Navigating the PPP Loan Forgiveness Process can be challenging…
Full loan forgiveness is an essential feature of the Paycheck Protection Program (PPP). However, navigating the loan forgiveness process can be challenging, in large part because the regulatory landscape continues to evolve.
Basics of PPP Loan Forgiveness
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. Under the PPP, loans may be completely forgiven provided that certain conditions are satisfied.
The Paycheck Protection Program Flexibility Act, which amended the CARES Act, provided 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. The amendments also lowered 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 loan forgiveness covered period. The threshold is now up to 60 percent for each of the above.
The Paycheck Protection Program Flexibility Act also established a safe harbor from reductions in loan forgiveness based on reductions in full-time equivalent employees for borrowers who are unable to return to pre-pandemic business activity levels, due to compliance with COVID-19 worker or customer safety requirements 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. Additionally, the amendments create a safe harbor from reductions in loan forgiveness based on reductions in full-time equivalent employees, to provide protections for borrowers who 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.
Answers to PPP Loan Forgiveness FAQs
To ensure that your loan is forgiven, it is imperative to stay on top of guidance issued by the U.S. Treasury Department and the Small Business Association (SBA). Below are several key questions that the agencies have answered to date:
When can borrowers seek forgiveness?
The SBA began accepting lender loan forgiveness submissions on August 10, 2020. 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. If the loan is fully forgiven, the borrower is not responsible for any payments. If only a portion of the loan is forgiven, or if the forgiveness application is denied, any remaining balance due on the loan must be repaid by the borrower on or before the maturity date of the loan.
What application form do I use?
Lenders can provide borrowers with the appropriate form, which will be either the SBA Form 3508, SBA Form 3508EZ, SBA Form 3508S, or a lender equivalent. The 3508EZ and the 3508S are shortened versions of the application for borrowers who meet specific requirements.
What documentation are borrowers required to provide?
Documents that must be submitted to the lender may include:
Bank account statements or third-party payroll service provider reports documenting the amount of cash compensation paid to employees.
Tax forms (or equivalent third-party payroll service provider reports) for the periods that overlap with the Covered Period or the Alternative Payroll Covered Period:
Payroll tax filings reported, or that will be reported, to the IRS (typically, Form 941); and
State quarterly business and individual employee wage reporting and unemployment insurance tax filings reported, or that will be reported, to the relevant state.
Payment receipts, cancelled checks, or account statements documenting the amount of any employer contributions to employee health insurance and retirement plans that the borrower included in the forgiveness amount.
Business mortgage interest payments: Copy of lender amortization schedule and receipts verifying payments, or lender account statements.
Business rent or lease payments: Copy of current lease agreement and receipts or cancelled checks verifying eligible payments.
Business utility payments: Copies of invoices and receipts, cancelled checks or account statements.
Will larger loans be scrutinized more closely?
Yes. Loan forgiveness 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.
Are smaller loans treated differently?
Some smaller loans enjoy relaxed requirements. In October, the SBA streamlined the loan forgiveness process for PPP loans of $50,000 or less. Under the Interim Final Rule, PPP borrowers of $50,000 or less are exempted from any reductions in forgiveness based on reductions in full-time-equivalent (FTE) employees and reductions in employee salary or wages. The SBA also published an alternative Loan Forgiveness Application (SBA Form 3508S) for use by PPP borrowers applying for loan forgiveness on PPP loans with a total loan amount of $50,000 or less (except for those borrowers that together with their affiliates received loans totaling $2 million or greater).
Can loan recipients appeal loan forgiveness denials?
Yes. 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. In August, the SBA issued a new Interim Final Rule establishing the process by which borrowers can appeal SBA decisions regarding PPP loans. Under the Interim Final Rule, only the borrower on a loan for which SBA has issued a final loan review decision has standing to appeal to the SBA’s Office of Hearings and Appeals (OHA). OHA may affirm, reverse, or remand an SBA loan review decision, which includes the denial of a forgiveness application in whole or part.
Next Steps for PPP Loan Recipients
Borrowers should familiarize themselves with the loan forgiveness process and take steps to ensure that they are maintaining the documentation that will be required when submitting a loan forgiveness application. It is likely that the PPP loan forgiveness requirements will continue to evolve over the next few months. Accordingly, businesses may want to consider holding off applications for forgiveness to see if future changes make the process easier and potentially more favorable.
As always, we encourage businesses to stay on top of legal updates and contact Scarinci Hollenbeck’s knowledgeable business attorneys with any questions.
If you have questions, please contact us
If you have any questions or if you would like to discuss the matter further, please contact me, Robert A. Marsico, or the Scarinci Hollenbeck attorney with whom you work, at 201-896-4100.
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Answers to Your Top Questions About PPP Credit Forgiveness
Author: Robert A. Marsico
Navigating the PPP Loan Forgiveness Process can be challenging…
Full loan forgiveness is an essential feature of the Paycheck Protection Program (PPP). However, navigating the loan forgiveness process can be challenging, in large part because the regulatory landscape continues to evolve.
Basics of PPP Loan Forgiveness
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. Under the PPP, loans may be completely forgiven provided that certain conditions are satisfied.
The Paycheck Protection Program Flexibility Act, which amended the CARES Act, provided 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. The amendments also lowered 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 loan forgiveness covered period. The threshold is now up to 60 percent for each of the above.
The Paycheck Protection Program Flexibility Act also established a safe harbor from reductions in loan forgiveness based on reductions in full-time equivalent employees for borrowers who are unable to return to pre-pandemic business activity levels, due to compliance with COVID-19 worker or customer safety requirements 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. Additionally, the amendments create a safe harbor from reductions in loan forgiveness based on reductions in full-time equivalent employees, to provide protections for borrowers who 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.
Answers to PPP Loan Forgiveness FAQs
To ensure that your loan is forgiven, it is imperative to stay on top of guidance issued by the U.S. Treasury Department and the Small Business Association (SBA). Below are several key questions that the agencies have answered to date:
When can borrowers seek forgiveness?
The SBA began accepting lender loan forgiveness submissions on August 10, 2020. 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. If the loan is fully forgiven, the borrower is not responsible for any payments. If only a portion of the loan is forgiven, or if the forgiveness application is denied, any remaining balance due on the loan must be repaid by the borrower on or before the maturity date of the loan.
What application form do I use?
Lenders can provide borrowers with the appropriate form, which will be either the SBA Form 3508, SBA Form 3508EZ, SBA Form 3508S, or a lender equivalent. The 3508EZ and the 3508S are shortened versions of the application for borrowers who meet specific requirements.
What documentation are borrowers required to provide?
Documents that must be submitted to the lender may include:
Bank account statements or third-party payroll service provider reports documenting the amount of cash compensation paid to employees.
Tax forms (or equivalent third-party payroll service provider reports) for the periods that overlap with the Covered Period or the Alternative Payroll Covered Period:
Payroll tax filings reported, or that will be reported, to the IRS (typically, Form 941); and
State quarterly business and individual employee wage reporting and unemployment insurance tax filings reported, or that will be reported, to the relevant state.
Payment receipts, cancelled checks, or account statements documenting the amount of any employer contributions to employee health insurance and retirement plans that the borrower included in the forgiveness amount.
Business mortgage interest payments: Copy of lender amortization schedule and receipts verifying payments, or lender account statements.
Business rent or lease payments: Copy of current lease agreement and receipts or cancelled checks verifying eligible payments.
Business utility payments: Copies of invoices and receipts, cancelled checks or account statements.
Will larger loans be scrutinized more closely?
Yes. Loan forgiveness 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.
Are smaller loans treated differently?
Some smaller loans enjoy relaxed requirements. In October, the SBA streamlined the loan forgiveness process for PPP loans of $50,000 or less. Under the Interim Final Rule, PPP borrowers of $50,000 or less are exempted from any reductions in forgiveness based on reductions in full-time-equivalent (FTE) employees and reductions in employee salary or wages. The SBA also published an alternative Loan Forgiveness Application (SBA Form 3508S) for use by PPP borrowers applying for loan forgiveness on PPP loans with a total loan amount of $50,000 or less (except for those borrowers that together with their affiliates received loans totaling $2 million or greater).
Can loan recipients appeal loan forgiveness denials?
Yes. 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. In August, the SBA issued a new Interim Final Rule establishing the process by which borrowers can appeal SBA decisions regarding PPP loans. Under the Interim Final Rule, only the borrower on a loan for which SBA has issued a final loan review decision has standing to appeal to the SBA’s Office of Hearings and Appeals (OHA). OHA may affirm, reverse, or remand an SBA loan review decision, which includes the denial of a forgiveness application in whole or part.
Next Steps for PPP Loan Recipients
Borrowers should familiarize themselves with the loan forgiveness process and take steps to ensure that they are maintaining the documentation that will be required when submitting a loan forgiveness application. It is likely that the PPP loan forgiveness requirements will continue to evolve over the next few months. Accordingly, businesses may want to consider holding off applications for forgiveness to see if future changes make the process easier and potentially more favorable.
As always, we encourage businesses to stay on top of legal updates and contact Scarinci Hollenbeck’s knowledgeable business attorneys with any questions.
If you have questions, please contact us
If you have any questions or if you would like to discuss the matter further, please contact me, Robert A. Marsico, or the Scarinci Hollenbeck attorney with whom you work, at 201-896-4100.
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