How to Make Sure Your PPP Loan Is Forgiven

For most small businesses, loan forgiveness is the most attractive aspect of the Paycheck Protection Program (PPP)...

For most small businesses, loan forgiveness is the most attractive aspect of the Paycheck Protection Program (PPP). With that in mind, it is imperative to comply with all of the program’s requirements.

Over the past several weeks, the Small Business Association (SBA) has published guidance and instructions informing borrowers on how to apply for forgiveness of their PPP loans. It has also published a revised Forgiveness Application and EZ Forgiveness Application.

Loan Forgiveness Under the Paycheck Protection Program

The Coronavirus Aid, Relief, and Economic Security (CARES) Act amended Section 7(a) of the Small Business Act to establish the PPP, a new guaranteed, unsecured loan program intended to help small businesses keep workers on their payroll amid the economic challenges caused by the COVID-19 pandemic. Loans are available to small businesses, nonprofits, veterans’ groups, or tribal businesses with 500 or fewer employees (or a number set by the SBA for the relevant industry); sole proprietors, independent contractors, and eligible self-employed workers; and restaurants, food service, caterers, and hotels that employ 500 or fewer employees per physical location. Under the PPP, loans may be forgiven provided that certain conditions are satisfied.

On June 4, 2020, the Paycheck Protection Program Flexibility Act was signed into law, which provides substantially greater flexibility for borrowers to qualify for loan forgiveness. The amendments to the PPP extended the covered period for loan forgiveness from eight weeks after the date of loan disbursement to 24 weeks after the date of loan disbursement. The forgiveness amount is equal to the sum of the following costs incurred during that period: payroll costs (compensation above $100,000 excluded); mortgage interest; rent obligations; and utility payments.

Under the Paycheck Protection Program Flexibility Act, the requirements that 75 percent of a borrower’s loan proceeds must be used for payroll costs and that 75 percent of the loan forgiveness amount must have been spent on payroll costs during the 24-week loan forgiveness covered period was lowered to 60 percent for each of these requirements. If a borrower uses less than 60 percent of the loan amount for payroll costs during the forgiveness covered period, the borrower will continue to be eligible for partial loan forgiveness, subject to at least 60 percent of the loan forgiveness amount having been used for payroll costs.

The PPP amendments also established a safe harbor from reductions in loan forgiveness based on reductions in full-time equivalent employees for borrowers that are unable to return to the same level of business activity the business was operating at before February 15, 2020, due to compliance with requirements or guidance issued between March 1, 2020, and December 31, 2020, 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, related to worker or customer safety requirements related to COVID–19. Additionally, the amendments provide a safe harbor from reductions in loan forgiveness based on reductions in full-time equivalent employees, to provide protections for borrowers that are both unable to rehire individuals who were employees of the borrower on February 15, 2020, and unable to hire similarly qualified employees for unfilled positions by December 31, 2020.

PPP Loan Forgiveness Application and Guidance

In light of the changes implemented under the PPP Flexibility Act, the SBA published a revised loan forgiveness application on June 17, 2020. In addition to revising the Full Forgiveness Application, SBA also published a new EZ Forgiveness Application. 

The EZ application requires fewer calculations and less documentation for eligible borrowers. The simplified version of the application is available to loan recipients that satisfy the following requirements:

• Are self-employed and have no employees; OR
• Did not reduce the salaries or wages of their employees by more than 25%, and did not reduce the number of hours of their employees; OR
• 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%.

Notably, both applications include a box that requires borrowers to alert the SBA if they received funds in excess of $2 million. Specifically, a borrower must check the box if, together with its affiliates (to the extent required under SBA’s interim final rule on affiliates (85 FR 20817)) and not waived under 15 U.S.C. 636(a)(36)(D)(iv)), received PPP loans with an original principal amount in excess of $2 million. The Treasury Department has previously indicated that it plans to audit companies receiving PPP loans in amounts of $2 million or more. “If SBA determines in the course of its review that a borrower lacked an adequate basis for the required certification concerning the necessity of the loan request, SBA will seek repayment of the outstanding PPP loan balance and will inform the lender that the borrower is not eligible for loan forgiveness,” the SBA stated in a recent FAQ response.

The SBA also continues to issue guidance regarding loan forgiveness. With regard to calculating payroll costs, borrowers with a biweekly (or more frequent) payroll schedule may elect to calculate eligible payroll costs using the eight-week (56-day) period that begins on the first day of their first pay period following their PPP Loan Disbursement Date (Alternative Payroll Covered Period). So if the borrower received its PPP loan proceeds on Monday, April 20, and the first day of its first pay period following its PPP loan disbursement is Sunday, April 26, the first day of the Alternative Payroll Covered Period is April 26 and the last day of the Alternative Payroll Covered Period is Saturday, June 20.

Most recently, the SBA clarified when borrowers can apply for forgiveness. The guidance states that a borrower may submit a loan forgiveness application any time on or before the maturity date of the loan–including before the end of the covered period—if the borrower has used all of the loan proceeds for which the borrower is requesting forgiveness. However, if a borrower applies for forgiveness before the end of the Applicable Covered Period, and it has reduced any employee’s salaries or wages in excess of 25%, the borrower must account for the excess salary reduction for the full 8-week or 24-week covered period.  

PPP Loan Forgiveness Process

The instructions for the loan forgiveness applications specify what documents must be submitted to the lender in connection with the application, including documentation verifying the eligible cash compensation and non-cash benefit payments from the Covered Period or the Alternative Payroll Covered Period and documentation verifying existence of the obligations/services prior to February 15, 2020 and eligible payments from the Covered Period. They also list documents that each borrower is required to maintain, but is not required to submit, such as documentation regarding any employee job offers and refusals, refusals to accept restoration of reductions in hours, firings for cause, voluntary resignations, written requests by any employee for reductions in work schedule, and any inability to hire similarly qualified employees for unfilled positions on or before December 31, 2020.

After a borrower submits a completed loan forgiveness application to its lender, the lender has 60 days to review the application and submit its decision to the SBA. If the lender denies forgiveness, borrowers may request that the SBA review a lender’s decision denying forgiveness within 30 days of receiving the denial notice from the lender. The SBA may decline or accept the request for review. The SBA has indicated that it plans to issue further guidance regarding the appeal process.

Extension of Paycheck Protection Program

The application deadline for the PPP was also extended to August 8, 2020.  Congress is also expected to consider an additional coronavirus relief package within the next few weeks. If you need any assistance in regard to the Paycheck Protect Program or any of the Federal programs now available, please contact us. We have a dedicated team of attorneys here to help. 

If you have questions, please contact us

If you have any questions or if you would like to discuss the matter further, please contact the Scarinci Hollenbeck attorney with whom you work, at 201-896-4100.