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Updated Key Considerations for PPP Documentation under the Economic Aid Act

January 27, 2021

Overview

Borrowers under the Small Business Administration’s (the “SBA”) Paycheck Protection Program (“PPP”) are required to either maintain or submit to lenders and the SBA certain documentation associated with their application for and their use of PPP loan proceeds. In addition, certain documentation is required for an appeal.

The Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (the “Economic Aid Act” or “PPP2 Act”) was enacted on December 27, 2020. On January 6, 2021, the SBA in consultation with the Department of Treasury (“Treasury”) released two interim final rules:

(a) Interim Final Rule called Business Loan Program Temporary Changes; Paycheck Protection Program as Amended by Economic Aid Act (“Consolidated First Draw PPP IFR”) effective January 12, 2020 and

(b) Interim final rule called Business Loan Program Temporary Changes; Paycheck Protection Program Second Draw Loans (“Second Draw Rules”) effective January 12, 2021.

On January 8, 2021, they posted Form 2483 – Borrower Application Form Revised January 8, 2021 and Form 2483-SD – Second Draw Borrower Application Form (the “Borrower Applications”). And on January 19, 2021, they posted new forgiveness application forms and the Interim Final Rule on Loan Forgiveness Requirements and Loan Review Procedures as Amended by Economic Aid Act (“2021 Forgiveness IFR”) effective immediately. For more info, please view “What to Know about the Paycheck Protection Program, Round Two” and “Economic Aid Act: 10 Things to Know about Second Draw PPP Loans”. It also made some changes to the loan review process.

The forms and the interim final rules apply to loan applications and loan forgiveness applications following enactment of the Economic Aid Act and loan forgiveness applications submitted before enactment of the Economic Aid Act where the SBA had not yet remitted the forgiveness payment to the lender. See also “Asking for Forgiveness: Revised PPP Loan Forgiveness Applications and Guidance.”

We previously posted “Key Considerations for PPP Documentation” and the information in that article would still apply to loans for which the SBA remitted forgiveness to a lender as of January 19, 2021.

This article is a general summary of considerations a borrower might keep in mind as it aims to comply with the documentation requirements associated with the application for, receipt of, and use of PPP loan proceeds (for forgiveness or otherwise), and an appeal of an unfavorable forgiveness decision.

Five Broad Categories of Documentation

To facilitate their record-keeping efforts, PPP borrowers may be well served by approaching documentation from five angles: eligibility and PPP loan amount calculation, necessity, use of funds, forgiveness, and appeals.

  • Eligibility and PPP Loan Amount Calculation: A borrower should maintain thorough contemporaneous records with information used to determine the borrower’s eligibility for applying for and participating in the PPP. Ideally, these documents would address issues related to SBA size standards, compliance with SBA affiliation rules, and employee count, among other considerations. The borrower should also assemble and retain documentation regarding the calculation of the PPP loan amount
  • Necessity: A PPP borrower should be able to produce documentation containing information used to substantiate the certification on its PPP loan application that the “current economic uncertainty makes this loan request necessary to support the ongoing operations” of the borrower. Such documents would have information to help the borrower show it made the certification in good faith, taking into account its business activity at the time of the application, and the borrower’s ability to access other sources of liquidity sufficient to support its operations in a manner that is not significantly detrimental to the business. Starting around October 26, 2020, the SBA asked PPP lenders to provide certain questionnaires to PPP borrowers with loans at or over $2 million regarding the necessity certifications. These new SBA forms are posted on the Treasury website and ask for specific detailed information both at the time of application and during the use of the funds. This is a surprise for most borrowers who were focused on this certification only at the time of the application. Borrowers with loans at or over $2 million should gather the requested information now in anticipation of the lender’s request. Given the uncertainty as to how this process will be administered and how the information will be used, and the tight timelines, borrowers should seek legal advice prior to submitting a forgiveness application or responding to a request. See “PPP Loans Over $2 Million and the PPP Necessity Questionnaires” for additional details.
  • Use of Funds: PPP borrowers will benefit from maintaining accurate records of how PPP loan proceeds were used. In general, funds can be used to pay payroll costs (including some benefits), mortgage interest, rent, utilities, worker protection costs related to COVID-19, uninsured property damage costs caused by looting or vandalism during 2020, and certain supplier costs and expenses for operations. Records of these costs should allow the SBA to track the inflow of PPP loan proceeds from the borrower’s lender and the outflow of PPP loan proceeds toward payment of covered expenses, like payroll expenses and lease payments. Consider having a separate bank account to facilitate this requirement.
  • Forgiveness: If the borrower will seek forgiveness, it must maintain and submit documentation set forth in the SBA’s loan forgiveness applications along with additional documentation lenders may require. Please see below for specific documentation outlined by the SBA.
  • Appeals: If the borrower appeals certain forgiveness decisions, it needs to produce specific documents. See “What to Know about PPP Appeals and Next Steps”.

Specific Guidance on Documents

Eligibility and PPP Loan Amount Calculation: There is no specific guidance on what to assemble and retain for eligibility purposes, other than a borrower must provide a payroll statement or similar documentation form for the pay period that covered February 15, 2020, to establish that the borrower was in operation and had employees on that date (if the borrower had employees). However, there is guidance on how to calculate the maximum loan amount and related documentation. First, the Borrower Applications specify which documents need to accompany the applications. Second, on January 17, 2021, the SBA posted two documents: “How to Calculate Maximum Loan Amounts for First Draw PPP Loans and What Documents to Provide– by Business Type”; and “How to Calculate Revenue Reduction and Maximum Loan Amounts Including What Documentation to Provide.” Third, the SBA has issued the interim final rules. In those forms, documents, and interim final rules, the SBA has outlined certain documents that can be used to substantiate qualifying payroll amounts, including (a) certain payroll tax records and filings, such as IRS Form W-2s, IRS Form W-3, IRS Form 941, IRS Form 944, IRS Form 943, Form 1099-MISC, From 1040 Schedule C or F or Form 1065 (including K-1s) or payroll reports by a recognized third-party payroll processor and state quarterly wage unemployment insurance tax reporting forms from each quarter in 2019 or 2020; (b) documentation of any retirement and group health, life, disability, vision, and dental insurance contributions, such as records from a retirement administrator, records from a health insurance company or third party administrator for self-insured plans; (c) other items, such as income expenses from a sole proprietorship, bank statements, bank records, invoices, and books of record; and (d) for gross receipts, quarterly financial statement, quarterly or monthly bank statements, and annual IRS income tax filings. For Second Draw PPP Loans over $150,000, the borrower must submit copies of annual tax forms substantiating the annual gross receipts reduction. Please note that for a borrower that is using the same lender and same payroll timeframe as it used for its First Draw PPP Loan and already submitted the required payroll documents to the lender, no additional payroll document is required to be submitted with its Second Draw PPP Loan Application. A borrower should maintain the records that it relied upon in making the application.

Forgiveness: There are three general categories of documents to be provided or retained and maintained depending on the forgiveness application form used by the borrower. In addition, for any First Draw PPP Loan made before December 27, 2020, each borrower must submit a Form 3508D. The three general categories of documents are:

  • Payroll: Payroll documentation verifying the eligible cash compensation and non-cash benefit payments from the covered period consisting of each of the following: (i) bank account statements or third-party payroll service provider reports documenting the amount of cash compensation paid to employees; (ii)tax forms (or equivalent third-party payroll service provider reports) for the periods that overlap with the covered period: (a) payroll tax filings reported, or that will be reported, to the IRS (typically, Form 941); (b) state quarterly business and individual employee wage reporting and unemployment insurance tax filings reported, or that will be reported, to the relevant state; and (c) payment receipts, cancelled checks, or account statements documenting the amount of any employer contributions to employee group health, life, disability, vision, or dental insurance and retirement plans that the borrower included in the forgiveness a
  • Nonpayroll: Nonpayroll costs (for categories i-iii, documentation verifying existence of the obligations/services prior to February 15, 2020 and, for all categories, eligible payments from the covered period): (i) business mortgage interest payments: copy of 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; (ii) business rent or lease payments: copy of current lease agreement and receipts or cancelled checks verifying eligible payments from the covered period; or lessor account statements from February 2020 and from the covered period through one month after the end of the covered period verifying eligible payments; (iii) Business utility payments: copy of invoices from February 2020 and those paid during the covered period and receipts, cancelled checks, or account statements verifying those eligible payments; (iv) covered operations expenditures: copy of invoices, orders, or purchase orders paid during the covered period and receipts, cancelled checks, or account statements verifying those eligible payments; (v) covered property damage costs: copy of invoices, orders, or purchase orders paid during the covered period and receipts, cancelled checks, or account statements verifying those eligible payments, and documentation that the costs were related to property damage and vandalism or looting due to public disturbances that occurred during 2020 and such costs were not covered by insurance or other compensation; (vi) covered supplier costs: copy of contracts, orders, or purchase orders in effect at any time before the covered period (except for perishable goods), copy of invoices, orders, or purchase orders paid during the covered period and receipts, cancelled checks, or account statements verifying those eligible payments; and (vii) covered worker protection expenditures: copy of invoices, orders, or purchase orders paid during the covered period and receipts, cancelled checks, or account statements verifying those eligible payments, and documentation that the expenditures were used by the borrower to comply with applicable COVID-19 guidance during the covered period.
  • Other records: Records relating to the borrower’s PPP loan, including documentation submitted with its PPP loan application, documentation supporting the borrower’s certifications as to its eligibility for a PPP loan (including the borrower’s gross receipt reduction certification for a Second Draw PPP Loan, if applicable), documentation necessary to support the borrower’s loan forgiveness application, and documentation demonstrating the borrower’s material compliance with PPP requirements.

Documentation per Form: in addition to the three general categories of documents to be provided or retained and maintained, each loan forgiveness form asks for specific documents to be provided or maintained:

  • Form 3508S: This form is for loans of $150,000 or less. It requires fewer calculations and less documentation to accompany the form. However, the SBA may request information and documents to review the calculations as part of the loan review or audit process. If the application is being submitted for a Second Draw PPP Loan, the borrower must submit simultaneously to its lender documentation supporting the gross receipts reduction certification on the Borrower Application (if the borrower did not previously submit the documentation to the lender). In addition, borrowers that received a PPP loan of more than $50,000 and borrowers of $50,000 or less that together with their affiliates received First Draw PPP Loans totaling $2 million or more or Second Draw PPP Loans totaling $2 million or more that were required to adjust their “Requested Loan Forgiveness Amount” due to statutory requirements concerning reductions in either full-time equivalent employees or employee salary wages must retain their calculations and related documentation, as the SBA may request the information and documents to review those calculations as part of the loan review and audit process. For purposes of this form, borrowers are not required to provide any supporting documentation, but are required to maintain the documents set forth above for payroll, nonpayroll, and other items.
  • Form 3508EZ: For purposes of this form, the borrower is required to submit the documentation set forth above relating to payroll and nonpayroll with its loan forgiveness application. However, the borrower must also maintain, but is not required to submit, the “other records” stated above and the following documentation:
  • Supporting the certification that annual salaries or hourly wages were not reduced by more than 25% during the covered period relative to the most recent full quarter before the covered period. This documentation must include payroll records that separately list each employee and show the amounts paid to each employee during the most recent full quarter before the covered period, and the amounts paid to each employee during the covered period.
  • Regarding any employee job offers and refusals, refusals to accept restoration of reductions in hours, firings for cause, voluntary resignations, written requests by any employee for reductions in work schedule, and any inability to hire similarly qualified employees for unfilled positions on or before December 31, 2020 (or, for a PPP loan made after December 27, 2020, the last day of the covered period). Please note that a borrower must maintain records documenting the written offer to rehire and a written record of the offer’s rejection. Also a borrower should keep a record of the borrower’s notification to the applicable state unemployment insurance office of any rejected rehire offer (must be informed within 30 days of the employees’ rejection of the offer).
  • Supporting the certification, if applicable, that 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 (other than any reductions 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 (or, for a PPP loan made after December 27, 2020, the last day of the covered period)). This documentation must include payroll records that separately list each employee and show the amounts paid to each employee between January 1, 2020 and the end of the covered period. Please note that a borrower must maintain records documenting its inability to rehire individuals or its efforts to hire similarly qualified individuals for unfilled positions.
  • Supporting the certification, if applicable, that the borrower 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 (or, for a PPP loan made after December 27, 2020, requirements established or guidance issued between March 1, 2020 and the last day of the covered period), 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 and 2021 Forgiveness IFR), related to the maintenance of standards of sanitation, social distancing, or any other work or customer safety requirement related to COVID-19. This documentation must include copies of the applicable requirements for each borrower location and relevant borrower financial records. Please note that for purposes of justifying a borrower’s inability to operate based on a “governmental order,” the documents must include copies of the applicable COVID-19 requirement or guidance for each business location (such as any local government’s shutdown orders that reference a federal COVID-19 requirement or guidance described above) and any relevant borrower financial records or other records that document that the reduction in business activity during the covered period stems directly or indirectly from compliance with the COVID-19 requirement or guidance.
  • Form 3508: For purposes of this form, the borrower is required to submit the documentation set forth above relating to payroll and nonpayroll with its loan forgiveness application. The borrower must also submit the following documentation relating to full-time equivalent (“FTE”) (at the election of the borrower): (i) the average number of FTE employees on payroll per week employed by the borrower between February 15, 2019 and June 30, 2019; (ii) the average number of FTE employees on payroll per week employed by the borrower between January 1, 2020 and February 29, 2020; or (iii) in the case of a seasonal employer, the average number of FTE employees on payroll per week employed by the borrower between February 15, 2019 and June 30, 2019; between January 1, 2020 and February 29, 2020; or any consecutive 12-week period between February 15, 2019 and February 15, The selected time period must be the same time period selected for purposes of completing PPP Schedule A, line 11, and documents 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. Documents submitted may cover periods longer than the specific time period.

The borrower must also maintain, but is not required to submit, documentation on the “other records” stated above and the following:

  • Supporting the listings of each individual employee in the PPP Schedule A Worksheet Table 1, including the “Salary/Hourly Wage Reduction” calculation, if necessary, and in PPP Schedule A Worksheet Table 2, specifically, that each listed employee received during any single pay period in 2019 compensation at an annualized rate of more than $100,000;
  • Regarding any employee job offers and refusals, refusals to accept restoration of reduction in hours, firings for cause, voluntary resignations, written requests by any employee for reductions in work schedules, and any inability to hire a similarly qualified individual for unfilled positions on or before (i) December 31, 2020 for a PPP loan made before December 27, 202 or (ii) the last day of the covered period for a PPP loan made after December 27, 2020. See the discussion above for Form 3508EZ;
  • Supporting the certification, if applicable, that the borrower 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 (or, for a PPP loan made after December 27, 2020, requirements established or guidance issued between March 31, 2020 and the last day of the covered period), 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 and 2021 Forgiveness IFR), related to the maintenance of standards of sanitation, social distancing, or any other work or customer safety requirement related to COVID-19. This documentation must include copies of the applicable requirements for each borrower location and relevant borrower financial records. See the discussion above for Form 3508EZ; and
  • Supporting the PPP Schedule A Worksheet “FTE Reduction Safe Harbor 2.”

Although the instructions say that the documents need not be submitted, the 2021 Forgiveness IFR requires lenders to collect and provide these records to the SBA within five business days after the SBA notifies the lender that the loan is under SBA review. Given this short timeline, borrowers should be prepared to provide these documents at the time of the forgiveness application.

Necessity Certifications

Starting around October 26, 2020, the SBA has requested that PPP lenders provide certain questionnaires to PPP borrowers with loans at or over $2 million. Those forms are posted on the Treasury website. The purpose of those forms is to help the SBA with the certification relating to “economic uncertainty made the loan request necessary.” For more information on the questions and information to be provided, see “PPP Loans Over $2 Million and the PPP Necessity Questionnaires.”

Record-Keeping Duration and SBA Access

Record retention depends on the type of forgiveness application used by the borrower. If Form 3508S was used, the borrower must retain all employment records/payroll documentation in its files for four years and all other documentation for three years after the date the loan forgiveness application is submitted to the lender. The borrower must also permit authorized representatives of the SBA, including representatives of its Office of Inspector General, to access such files upon request, and the borrower must provide documentation independently to a lender to satisfy relevant federal, state, local, or other statutory or regulatory requirements or in connection with an SBA loan review or audit. If Form 3508EZ or 3508 is used, the borrower must retain all such documentation in its files for six years after the date the loan is forgiven or repaid in full, and permit authorized representatives of the SBA, including representatives of its Office of Inspector General, to access such files upon request, and the borrower must provide documentation independently to a lender to satisfy relevant federal, state, local, or other statutory or regulatory requirements or in connection with an SBA loan review or audit.

Appeals

For documentation related to an appeal, see part four of our series After the Economic Aid Act: An Updated Guide to the PPP Loan Forgiveness Review and Appeals Process.

Borrowers maintaining documentation to demonstrate eligibility, necessity, use, and basis for forgiveness and to support an appeal should keep in mind the different sources of statutory and regulatory guidance related to these four areas. For example, Treasury Frequently Asked Questions 17 and 31 remind borrowers that questions related to eligibility and necessity must be addressed based on the “laws, rules, and guidance available at the time of the relevant application.” In addition, the 2021 Forgiveness IFR states: “If SBA determines in the course of its review that the borrower was ineligible for the PPP loan under the statute, the SBA rules or guidance available at the time of the borrower’s loan application, or the terms of the borrower’s PPP loan application (for example, because the borrower lacked an adequate basis for the certifications that it made in its PPP loan application), the loan will not be eligible for forgiveness.” A borrower planning to use PPP loan proceeds with the intention of later seeking forgiveness must take into account the continually evolving guidance issued by the SBA, the Treasury, and lenders.

Schwabe is closely monitoring developments related to the PPP and other legal implications of COVID-19. We encourage you to visit Schwabe’s COVID-19 and CARES Act resource pages for information as it becomes available. This article summarizes aspects of the law relevant to the PPP program; it does not constitute legal advice. For legal advice for your situation, you should contact an attorney.

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