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Strategies on acing the SBA’s new PPP Loan Forgiveness Application
May 18, 2020


All information in this COVID-19 Response Resource issue is effective as of May 18, 2020.

On Friday, May 15, 2020, the Small Business Administration (SBA) released the application form that Borrowers will use to apply for PPP loan forgiveness. The SBA is expected to release additional, formal guidance in the coming weeks. 

The application form details the information that Borrowers will be required to include and the calculations they will be required to perform to obtain Paycheck Protection Program (PPP) loan forgiveness. Notably, the application provides a safe harbor for borrowers that return employees to work by June 30, 2020, from the full-time equivalency reduction calculation. In addition, certain “incurred” but not paid expenses are eligible for forgiveness, even if not paid during the eight-(8)-week period after a PPP loan is funded.     

Borrowers that return their workforce by June 30 are eligible for a safe harbor from the proportional reduction.    

The PPP loan program reduces the amount of forgiveness based on proportional reductions in workforce. The application provides a safe harbor for Borrowers who, by June 30, 2020, restore full-time-equivalent (FTE) employee levels to the same level of the Borrower’s pay period that included February 15, 2020. FTEs are calculated based on a 40-hour work week to determine FTE levels.  

Notably, the safe harbor does not modify the SBA’s 75 percent limitation on forgiveness[1] which limits forgiveness in the event that at least 75 percent of PPP loan proceeds are not used for payroll costs.  

Borrowers can adjust the eight-week covered period to match the employer’s payroll cycle.  

Borrowers will be allowed to delay the eight-week loan period to the start of the first payroll period after the PPP loan was obtained. Thus, if the PPP loan was obtained on April 20, but the Borrower’s first post-PPP loan payroll period begins on April 26, then all payroll costs paid or incurred for eight weeks after April 26, can be counted for purposes of loan forgiveness. This alternative covered period only applies to payroll costs and not the other eligible expenses (rent, mortgage interest, and utilities). If the Borrower’s cycle is bi-monthly as opposed to bi-weekly, this option likely loses some of its utility.   

Payroll costs that are “incurred” are eligible for forgiveness even if not paid in the covered period.     

Payroll costs are considered incurred on the day that employee’s pay is earned and are included as an eligible expense so long as they are paid before the employee’s next regular payroll date. For example, if an employer’s covered period ended on June 10, forgiveness would include all payroll earned as of June 10, even though employees would not receive paychecks until later in June. It also appears that an employer can count payroll that was incurred before the eight-week covered period but paid during that period in determining loan forgiveness.

The total amount of forgiveness for payroll made to a particular employee may not exceed $100,000 on a prorated basis (approximately $15,384.62 per employee). 

Utility costs have been broadly defined and only need to be incurred to be eligible.    

Unlike payroll costs, there is no alternative eight-week period for the Borrower to select for the other covered expenses. However, if utility costs are incurred but not paid during the eight weeks after the Borrower receives the PPP loan proceeds, such costs are forgivable if paid on or before the “next regular billing date.” Utility costs are defined as “payments for the distribution of electricity, gas, water, transportation, telephone, or interest access for which service began before February 15, 2020.”     

Borrowers must make additional certifications as to eligibility and size

The application contains several additional certifications and representations that the Borrower must make. First, the Borrower must acknowledge that the SBA “may request additional information” regarding the Borrower’s loan eligibility for the PPP loan and for loan forgiveness, and that if the Borrower fails to provide this information, it will be ineligible for forgiveness. Second, the Borrower must certify if its loan amount is above or below the $2 million mandatory review/audit threshold—after application of the affiliation rules. Third, all tax documents the Borrower submits are required to be consistent with what it has or will submit to all IRS and/or state workforce agencies. 

Borrowers must provide significant information and preserve other records for six (6) years.

The Borrower’s PPP loan forgiveness application must contain documentation concerning the use of loan proceeds. This documentation includes:

  • Lease and mortgage documents signed before February 15, 2020, associated with rent and interest expenses, including amortization schedules and canceled checks to verify payment.  
  • Bank statements (or third-party payroll reports) documenting cash compensation paid to employees.
  • State and federal payroll reporting forms (i.e. 941).
  • Payment receipts, cancelled checks or account statements documenting employer contributions to employee health and retirement plans.
  • Invoices, receipts and canceled checks for all business utility statements.
  • Discrete—employee by employee—payroll records and FTE calculations.

In addition, Borrowers must maintain documentation “supporting the Borrower’s certifications as to the necessity of the loan request and its eligibility for a PPP loan” and associated documents around the PPP loan application and the Borrowers eligibility.

Acing forgiveness is a technical and legal exercise.

It is imperative that Borrowers, even those with PPP loans under $2 million, prepare a “necessity file” documenting their need for the PPP loan proceeds on the date that they signed the PPP loan application and certified that the PPP loan was necessary. Borrowers are advised to engage and begin working with legal and tax counsel now to assemble their “necessity file” (which in most cases will not be able to submitted to the lender for loan forgiveness until early July when the Q2 941 can be completed) and to prepare for a process that is expected to look similar to an IRS audit.   

If you would like to learn more about this topic, join Parsons Behle & Latimer attorneys for a webcast Wed., May 20, from 4 – 5 p.m. to discuss the contents of this client alert and more. Additional details and registration information are available here.  

To contact a Parsons attorney and discuss this topic or other SBA-related matters, call Sean Monson at (801) 536-6714 or send an email to smonson@parsonsbehle.com; Ross Keogh at (406) 206-9710 or send an email to rkeogh@parsonsbehle.com; Matt Cook at (801) 536-6819 or send an email to mcook@parsonsbehle.com; Brandon Mark at (801) 536-6958 or send an email to bmark@parsonsbehle.com; or Liz Mellem at (406) 333-0530 or send an email to amellem@parsonsbehle.com.  

 

[1] This rule is currently being challenged in litigation.