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On the evening of May 15, 2020, the Small Business Administration (“SBA”) and U.S. Treasury Department (“Treasury”) released their highly-anticipated Paycheck Protection Program (“PPP”) loan forgiveness application and instructions. The accompanying press release noted that additional regulations and guidance would be issued soon to assist borrowers with completing their applications for forgiveness and lenders with compliance.
The press release also noted that the loan forgiveness application and instructions include several features intended to reduce compliance burdens and simplify the overall PPP loan forgiveness process for borrowers, including:
The form and instructions also make the following important clarifications:
The form provides that borrowers must complete the application as directed and submit it to their lender or the lender servicing the loan. Borrowers are also given the option to submit the application electronically through their lender.
The application is divided into four sections: (1) the PPP loan forgiveness calculation form; (2) Schedule A, where borrowers calculate payroll costs and any full-time equivalency (“FTE”) reduction; (3) a worksheet for Schedule A; and (4) an optional borrower demographic information form. Borrowers must submit items (1) and (2) to their lenders.
The key metric for PPP loan forgiveness is, of course, the amount of the borrower’s payroll costs and other eligible expenses attributable to the “Forgiveness Covered Period” (“FCP”). As discussed in our last PPP alert, the FCP is the eight-week period beginning on the date that PPP loan proceeds were received in the borrower’s bank account. Commentators had advocated for a kind of “cash method” where the FCP would start either at the beginning of the payroll period during which funding was received or the beginning of the next payroll period, at the borrower’s discretion.
While the SBA declined to adopt this method in its “FAQ” guidance, the PPP loan forgiveness application and instructions provide some latitude for payments made after the FCP. Specifically, payroll costs are considered “incurred” on the date the employee earns the compensation and considered “paid” on the date the borrower either gives the payroll check to an employee or initiates an ACH transaction for a direct deposit.
If a borrower uses a bi-weekly or more frequent payroll schedule, then in calculating its payroll costs, it can use either the FCP or an “Alternative Payroll Covered Period” beginning on the first day of the scheduled payroll period following the day on which the borrower received the PPP loan proceeds. Regardless, payroll costs earned by an employee will be considered as “paid” during the period and will count towards forgiveness as long as the payment is made on or before the next regularly scheduled payroll date, even if that date falls outside the FCP or Alternative Payroll Covered Period. No guidance is provided for employers who use multiple payroll schedules for different classes of employees.
Consistent with the mandates of the CARES Act, the forgiveness application and instructions retain the requirement that 75 percent of PPP borrowing be used for payroll costs, and no more than 25 percent be used for eligible non-payroll costs. It must be emphasized, however, that the calculation is based on the amount of forgiveness and not the total amount of loan proceeds. Put another way, the borrower must use 75 percent of the forgiveness amount for payroll costs or face losing part of the forgiveness.
The instructions include a list of documents borrowers must submit with their forgiveness applications to support payroll cost, FTE, and non-payroll eligible cost calculations and documents that borrowers must maintain for six years after forgiveness or repayment in full, but which are not required to be submitted unless requested by the SBA. The documents that must be submitted include:
Documents that borrowers must maintain for six years after forgiveness, but which are not required to be submitted unless requested by the SBA include:
The complete PPP loan forgiveness application and instructions can be found here:
Members of Smith Debnam’s Corporate & Business Law Practice Group are closely monitoring developments related to the PPP and other programs designed to keep the economy moving as part of our comprehensive response to the COVID-19 pandemic. If you have any questions, please contact us.