to their previous compensation.
As for proving that you’ve met these criteria and your record keeping requirements, as we mentioned above they are statutorily mandated and will be part of the application for forgiveness. Keeping track of the expenses and having accurate payroll records is key to the reporting and application mechanisms detailed in the CARES Act for obtaining forgiveness and no forgiveness will be given without adequate documentation:
An eligible recipient seeking loan forgiveness under this section shall submit to the lender that is servicing the covered loan an application, which shall include—
(1)documentation verifying the number of full-time equivalent employees on payroll and pay rates for the periods described in subsection (d), including—
(A)payroll tax filings reported to the Internal Revenue Service; and
(B)State income, payroll, and unemployment insurance filings;
(2)documentation, including cancelled checks, payment receipts, transcripts of accounts, or other documents verifying payments on covered mortgage obligations, payments on covered lease obligations, and covered utility payments;
(3)a certification from a representative of the eligible recipient authorized to make such certifications that—
(A)the documentation presented is true and correct; and
(B)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
(4)any other documentation the Administrator determines necessary.
(f)Prohibition on forgiveness without documentation
No eligible recipient shall receive forgiveness under this section without submitting to the lender that is servicing the covered loan the documentation required under subsection (e).
The SBA is continually updating its FAQs on these topics. Some other interesting points from the SBA’s updated May 3, 2020 guidance (includes points from the prior versions):
Question: Do PPP loans cover paid sick leave?
Answer: Yes. PPP loans covers payroll costs, including costs for employee vacation, parental, family, medical, and sick leave. However, the CARES Act excludes qualified sick and family leave wages for which a credit is allowed under sections 7001 and 7003 of the Families First Coronavirus Response Act (Public Law 116–127). Learn more about the Paid Sick Leave Refundable Credit here.
Question: The amount of forgiveness of a PPP loan depends on the borrower’s payroll costs over an eight-week period; when does that eight-week period begin?
Answer: The eight-week period begins on the date the lender makes the first disbursement of the PPP loan to the borrower. The lender must make the first disbursement of the loan no later than ten calendar days from the date of loan approval.
Question: To determine borrower eligibility under the 500-employee or other applicable threshold established by the CARES Act, must a borrower count all employees or only full-time equivalent employees?
Answer: For purposes of loan eligibility, the CARES Act defines the term employee to include “individuals employed on a full-time, part-time, or other basis.” A borrower must therefore calculate the total number of employees, including part-time employees, when determining their employee headcount for purposes of the eligibility threshold. For example, if a borrower has 200 full-time employees and 50 part-time employees each working 10 hours per week, the borrower has a total of 250 employees.
By contrast, for purposes of loan forgiveness, the CARES Act uses the standard of “full-time equivalent employees” to determine the extent to which the loan forgiveness amount will be reduced in the event of workforce reductions.
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 minimis 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.