A recipient of a PPP Loan may request forgiveness of the portion of the loan proceeds (the “Forgivable Loan Amount”) that was used during the Covered Period (defined below) for the following expenses: payroll costs (including cash compensation and certain employee benefits), payments of interest on covered mortgage obligations, rent incurred under leases in force prior to February 15, 2020, and utility expenses for utility services which were started prior to February 15, 2020. No more than 25% of the Forgivable Loan Amount may be attributable to non-payroll costs, and the Forgivable Loan Amount cannot exceed the principal amount of the loan.
On May 15, 2020, the SBA released the application for applying for PPP Loan forgiveness (the “Loan Forgiveness Application”), which is to be submitted to the applicant’s lender following the Covered Period. Below is an overview of the material concepts and/or changes resulting from the Loan Forgiveness Application:
Calculating the Covered Period
The Covered Period is the eight-week (56-day) period of the PPP Loan commencing on the first day the borrower receives its PPP Loan proceeds. For example, if the borrower first received the proceeds on April 20, the first day of the Covered Period is April 20 and the last day is June 14.
As an alternative to using the payroll costs incurred during the Covered Period for purposes of calculating the Forgivable Loan Amount, borrowers with a biweekly or more frequent payroll schedule may elect to calculate their eligible payroll costs using the eight-week (56-day) period that begins on the first day of their first pay period following the date they received their loan proceeds (the “Alternative Payroll Covered Period”). The instructions for the Loan Forgiveness Application provide the following example: “if a 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.”
Payroll costs are considered paid on the date that paychecks are distributed or an ACH transaction is initiated. Payroll costs are incurred on the date that the pay is earned. Payroll costs incurred but not paid during the borrower’s last pay period of the Covered Period or Alternative Payroll Covered Period are eligible for forgiveness if paid on or before the next regular payroll date.
Employee or Wage Reduction Calculations
The Forgivable Loan Amount is subject to reduction if the borrower reduced its number of full-time equivalent (“FTE”) employees and/or the salaries and wages of its employees due to the coronavirus pandemic. The full-time equivalent (FTE) status of each employee is determined by dividing the average number of hours for which an employee received compensation per week by 40. Alternatively, borrowers can elect to assign 1.0 to every employee who was paid for an average of 40 hours or more per week and 0.5 to every employee who was paid, on average, for less than 40 hours a week.
Reduction in Salaries and Wages
The Forgivable Loan Amount is subject to reduction if the average annual salary or wages of certain employees during the Covered Period or the Alternative Payroll Covered Period is less than 75% of the average annual salary or wages for those employees during the period from January 1, 2020, to March 31, 2020. If so, the Forgivable Loan Amount is reduced, on a dollar-for-dollar basis, by the difference of (i) 75% of the average salary or wages for an eight-week period based on the annualized salary or wages from January 1, 2020, to March 31, 2020, less (ii) the actual salary or wages paid during the Covered Period or Alternative Payroll Covered Period. This calculation is determined on an employee-by-employee basis and does not include employees who earned annualized salaries or wages of more than $100,000 in 2019.
Importantly, if, by June 30, 2020, an employer restores any wage reductions that occurred during the period from February 15, 2020, to April 26, 2020, such reductions will not be included in the above calculation.
Reduction in Headcount
The Forgivable Loan Amount may be subject to further reduction if the borrower’s average number of FTE employees during the Covered Period or Alternative Payroll Covered Period is less than the lesser of the borrower’s average FTE employees from (i) February 15, 2019, to June 30, 2019, or (ii) January 1, 2020, to February 29, 2020 (the “Reference Period”). If the foregoing applies to the borrower, the Forgivable Loan Amount will be reduced to a percentage equal to the borrower’s average FTE employees during the Covered Period or Alternative Payroll Covered Period divided by the borrower’s average FTE employees during the Reference Period. However, if the borrower reduced employee headcount between February 15, 2020, and April 26, 2020, and is able to restore such reduction by June 30, 2020, such reduction will not be taken into account for purposes of the employee reduction calculation.
If a borrower received an emergency EIDL advance, the Forgivable Loan Amount will be reduced by the amount of such advance.
The Loan Forgiveness Application requires borrowers to make the following certifications:
- The Forgivable Loan Amount was used only for eligible expenses, does not include non-payroll costs in excess of 25% of the total amount, and includes all required reductions.
- The borrower acknowledges that if the funds were knowingly used for unauthorized purposes, the government may pursue recovery of the loan proceeds and/or civil or criminal fraud charges.
- The borrower has accurately verified the payments for the eligible expenses for which the borrower is requesting forgiveness.
- All necessary documentation (listed below) is included with the Loan Forgiveness Application.
- All information contained in the Loan Forgiveness Application is true and correct, and the borrower acknowledges that the borrower is subject to civil and criminal penalties if false statements were made to obtain forgiveness.
- The tax information included with the borrower’s Loan Forgiveness Application materials is consistent with the tax information submitted by the borrower to the taxing authorities, and the lender can share such tax information with the SBA.
- The SBA may request additional information for the purposes of evaluating the borrower’s eligibility for the PPP Loan and for loan forgiveness, and the borrower’s failure to provide such documentation upon request may result in a determination by the SBA that the borrower was ineligible for the PPP Loan or a denial of the borrower’s Loan Forgiveness Application.
The Loan Forgiveness Application also requires the borrower to check a box indicating whether it, together with its affiliates, received more than $2 million in PPP Loan proceeds.
In addition to the Loan Forgiveness Application materials, the following documentation must be submitted to the borrower’s lender when applying for loan forgiveness:
- Payroll documentation verifying the eligible cash compensation and non-cash benefit payments made during the Covered Period or the Alternative Payroll Covered Period, consisting of the following:
- 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, including 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.
- Documentation showing the average number of FTE employees on the borrower’s payroll during the Reference Period elected by the borrower (see Reduction in Headcount above). Such documentation may include 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.
- Non-payroll documentation verifying existence of the obligations/services prior to February 15, 2020, and eligible payments made during the Covered Period, including:
- For business mortgage interest payments, a copy of the lender amortization schedule and receipts or cancelled checks verifying eligible payments from the Covered Period; or lender account statements from February 2020 and the months of the Covered Period through one month after the end of the Covered Period verifying interest amounts and eligible payments;
- For business rent or lease payments, a copy of the current lease agreement and receipts or cancelled checks verifying eligible payments from the Covered Period; or landlord account statements from February 2020 and from the Covered Period through one month after the end of the Covered Period verifying eligible payments.
- For business utility payments, a copy of invoices from February 2020 and those paid during the Covered Period and receipts, cancelled checks, or account statements verifying those eligible payments.
The Loan Forgiveness Application confirms that applicants need to follow best practices in handling loan proceeds and confirms that applicants with loans in excess of $2 million will be subject to additional scrutiny. We are working with many of our clients to chart out the process and best practices in anticipation of an audit or potential public scrutiny. More information regarding the Paycheck Protection Program can be found on our website, including the recommendations and best practices we have identified to maximize and obtain forgiveness.
The information provided are general guidelines and should not be considered professional advice. Every client has unique circumstances which may not fall within the circumstances described above. Additional guidance may be issued which changes the foregoing discussion. The Business and Corporate attorneys at Dvorak Law Group have the knowledge and experience to efficiently assist our clients with various business matters, including matters pertaining to the Paycheck Protection Program. Please contact Dvorak Law Group for specific questions and recommendations regarding your business.
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