An Updated Guide to Applying for PPP Loan Forgiveness, With Changes From the PPP Flexibility Act

COVID-19 Update

As set forth in the CARES Act, a substantial portion of monies borrowed under the Paycheck Protection Program (PPP) may be eligible for forgiveness. Many questions have arisen since the passage of the CARES Act regarding provisions in the act relating to such forgiveness and how a borrower would ultimately apply for forgiveness. As set forth in the act, as amended by the Paycheck Protection Flexibility Act (the Flexibility Act), some borrowers can seek loan forgiveness as early as eight weeks following the date of disbursement of their PPP loans. For many borrowers, this eight-week period is either right around the corner or soon approaching.

In light of this timing, on May 22, 2020, the Treasury and the Small Business Administration (SBA) issued two new interim rules, which were subsequently amended on June 17, 2020 (the Interim Rules), providing further detail on the requirements governing the forgiveness of PPP loans for borrowers and lenders. The guidance provided in the Interim Rules, which can be found here, here and here, provides additional information on how borrowers can apply for and maximize their loan forgiveness amounts.

This article reflects the latest changes made to the PPP based on the new Flexibility Act, passed on June 5, 2020. By easing the terms of existing PPP loans, the Flexibility Act provides additional relief for borrowers seeking loan forgiveness. Notable changes made to the PPP include extending the covered period for loan forgiveness from eight weeks to 24 weeks and lowering the percentage of loan funds that must be spent on eligible payroll costs from 75% to 60%. In order to implement the changes made by the Flexibility Act, on June 16, 2020, the SBA and the Department of the Treasury released a revised PPP loan forgiveness application, which has been shortened from 11 pages to five and can be found here, and loan forgiveness application instructions, which can be found here. In addition, the SBA released a new EZ version of the forgiveness application, Form 3508EZ, which can be found here, and Form 3508EZ Instructions, which can be found here. Both applications aim to simplify the loan forgiveness process for borrowers.

What Is the Covered Period?

Generally, the covered period begins on the first day a borrower receives its PPP loan proceeds. However, borrowers with a biweekly (or more frequent) payroll schedule can choose to use an alternative payroll covered period that begins on their first pay period following their PPP loan disbursement date. Borrowers that elect to use the alternative payroll covered period must apply such period wherever there is a reference in the loan forgiveness application to “the Covered Period or the Alternative Payroll Covered Period.” However, borrowers must apply the covered period (not the alternative payroll covered period) wherever there is a reference in the loan forgiveness application to “the Covered Period” only.

Originally, the covered period was the eight-week period following the date a borrower received its PPP loan (or such later beginning date as discussed above for borrowers with more frequent payroll schedules). The Flexibility Act extended the covered period to the earlier of (i) 24 weeks after such date of origination of the loan or (ii) December 31, 2020. Borrowers who obtained a PPP loan prior to enactment of the Flexibility Act may elect to keep the original eight-week covered period.

How Can I Apply for Loan Forgiveness?

Step 1. Read and fill out the revised SBA form of loan forgiveness application, which can be found here. Detailed instructions for completing the application can be found in the loan forgiveness application instructions. The instructions are a helpful guide to help borrowers navigate the myriad rules and guidance the SBA promulgated under the CARES Act.

Step 2. Gather documentation that is required to be submitted with the application. The loan forgiveness application instructions specifically set forth what documentation must be submitted with the application and what may be voluntarily submitted.

Required documentation includes a PPP Schedule A, which is attached to the loan forgiveness application, and supplemental borrower-provided documentation verifying payroll and nonpayroll costs and full-time equivalent employees (FTEEs). PPP Schedule A requires the borrower to list information about employee compensation and FTEEs’ hours to determine whether there will be any reductions in the loan forgiveness amount. The PPP Schedule A Worksheet includes instructions for calculating the amounts to be included on PPP Schedule A. Typical documentation for verifying a borrower’s payroll and nonpayroll costs and FTEEs would consist of bank accounts, payment receipts, payroll tax filings reported to the IRS, lease agreements, utility invoices and copies of lender amortization schedules. Detailed instructions for completing PPP Schedule A and the PPP Schedule A Worksheet can be found in the loan forgiveness application instructions.

Voluntary documentation includes what is called a PPP Borrower Demographic Information Form. The form requests information about each of a borrower’s principals to collect data on veteran, gender, race and ethnicity for PPP reporting purposes.

In case of audit by the SBA and the SBA Inspector General, all documentation identified in the loan forgiveness application instructions and all records relating to a borrower’s PPP loan must be maintained in a borrower’s files for at least six years after the date the loan is forgiven or repaid in full.

Step 3. Submit the completed application to the lender servicing your PPP loan, which is in most cases your lender.

Set forth below is a summary of matters referenced in the Calculation Form and a reiteration of rules and suggestions to assist borrowers in maximizing the loan forgiveness amount.

Who Is Eligible to Use Form 3508EZ?

Form 3508EZ applies to borrowers who (i) are self-employed and have no employees; or (ii) did not reduce the salaries or wages of their employees by more than 25%, and did not reduce the number or hours of their employees; or (iii) experienced reductions in business activity as a result of health directives related to COVID-19, and did not reduce the salaries or wages of their employees by more than 25%.

How Can I Apply for Loan Forgiveness Under Form 3508EZ?

The three-page Form 3508EZ requires fewer calculations and less documentation for eligible borrowers. The EZ version of the loan forgiveness application requires a borrower to calculate its loan forgiveness amount and make certain representations and certifications. As on the PPP forgiveness application, a borrower has the option of submitting a PPP Borrower Demographic Information Form and must submit documentation verifying payroll costs and nonpayroll costs. Detailed instructions for completing Form 3508EZ and calculating forgiveness amounts and on the documentation a borrower must submit can be found in the Form 3508EZ Instructions.

What Costs Are Eligible for Forgiveness?

As set forth in the CARES Act, payroll costs paid or incurred during the covered period are eligible for forgiveness. Eligible payroll costs that are incurred but not paid during the forgiveness period will qualify for forgiveness if paid on or before the next regular payroll date. Typically, payroll costs are incurred on the day the employee’s pay is earned. However, for employees who are not performing work but are still on a borrower’s payroll, payroll costs are incurred based on the schedule set by the borrower. Note that the Interim Rules clarify that salary, wages or commissions paid to a furloughed employee qualify as payroll costs, as do such an employee’s hazard pay and bonuses if that employee’s total compensation does not exceed $100,000.

In addition, for borrowers using an eight-week covered period, the amount of loan forgiveness requested by the borrower cannot exceed $15,385 per individual employee. For borrowers using a 24-week covered period, this amount is capped at $46,154.

Compensation paid to owners (including owner-employees, a self-employed individual or general partners) qualifies for forgiveness up to eight weeks’ worth (8/52) of 2019 net profit (capped at $15,385) for an eight-week covered period or 2.5 months’ worth (2.5/12) of 2019 net profit (capped at $20,833) for a 24-week covered period.

Nonpayroll costs, including covered mortgage interest obligations, covered rent or lease obligations, and covered utility payments, are also eligible for forgiveness if they are paid or incurred during the covered period or incurred during the covered period and paid on or before the next regular billing date, even if the billing date is after the covered period.

How Can I Maximize My Loan Forgiveness Amount?

Ensure That Eligible Nonpayroll Costs Do Not Exceed 40% of the Loan Forgiveness Amount

At least 60% of loan proceeds must be used for payroll costs. Eligible nonpayroll costs that exceed 40% of the loan forgiveness amount will reduce the total amount of loan forgiveness a borrower may obtain. To calculate the maximum eligible loan forgiveness amount, a borrower can divide its total payroll costs by 0.60. For example, if a borrower’s payroll costs for the covered period are $60,000, the loan forgiveness amount cannot exceed $100,000 ($60,000 / 0.60 = $100,000).

Note that prior to passage of the Flexibility Act, PPP loan borrowers were required to spend at least 75% of their loan proceeds on payroll costs in order to be eligible for maximum forgiveness. A borrower is now required only to spend 60% of its loan proceeds on payroll costs and can spend the remaining 40% on eligible nonpayroll costs.

Spend the Loan Proceeds During the Covered Period

Only the loan proceeds spent during the covered period will qualify for forgiveness. Borrowers should ensure that they are spending the loan proceeds during the covered period on eligible costs, as portions spent after the covered period will be subject to repayment.

Maintain Full-Time Equivalent Employees and Employee Salary and Wages

Loan forgiveness amounts will be reduced by (i) reductions in FTEEs—employees who work 40 hours or more—on average each week during the covered period or (ii) reductions in salary and wages in excess of 25% for employees who are new in 2020 or who were not paid more than $100,000 annualized in any pay period in 2019.

To ensure maximum eligibility for forgiveness, you should do both of the following:

(1) Maintain your FTEEs by either (a) ensuring your average weekly FTEE headcount during your covered period is equal to or greater than your average weekly FTEE headcount during your chosen reference period or (b) meeting the FTEE Reduction Safe Harbor. For more details, see How Do I Determine If I Have Reduced My Full-Time Equivalent Employee Headcount? below; and

(2) Maintain your employee salary and wages by either (a) not reducing salaries or wages by more than 25% for new employees in 2020 or existing employees who made less than $100,000 annualized in any pay period in 2019 or (b) meeting the Salary/Wage Reduction Safe Harbor for each employee. For more details, see How Do I Determine If I Have Reduced My Wages? below.

How Do I Calculate Full-Time Equivalent Employees?

To calculate average FTEEs, for each employee, enter the average number of hours paid per week, divide that number by 40, and round the total to the nearest tenth. The maximum for each employee is capped at 1.0. In the alternative, a borrower may elect to use a simplified method that assigns 1.0 for employees who work 40 hours or more per week and 0.5 for part-time employees who work fewer hours.

How Do I Determine If I Have Reduced My Full-Time Equivalent Employee Headcount?

Step 1. Calculate your average weekly FTEEs during either (a) February 15, 2019, to June 30, 2019, or (b) January 1, 2020, to February 29, 2020. If you are a seasonal employer, you can choose either of the foregoing reference periods or a consecutive 12-week period between May 1, 2019, and September 15, 2019. Choose the reference period that gives you the lowest number of FTEEs.

Step 2. Calculate your average weekly FTEEs during your covered period. For purposes of this calculation, the following are considered FTE Reduction Exceptions and will not reduce your forgiveness amount: (1) any positions for which you made a good-faith written offer to rehire an individual who was an employee on February 15, 2020, and you were unable to hire similarly qualified employees for unfilled positions on or before December 31, 2020; (2) any positions for which you made a good-faith written offer to restore any reduction in hours, at the same salary or wages, during the covered period, and your offer was rejected by the employee; and (3) any employees who during the covered period (a) were fired for cause, (b) voluntarily resigned, or (c) voluntarily requested and received a reduction of their hours. In order to exclude reductions for rejected offers to rehire, the Interim Rules clarify that the offer must have been for the same salary or wages and same number of hours as earned by the employee in the last pay period prior to separation or reduction in hours, you must maintain records documenting the offer and rejection, and you must inform the applicable state unemployment insurance office of the employee’s rejected offer within 30 days of the rejection. Information on how to report rejected rehire offers to state unemployment insurance offices will be provided on the SBA’s website.

Step 3. Check whether either of the FTE Reduction Safe Harbors applies.

FTE Reduction Safe Harbor 1

This safe harbor applies if you, in good faith, are able to document an inability to return to the same level of business activity between February 15, 2020 and the end of the covered period as you were operating at before February 15, 2020, due to compliance with requirements established or guidance issued by the Secretary of Health and Human Services, the Director of the Centers for Disease Control and Prevention, or the Occupational Safety and Health Administration between March 1, 2020, and December 31, 2020, related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID-19.

FTE Reduction Safe Harbor 2

a) If you reduced your FTEEs in the period beginning February 15, 2020, and ending April 26, 2020;

b) But you restore your FTEEs by the earlier of (i) the date the forgiveness application is submitted and (ii) December 31, 2020 (as extended by the Flexibility Act), to your FTEEs in the pay period that included February 15, 2020; then

c) You will not be subject to loan forgiveness reduction for reduction in FTEEs.

Step 4. If neither of the FTE Reduction Safe Harbors applies, and your FTEE calculation from Step 2 is less than your FTEE calculation from Step 1, then your loan forgiveness may be subject to reduction.

How Do I Determine If I Have Reduced My Wages?

Step 1. List each new employee in 2020 and each existing employee who was not paid more than $100,000 annualized in any pay period in 2019.

Step 2. For each of the listed employees, calculate the average annual salary or hourly wage during your covered period.

Step 3. For each of the listed employees, calculate the average annual salary or hourly wage between January 1, 2020 and March 31, 2020.

Step 4. Check if the Salary/Hourly Wage Reduction Safe Harbor is met for each listed employee.

a) If you reduced your average annual salary or hourly wage for such employee in the period beginning February 15, 2020 and ending April 26, 2020;

b) But you restore the average annual salary or hourly wage for such employee by the earlier of (i) the date the forgiveness application is submitted and (ii) December 31, 2020 (as extended by the Flexibility Act), to the amount of such employee’s average annual salary or hourly wage as it existed as of February 15, 2020; then

c) You will not be subject to loan forgiveness reduction for reduction in salary/hourly wage for the applicable employee.

Step 5. If the Salary/Hourly Wage Reduction Safe Harbor does not apply for a listed employee, then divide the result from Step 3 by the result from Step 2 for such employee. If the resulting number is less than 0.75, your loan forgiveness may be subject to reduction.

What If My Loan Forgiveness Is Subject to Reduction?

Where there is a reduction in FTEEs during the covered period, loan forgiveness will be reduced proportionally by the percentage reduction in full-time equivalent employees. For reductions in an employee’s salary or wages, a borrower must reduce its total forgiveness amount by the total dollar amount of the salary or wage reductions that are in excess of 25 percent of base salary or wages. The salary and wage reduction will only apply to the portion of the decrease in employee salary and wages that is not attributable to the FTEE reduction. In addition, EIDL Advance Amounts received by a borrower will be deducted from the total loan forgiveness amount.

When Should I Expect To Hear Back From My Lender?

A lender has 60 days from the time it receives a completed loan forgiveness application issue its decision regarding loan forgiveness to the SBA. The SBA has an additional 90 days to review the loan application and remit the loan forgiveness amount to the lender. In such case, a borrower may not hear back regarding the status of its loan forgiveness application until both the lender has submitted the application to the SBA and the SBA has completed its review.

How Does the SBA Loan Review Process Work?

The Interim Rules provide additional insight into the SBA’s loan review process. Although the SBA recently indicated that its review of loans would center on loans over $2 million, the most recent Interim Rules clarify that the SBA may review any loan it deems appropriate at its discretion. As part of the SBA’s review of individual PPP loans, the SBA will evaluate a borrower’s eligibility for a PPP loan, whether a borrower calculated the loan amount accurately and used the loan proceeds for eligible uses, and whether a borrower is entitled to the amount of loan forgiveness claimed.

In the case the SBA determines that a borrower may be ineligible for a PPP loan or for the amount of forgiveness sought, the SBA will contact the lender or borrower directly to request additional information that the SBA will consider as part of its review. A borrower’s failure to respond to an SBA inquiry may result in a determination that a borrower was ineligible for a PPP loan or ineligible to receive the loan amount or loan forgiveness amount claimed by a borrower.

A borrower may appeal SBA’s determination that a borrower is ineligible for a PPP loan or ineligible for the loan amount or the loan forgiveness amount claimed by a borrower, and the SBA intends to issue a separate interim final rule addressing this process.

What Happens If My Loan Is Not Forgiven?

If a PPP loan is ineligible for forgiveness or if only a portion of the loan is forgiven, borrowers must repay the remaining balance of the loan before the maturity of the loan at a 1% interest rate. For loans made prior to June 5, 2020, the maturity date is 2 years (subject to any mutually agreed extension by the borrowers and lenders). For loans made on or after June 5, 2020, the maturity date is 5 years.

In addition, payments on the loan are deferred until the SBA remits the amount of any loan forgiveness to the applicable lender (unless the borrower fails to apply for forgiveness within 10 months after the end of the covered period in which case, payments begin 10 months after the end of the covered period). Prior to the passage of the Flexibility Act, payments on the loan were only deferred for the first 6 months.

Additional Information

For a detailed review of the Loan Application released on May 15, 2020 see https://www.manatt.com/insights/newsletters/covid-19-update/sba-publishes-loan-forgiveness-application-for-pay.

Manatt will continue to monitor developments in the SBA Paycheck Protection Program and in other COVID-19 relief programs. Our COVID-19 resources are available at https://www.manatt.com/covid-19.

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