SBA Issues Regulations on PPP Forgiveness

The SBA has issued a much-awaited Interim Final Rule on PPP loan forgiveness.  The guidance finally provides borrowers with clarity regarding forgivable expenses and the forgiveness process, allowing borrowers to take immediate steps to maximize their loan forgiveness amount.  If spent appropriately, PPP loans are forgivable, up to 100% of the principal of the loan. 

To review, the forgiveness amount is the amount of loan proceeds spent on the following covered expenses during the applicable covered period:

·      Payroll costs, including: compensation in the form of salary, wages, commissions, or similar compensation (up to $15,385 per individual employee); cash tips or equivalent; payments for vacation, parental, family, medical, or sick leave; allowance for separation or dismissal; payment for employee benefits, including group health care coverage and premiums, and retirement benefits; payment of state and local taxes assessed on compensation of employees; and, for an independent contractor or sole proprietor, wages, commissions, income, or net earnings from self-employment, or similar compensation;

·      Covered mortgage interest payments, being interest payments on a loan obligation on real or personal property that was incurred before February 15, 2020;

·   Covered rent payments, being rent payments on leases of real or personal property under a lease in force before February 15, 2020; and

·     Covered utility payments, being utility payments for electricity, gas, water, transportation, telephone, or internet access for which service began before February 15, 2020.

The SBA Interim Final Rule, discussed below, provides additional detail on the components of the forgivable amount, forgiveness process, and reductions to the forgiveness amount.

Loan Forgiveness Process

A borrower can request loan forgiveness as early as eight-weeks after the date of disbursement of the loan proceeds.  To do so, a borrower must submit a Loan Forgiveness Application, along with supporting documentation, to its lender.  The lender has 60 days from receipt of the complete application to make a decision regarding forgiveness.  At the time of the that decision, if the lender determines that all or part of the loan is forgivable, the lender will request payment from the SBA.  The SBA has 90 days from when the lender issues its decision to remit the appropriate forgiveness amount, together with accrued interest, to the lender. 

The SBA may review the loan before or after the lender’s decision.  If the SBA determines that the borrower was ineligible for a PPP loan, the loan will not be eligible for forgiveness.  If all or a portion of the loan is not forgiven, the borrower must repay the loan on or before the two-year maturity of the loan.  There will be an appeal process, for which future guidance will be issued.

Payroll Costs Clarity

·    As discussed in a prior client alert, a borrower with a bi-weekly or more frequent payroll cycle may use the statutory covered period, being the eight-week period from disbursement, or may alternatively elect to seek forgiveness for payroll costs for the eight weeks beginning on the first day of the first payroll cycle in the covered period (the “alternative payroll covered period”).

·      Payroll costs paid or incurred during the applicable covered period are eligible for forgiveness. 

·      Payroll costs incurred during the last pay period in the applicable covered period are eligible for forgiveness if paid on or before the next regular payroll date.

·      Payments to furloughed employees during the covered period are eligible for forgiveness, subject to the $100,000 annual compensation cap prorated for the covered period ($15,385).

·      Employee bonuses and hazard pay are eligible for loan forgiveness, subject to the $15,385 cap on compensation during the covered period.

·      Owner-employees are generally limited in forgiveness to the lesser of 8/52 of 2019 compensation or the $15,385 cap on compensation during the covered period.

Non-Payroll Costs

·    Non-payroll costs (covered mortgage interest, rent, and utilities) are eligible for forgiveness if paid during the covered period or incurred during the covered period and paid on or before the next regular billing date after the covered period.

·      Eligible non-payroll costs cannot exceed 25% of the loan forgiveness amount.

·      Advanced payments of mortgage interest are not forgivable expenses.

Avoiding Reductions to the Loan Forgiveness Amount

Under the CARES Act, the forgivable amount of a loan is subject to reduction if the employer hasn’t restored workforce (FTEs) and wages (to within 25% of pre-pandemic level) by June 30, 2020.  However, a borrower’s loan forgiveness amount will not be reduced if the following criteria are met:

·      The borrower made a good faith written offer to rehire the employee during the applicable covered period;

·     The offer was for the same salary or wages and same number of hours as earned by the employee during the last pay period prior to separation or reduction in hours;

·      The employee rejected the offer;

·      The borrower documented the offer and rejection; and

·      The borrower informed the state unemployment office of the employee’s rejection of the offer of reemployment within 30 days of the employee’s rejection of the offer.

Additional Details in the Interim Final Rule

·      The reduction to forgiveness amount based on salary/wage reduction only applies to the portion of the decline in salary and wages that is not attributable to the FTE reduction.

·      The forgiveness amount will not be reduced for an employee that is fired for cause, voluntarily resigns, or voluntarily requests a schedule reduction.  Borrowers should be prepared to provide supporting documentation.

·      Borrowers may make the FTE calculation in one of two ways: (1) divide the average number of hours paid for each employee per week by 40, capping this quotient at 1.0; or (2) assign 1.0 to employees that work 40 hours or more and 0.5 to employees that work less than 40 hours.  Employers should consistently use one of the two methods in calculating FTEs. 

Borrowers should carefully review the Loan Forgiveness Application and Interim Final Rule.  There are still many unanswered questions, but the SBA has now provided long-awaited guidance for borrowers to maximize their loan forgiveness amount.  If you have any questions about the use of your loan proceeds and how to maximize your loan forgiveness amount, please contact a MacDonald Illig attorney to assist you.