By Robert T. Smith and Madeline O. McElhanon
On August 4, the U. S. Small Business Administration (SBA), in consultation with the Department of the Treasury, issued additional guidance on the forgiveness of Paycheck Protection Program (PPP) loans in the form of Frequently Asked Questions.
The FAQs addressed a number of issues including the following:
General Loan Forgiveness
- Sole proprietors, independent contractors, and self-employed individuals who had no employees at time of the PPP loan application automatically qualify to use Loan Forgiveness Application Form 3508EZ.
- PPP lenders may use and accept scanned copies of documents, E-signatures, and E-consents for loan forgiveness applications and loan forgiveness documentation.
- If a borrower submits its loan forgiveness application within ten months of the completion of the Covered Period, the borrower is not required to make any payments until the forgiveness amount is remitted to the lender by SBA. If the loan is fully forgiven, the borrower is not responsible for payments. If there is no forgiveness or partial forgiveness, the borrower must pay the remaining balance on or before maturity of the loan.
- The borrower is responsible for paying the accrued interest on any amount of the loan that is not forgiven. The lender is responsible for notifying the borrower of the remittance by SBA, the amount of loan forgiveness, and when the borrower’s first payment is due, if applicable.
Loan Forgiveness Payroll Costs
- Payroll costs incurred during the Covered Period paid after the end of the Covered Period are eligible for loan forgiveness as long as the payroll costs are paid on or before the next regular payroll date after the Covered Period.
- Payroll costs incurred before the Covered Period but paid during the Covered Period are also eligible for loan forgiveness.
- If a borrower uses a twice a month or less frequent payroll cycle, the borrower will need to calculate payroll costs for partial pay periods. If the borrower uses a biweekly or more frequent payroll cycle, the borrower may elect to calculate payroll costs from the first day of the first payroll cycle following the PPP disbursement date.
- Borrowers should use the gross amount when calculating cash compensation for employees.
- Loan funds used by Borrowers to pay any payroll costs, including lost tips, lost commissions, bonus, and hazard pay are eligible for loan forgiveness. However, forgivable cash compensation per employee is limited to $100,000 on an annualized basis.
- Employer contributions for employee retirement benefits and group health care benefits that are paid or incurred by the borrower during the Covered Period qualify as payroll costs eligible for loan forgiveness.
- Retirements benefits and group health care costs that are paid by employees are not considered payroll costs and are therefore not eligible for loan forgiveness.
- Loan forgiveness is not provided for expenses of retirement benefits or group health benefits accelerated from periods outside the Covered Period. This has been one of the most common questions from borrowers throughout the PPP process. The FAQs confirm that a borrower may not effectively “pre pay” retirement contributions and include those amounts for forgiveness purposes.
Loan Forgiveness Nonpayroll Costs
- Business mortgage interest costs, eligible business rent or lease costs, and eligible business utility costs incurred prior to the Covered Period and paid during the Covered Period are eligible for loan forgiveness.
- Interest on unsecured credit is not eligible for loan forgiveness. Although interest on unsecured credit incurred before February 15, 2020 is a permissible use of PPP loan proceeds, this expense is not eligible for forgiveness.
- Payments made on recently renewed leases or interest payments on refinanced mortgage loans are eligible for loan forgiveness if the original lease or mortgage existed prior to February 15, 2020.
Loan Forgiveness Reductions
- The FTE Reduction Exceptions apply to all employees, not just those who would be listed in Table 1 of the Loan Forgiveness Application. Borrowers should therefore include employees who made more than $100,000 in the FTE Reduction Exception line in Table 1 of the PPP Schedule A Worksheet.
- For purposes of calculating reductions in the loan forgiveness amount, the borrower should only account for decreases in salaries for wages, not all forms of compensation.
Note: The “Covered Period” is the 24-week (168-day) period beginning on the PPP loan disbursement date. However, if the borrower received its PPP loan before June 5, 2020, the borrower may elect to use an eight-week (56-day) Covered Period. Some borrowers with more frequent payroll cycles may elect into the Alternative Covered Period. The Alternative Covered Period begins on the first day of the first pay period after the PPP loan disbursement.
We are advising both lenders and borrowers as they navigate the PPP forgiveness process. Please contact one of our attorneys for assistance.
Robert T. Smith heads the Finance and Commercial Transactions Practice Group. His diverse corporate practice focuses on representing companies and financial institutions in general business, transactional, securities and regulatory matters.
Madeline O. McElhanon is an associate in Finance & Commercial Transactions Practice Group where she will advise banking, healthcare, real estate and technology companies on transactional, tax, securities and regulatory matters.
Disclaimer: The information included here is provided for general informational purposes only and should not be a substitute for legal advice nor is it intended to be a substitute for legal counsel. For more information or if you have further questions, please contact one of our Attorneys.