Updates to Loan Forgiveness Under the Paycheck Protection Program
This week, the U.S. Small Business Administration issued guidance to address questions concerning forgiveness of Paycheck Protection Program (“PPP”) loans, as provided under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), as amended by the PPP Flexibility Act (“Flexibility Act”).FN1 The following are a few key takeaways from the SBA’s Frequently Asked Questions on PPP Loan Forgiveness:
Loan Repayment:
Employers who borrowed money under the PPP are not required to make any loan payments as long as their loan forgiveness application is submitted within ten months after the Covered Period ends.FN2 If the lender determines the loan is fully forgiven, employers are not responsible for any payments. If any amount of the loan is not forgiven, employers must repay the entire loan amount on or before the loan’s maturity date.
Payroll Costs:
Payroll costs incurred during the Covered Period and paid on or before the next regular payroll date after the Covered Period ends are eligible for loan forgiveness.FN3
Payroll costs incurred before the Covered Period but paid during the Covered Period are also eligible for loan forgiveness.FN4
For purposes of calculating cash compensation, employers should use the gross amounts paid to employees—including salaries, wages, tips, commissions, bonuses and hazard pay—before deductions for taxes, employee benefit payments, or similar, when calculating the amount of payroll costs.FN5
The amount of expenses employers pay for group health care benefits and/or employee retirement benefits during the Covered Period are included in calculating payroll costs for loan forgiveness; but employers may not include contributions or payments made by, or deducted from, employees.FN6
Nonpayroll Costs:
Similar to payroll costs, nonpayroll costs—eligible mortgage interest costs, business rent, lease costs, and utility costs—incurred prior to the Covered Period but paid during the Covered Period are eligible for loan forgiveness.FN7
Similarly, nonpayroll costs incurred during the Covered Period and paid on or before the next regular billing date are also eligible for loan forgiveness.FN8
Lease payments or mortgage interest payments made during the Covered Period for leases or mortgages that existed prior to February 15, 2020 and were renewed or refinanced after February 15, 2020, are eligible for loan forgiveness.FN9
Loan Forgiveness Reductions:
Contrary to the rule concerning the calculation of payroll costs, for the purposes of calculating reductions of the loan forgiveness amount, employers should only take into account decreases in salaries or wages, and do not have to include decreases in tips, bonuses, commissions, or hazard pay.FN10
When calculating the loan forgiveness amount, employers may exclude any reduction in full-time employees if they are able to document in good faith: “(1) an inability to rehire individuals who were employees of the borrower on February 15, 2020 and (2) an inability to hire similarly qualified individuals for unfilled positions on or before December 31, 2020.”FN11
If an employee’s salary or hourly wage is reduced by more than 25% during the Covered Period, the portion above the 25% reduces the amount of payroll costs eligible for forgiveness unless the employer is able to demonstrate they satisfy the Salary/Hourly Wage Reduction Safe Harbor.FN12
Takeaway
Employers borrowing money under the PPP are encouraged to maintain documentation of their eligible payroll and nonpayroll costs in anticipation of the submission of their loan forgiveness applications. Employers interested in receiving a loan under the PPP have until Saturday, August 8, 2020 to apply.FN13
Footnotes:
FN1: Paycheck Protection Program Frequently Asked Questions (FAQs) on PPP Loan Forgiveness, (published August 4, 2020), https://www.sba.gov/sites/default/files/2020-08/PPP%20Loan%20Forgiveness%20FAQs%208-4-20-508.pdf
FN2: The Covered Period is either (1) the 24-week (168-day) period beginning on the PPP loan disbursement date, or (2) if the borrower received its PPP loan before June 5, 2020, the borrower may elect to use an eight-week (56-day) Covered Period. See General Loan Forgiveness FAQ 3.
FN3: See Loan Forgiveness Payroll Costs FAQ 1.
FN4: See Loan Forgiveness Payroll Costs FAQ 2.
FN5: See Loan Forgiveness Payroll Costs FAQs 4 and 5.
FN6: See Loan Forgiveness Payroll Costs FAQs 6 and 7.
FN7: See Loan Forgiveness Nonpayroll Costs FAQ 1.
FN8: See Loan Forgiveness Nonpayroll Costs FAQ 2.
FN9: See Loan Forgiveness Nonpayroll Costs FAQ 5.
FN10: See Loan Forgiveness Reductions FAQ 5.
FN11: To satisfy this exemption, employers should maintain written offers to rehire an individual, a written record of the offer’s rejection, and written records of efforts to hire a similarly qualified individual. See Loan Forgiveness Reductions FAQ 1.
FN12: See Loan Forgiveness Reductions FAQ 1. To qualify under FTE (full-time equivalency) Reduction Safe Harbor 1, employers must demonstrate they were “unable to operate between February 15, 2020, and the end of the Covered Period at the same level of business activity as before February 15, 2020 due to compliance with requirements established 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 the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID-19.” See also SBA Form 3508, https://home.treasury.gov/system/files/136/3245-0407-SBA-Form-3508-PPP-Forgiveness-Application.pdf.
FN13: The deadline to apply for a Paycheck Protection Program loan is August 8, 2020. See https://www.sba.gov/funding-programs/loans/coronavirus-relief-options/paycheck-protection-program.