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Ten Things to Know About the PPP Loan Forgiveness Applications (Revised July 23, 2020)

July 23, 2020

Overview

Below are the top ten things to know about the Paycheck Protection Program (“PPP”) Loan Forgiveness Applications and the detailed instructions for the applications posted on June 16, 2020.  There are two forms and two sets of instructions:  (a) EZ Forms: PPP Loan Forgiveness Application Form 3508EZ (“Form EZ”), and PPP Loan Forgiveness Application Form 3580EZ Instructions for Borrowers/Checklist for Using SBA Form 3508EZ (“Form EZ Instructions”); and (b) Forgiveness Forms: PPP Loan Forgiveness Application Form Revised June 16, 2020 (“Forgiveness Application”) and Loan Forgiveness Application Instructions for Borrowers (“Forgiveness Application Instructions”).  The forms and the instructions DO NOT ANSWER all questions on forgiveness.  We expect the SBA to issue further regulations and guidance to further assist borrowers as they complete their applications, and to provide lenders with guidance on their responsibilities.

Download the PPP Loan Forgiveness Application one-pager.

PPP Loan Forgiveness Applications Updates:

1. COVERED PERIOD AND ALTERNATIVE PAYROLL COVERED PERIOD: 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. In no event may the Covered Period extend beyond December 31, 2020.There are options for borrowers to calculate payroll costs using an “alternative payroll covered period” under certain circumstances. Borrowers with a biweekly (or more frequent) payroll schedule may elect to calculate eligible payroll costs using the 24-week (168-day) period (or for loans received before June 5, 2020 at the election of the borrower, the eight-week (56-day) period) that begins on the first day of their first pay period following their PPP loan disbursement date. Borrowers that elect to use the Alternative Payroll Covered Period must apply the Alternative Payroll Covered Period wherever there is a reference in the application to “the Covered Period or the Alternative Payroll Covered Period.” However, borrowers must apply the Covered Period (not the Alternative Payroll Covered Period) wherever there is a reference in the application to “the Covered Period” only. In no event may the Alternative Payroll Covered Period extend beyond December 31, 2020.   

2. TIMELINE FOR SUBMITTING APPLICATION AND DEFERRAL: A borrower may submit a loan forgiveness application any time on or before the maturity 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. However, if the borrower applies before the end of the Covered Period, the borrower must account for the salary reductions for the full Covered Period. If the borrower does not apply for loan forgiveness within 10 months after the last day of the covered period, or if the SBA determines that the loan is not eligible for forgiveness (in whole or in part), the PPP loan is no longer deferred and the borrower must begin paying principal and interest.  If this occurs, the lender must notify the borrower of the date the first payment is due.

3. ELIGIBLE PAYROLL COSTS: Borrowers are generally eligible for forgiveness for the payroll costs paid and payroll costs incurred during the 24-week (168-day) or 8-week (56-day) Covered Period (or Alternative Payroll Covered Period) (“payroll costs”). Payroll costs are considered paid on the day that paychecks are distributed or the Borrower originates an ACH credit transaction. Payroll costs are considered incurred on the day that the employee’s 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. Otherwise, payroll costs must be paid during the Covered Period (or Alternative Payroll Covered Period). For each individual employee, the total amount of cash compensation eligible for forgiveness may not exceed an annual salary of $100,000, as prorated for the Covered Period. Count payroll costs that were both paid and incurred only once. Include only payroll costs for employees whose principal place of residence is in the United States.

4. NONPAYROLL COSTS: Nonpayroll costs eligible for forgiveness consist of: (a) business mortgage interest payments: payments of mortgage interest (not including any prepayment or payment of principal) on any business mortgage obligation on real or personal property incurred before February 15, 2020; (b) business rent or lease payments: business rent or lease payments pursuant to lease agreements for real or personal property in force before February 15, 2020; and (c) business utility payments: business payments for a service for the distribution of electricity, gas, water, telephone, transportation, or internet access for which service began before February 15, 2020. An eligible nonpayroll cost must be paid during the Covered Period or incurred during the Covered Period and paid on or before the next regular billing date, even if the billing date is after the Covered Period. Eligible nonpayroll costs cannot exceed 40% of the total forgiveness amount. Count nonpayroll costs that were both paid and incurred only once.

5. RENTS AND LEASES: The PPP instructions provide clarification that rent includes business rent or lease payments for real and personal property during the Covered Period, pursuant to lease agreements in force before February 15, 2020.

6. FORM EZ ELIGIBILITY: A borrower may use the Form EZ if the borrower can check one of the three boxes below.  All other borrowers must use the Loan Forgiveness Application.  The three boxes are:

    • Borrower is a self-employed individual, independent contractor, or sole proprietor who had no employees at the time of the PPP loan application and did not include any employee salaries in the computation of average monthly payroll in the Borrower Application Form (SBA Form 2483).
    • Borrower did not reduce annual salary or hourly wages of any employee by more than 25% during the Covered Period or the Alternative Payroll Covered Period compared to the period between January 1, 2020 and March 31, 2020 (for purposes of this statement, “employees” means only those employees that did not receive, during any single period during 2019, wages or salary at an annualized rate of pay in an amount more than $100,000); AND the borrower did not reduce the number of employees or the average paid hours of employees between January 1, 2020 and the end of the Covered Period. (ignoring reductions: (i) that arose from an inability to rehire individuals who were employees on February 15, 2020 if the borrower was unable to hire similarly qualified employees for unfilled positions on or before December 31, 2020; and (ii) in an employee’s hours that the borrower offered to restore and the employee refused.
    • Borrower did not reduce annual salary or hourly wages of any employee by more than 25% during the Covered Period or the Alternative Payroll Covered Period compared to the period between January 1, 2020 and March 31, 2020 (for purposes of this statement, “employees” means only those employees that did not receive, during any single period during 2019, wages or salary at an annualized rate of pay in an amount more than $100,000); AND the borrower was unable to operate during 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 (includes both direct and indirect compliance with COVID-19 requirements and guidance, such as state and local government shutdown orders that are based in part on guidance from the three federal agencies [based on the Interim Final Rule posted June 22, 2020]), related to the maintenance of standards of sanitation, social distancing, or any other work or customer safety requirement related to COVID-19.

7. FORGIVENESS CALCULATION FOR FORM EZ: Borrowers and other interested parties can use the Form EZ and accompanying instructions to calculate the amount of forgiveness, including expenses and its subcategories of payroll and nonpayroll costs, potential forgiveness amounts, adjustment for 60% of the potential forgiveness amount was used for payroll costs and forgiveness amount. 

8. FORGIVENESS CALCULATION FOR LOAN FORGIVENESS APPLICATION: Borrowers and other interested parties may use the PPP Loan Forgiveness Calculation Form and accompanying instructions to calculate the amount of forgiveness, including expenses and its subcategories of payroll and nonpayroll costs, adjustments for full-time equivalency (FTE) and salary/hourly wage reductions, potential forgiveness amounts, adjustment for 60% of the potential forgiveness amount was used for payroll costs and forgiveness amount. 

9. FORGIVENESS REDUCTIONS BASED ON HEAD COUNT, SAFE HARBORS AND REHIRING FORGIVENESS GUIDANCE: There is some guidance in the Loan Forgiveness Instruction on implementation of statutory exemptions from loan forgiveness reduction based on reductions in full-time equivalent employees, including the calculation of the average full-time equivalency (FTE) (40 hour week), the FTE Reduction Safe Harbors and the FTE Reduction Exceptions.

  • FTE Reduction Safe Harbors: There are two separate safe harbors that exempt certain borrowers from any loan forgiveness reduction based on a reduction in FTE employee levels: 
  1. Safe Harbor 1: If the Borrower, in good faith, is able to document that it was 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 (includes both direct and indirect compliance with COVID requirements and guidance, such as state and local government shutdown orders that are based in part on guidance from the three federal agencies [based on the Interim Final Rule posted June 22, 2020]), related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID-19.
  2. Safe Harbor 2: If both of the following conditions are met: (1) the borrower reduced its FTE employee level in the period beginning February 15, 2020, and ending April 26, 2020; and (2) the borrower then restored its FTE employee levels as of the earlier of December 31, 2020 or the date of the application to its FTE employee levels in the borrower’s pay period that included February 15, 2020.
  • FTE Reduction Exceptions: Any FTE reductions in the following cases do not reduce the borrower’s loan forgiveness: the FTE of (1) any positions for which the borrower made a good-faith, written offer to rehire an individual who was an employee on February 15, 2020 and the borrower was unable to hire similarly qualified employees for unfilled positions on or before December 31, 2020; (2) any positions for which the borrower made a good-faith, written offer to restore any reduction in hours, at the same salary or wages, during the Covered Period or the Alternative Covered Period and the employee rejected the offer, and (3) any employees who during the Covered Period or the Alternative Payroll Covered Period (a) were fired for cause, (b) voluntarily resigned, or (c) voluntarily requested and received a reduction of their hours. In all of these cases, include the FTE on the form only if the position was not filled by a new employee.

10. FORGIVENESS REDUCTIONS BASED ON SALARY/HOURLY WAGES: The Forgiveness Application Instructions provide some direction on implementation of the statutory requirement concerning reductions in employee salary and wages. The actual amount of loan forgiveness depends on whether the salary or hourly wages of certain employees (those employees whose salaries or hourly wages were reduced by more than 25% during the Covered Period or the Alternative Payroll Covered Period) was less than during the period from January 1, 2020 to March 31, 2020.  If the borrower restored salary/hourly wage levels, the borrower may be eligible for elimination of the salary/hourly wage reduction amount. 

We encourage you to visit Schwabe’s COVID-19 and CARES Act resource pages frequently for the most up-to-date information as it becomes available. For additional assistance, please reach out to Carmen Calzacorta, Mark Long, Dan Eller, Russel Robertson, Charmin Shiely, Omar Contreras, Kenneth Katzaroff, or Savannah Wolfe.

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