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What to Know for Businesses Completing the Revised PPP Loan Forgiveness Applications (Updated 6/25/2020)

June 25, 2020

Overview

On May 18, 2020, and May 26, 2020, Schwabe published two articles about the Paycheck Protection Program (“PPP”) Loan Forgiveness Application dated May 2020. On June 16, 2020, in light of the changes from the Paycheck Protection Program Flexibility Act (“PPPFA”), the U.S. Treasury posted two replacement forms and instructions: a PPP Loan Forgiveness Application Form 3508EZ (“Form EZ”), Form EZ Instructions, a Loan Forgiveness Application Revised June 16, 2020 PPP Loan Forgiveness Calculation Form (“Updated Forgiveness Form”) and Updated Forgiveness Form Instructions.

Today we’re walking through some of the basic items to help businesses identify what to look out for as they complete the Form EZ and the Updated Forgiveness Form and follow the accompanying instructions (“Instructions”), and also to provide updates as new guidance is posted (for this article that was originally published on June 22, 2020). We expect the Small Business Administration (the “SBA”) to issue further guidance in the coming weeks and answer some of the other open questions related to the loan forgiveness process. Schwabe will continue to monitor any developments and will update this and other resources as appropriate.

Who is eligible to use Form EZ and the Updated Forgiveness Form: Borrowers may only use Form EZ if they are able to check one of three qualification boxes. All other borrowers must use the Updated Forgiveness Form. To use Form EZ, the borrower must be able to check at least one of the following three boxes:

  • The 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 application.
  • The borrower did not reduce annual salary or hourly wages of any employee by more than 25% during the Covered Period or 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 who 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 (a) 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; and (b) reductions in an employee’s hours that the borrower offered to restore and the employee refused.

  • The 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 who 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), related to the maintenance of standards of sanitation, social distancing, or any other work or customer safety requirement related to COVID-19.

What to know about the timeline for submitting the forgiveness 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. 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.

What to know about the general process to obtain loan forgiveness: To receive loan forgiveness, the borrower must complete and submit a Loan Forgiveness Application to its lender (or the lender servicing the loan). As a general matter, the lender will review the application and make a decision regarding loan forgiveness. The lender has 60 days from receipt of a complete application to issue a decision to the SBA. The lender decision may take the form of an approval (in whole or in part); denial; or (if directed by the SBA) a denial without prejudice due to a pending SBA review of the loan for which forgiveness is sought.

  • Lender approval in whole or in part: If the lender determines that the borrower is entitled to forgiveness of some or all of the amount applied for under the statutes and application regulations, the lender is to request payment from the SBA at the time the lender issues its decision to the SBA. The SBA will, subject to any SBA review of the loan or loan application, remit the appropriate forgiveness amount to the lender, plus any interest accrued through the date of payment, not later than 90 days after the lender issues its decision to the SBA. If the SBA determines in the course of its review that the borrower was ineligible for the PPP loan based on the provisions of the CARES Act, 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 loan forgiveness. The lender is responsible for notifying the borrower of the forgiveness amount. If only a portion of the loan is forgiven, or if the forgiveness request is denied, any remaining balance due on the loan is to be repaid by the borrower on or before the maturity date of the loan. The lender is responsible for notifying the borrower of remittance by the SBA of the loan forgiveness amount (or that the SBA determined that no amount of the loan is eligible for forgiveness) and the date on which the borrower’s first payment is due, if applicable.
  • Denial without prejudice: In the case of a denial without prejudice, the borrower may subsequently request that the lender reconsider its application for loan forgiveness, unless the SBA determines that the borrower is ineligible for a PPP loan.
  • Denial: The lender must notify the borrower in writing that the lender has issued a decision to the SBA denying the loan forgiveness application. The SBA reserves the right to review the lender’s decision in its sole discretion. Within 30 days of such notice from the lender, a borrower may notify the lender that it is requesting that the SBA review the lender’s decision and the lender must notify the SBA within 5 days of receipt of such notice. If the borrower does not request the SBA review or the SBA declines the request for review, the lender is responsible for notifying the borrower of the date on which the borrower’s first payment is due. If the SBA accepts a borrower’s request of the review, the SBA will notify the lender and the borrower of the results of the review; the SBA may use the statutory 90-day period to review.

What to know about the Covered Period and the Alternative Payroll Covered Period and payroll costs: PPP borrowers are generally eligible for forgiveness for payroll costs paid and payroll costs incurred during the 24-week or 8-week Covered Period or Alternative Payroll Covered Period. For the “Covered Period,” the period begins on the date of disbursement of the borrower’s PPP loan proceeds from the lender, and for the “Alternative Payroll Covered Period,” the period begins on the first day of the first payroll cycle in the covered period. Please note that the “Alternative Payroll Covered Period” can only be selected by a borrower with a bi-weekly (or more frequent) payroll cycle. To calculate, (a) payroll costs are considered paid on the day that paychecks are distributed or the day that the borrower initiates an ACH credit transaction, and (b) payroll costs are generally considered incurred on the day that an employee’s pay is earned (i.e., on the day the employee worked). Payroll costs incurred during the borrower’s last pay period of the Covered Period or the 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) to be eligible for forgiveness. For employees who are not performing work but are still on the borrower’s payroll, payroll costs are incurred based on the schedule established by the borrower (typically, each day that the employee would have performed work). For forgiveness purposes, payroll costs must either be paid during the Covered Period or Alternative Payroll Covered Period, or, for payroll costs incurred but not paid during the borrower’s last pay period of the Covered Period or Alternative Payroll Covered Period, paid on or before the next regular payroll date. 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. For an 8-week Covered Period, that total is $15,385, and for a 24-week Covered Period, that total is $46,154. Count payroll costs that were both paid and incurred only once. Only compensation of employees who were employed by the borrower at any point during the Covered Period or the Alternative Payroll Covered Period and whose principal place of residence is in the United States may be included.

What we know about employee benefits: The following items are included, during the Covered Period or the Alternative Payroll Covered Period, in the total amount paid by the borrower for:

  • Employer contributions for employee health insurance, including employer contributions to a self-insured employer sponsored group health plan, but excluding any pre-tax or after-tax contribution by employees. Do not include employer health insurance contributions made on behalf of a self-employed individual, general partners, or owner-employees of an S-corporation, because such payments are already included in their compensation.
  • Employer contributions to employee retirement plans, excluding any pre-tax or after-tax contributions by employees. Do not add employer retirement contributions made on behalf of a self-employed individual or general partners, because such payments are already included in their compensation. In addition, for Form EZ, contributions on behalf of owner-employees are capped at 2.5 months’ worth of the 2019 contribution amount.
  • Employer state and local taxes paid by the borrower and assessed on employee compensation (e.g., state unemployment insurance tax), excluding any taxes withheld from employee earnings.

How to calculate “owner compensation”: There are caps on the amount of loan forgiveness for owner-employees and self-employed individuals’ own payroll compensation. For borrowers that received a PPP loan before June 5, 2020, and elect to use an 8-week Covered Period, the amount of loan forgiveness requested for owner-employees’ and self-employed individuals’ payroll compensation is capped at eight weeks’ worth (8/52) of 2019 compensation (i.e., approximately 15.38 percent of 2019 compensation) or $15,385 per individual, whichever is less, in total across all businesses. For all other borrowers, the amount of loan forgiveness requested for owner-employees and self-employed individuals’ payroll compensation is capped at 2.5 months’ worth (2.5/12) of 2019 compensation (i.e., approximately 20.83 percent of 2019 compensation) or $20,833 per individual, whichever is less, in total across all businesses. In particular, the following caps apply: (a) C-corporation owner-employees are capped by the amount of their 2019 employee cash compensation and employer retirement and health insurance contributions made on their behalf; (b) S-corporation owner-employees are capped by the amount of their 2019 employee cash compensation and employer retirement contributions made on their behalf, but employer health insurance contributions made on their behalf cannot be separately added because those payments are already included in their employee cash compensation; (c) Schedule C or F filers are capped by the amount of their owner compensation replacement, calculated based on 2019 net profit; and (d) general partners are capped by the amount of their 2019 net earnings from self-employment (reduced by claimed section 179 expense deduction, unreimbursed partnership expenses, and depletion from oil and gas properties) multiplied by 0.9235. For self-employed individuals, including Schedule C or F filers and general partners, retirement and health insurance contributions are included in their net self-employment income and therefore cannot be separately added to their payroll calculation.

How rent and lease obligations and interest on covered mortgage obligations factor into the applications: The Instructions clarify that business lease and business mortgage obligations may relate to real or personal property. The arrangements should be in writing and must be entered into and in force prior to February 15, 2020. The documents will need to be provided with the application, together with evidence of payments. The payments 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 expiration of the Covered Period). Do not include prepayments for business mortgage interest payments.

What are covered utility payments: Business payments for a service for the distribution of electricity, gas, water, transportation, telephone, or internet access, in each case, for which service commenced prior to February 15, 2020, are considered covered utility payments. There is no further guidance on what these terms mean.

What is the limit on eligible nonpayroll costs: For forgiveness purposes, eligible nonpayroll costs are not permitted to exceed 40% of the total PPP loan forgiveness amount.

What to know about forgiveness reductions for workforce reductions: Per the Instructions to the Updated Forgiveness Form and other guidance, the borrower must calculate its total average weekly full-time equivalency (“FTE”) during the chosen reference period, which may be either (a) February 15, 2019, to June 30, 2019, (b) January 1, 2020, to February 29, 2020, or (c) in the case of seasonal employers, either of the preceding periods or a consecutive 12-week period between May 1, 2019, and September 15, 2019, in each case at the borrower’s option. The loan forgiveness amount must be reduced based on reductions in full-time equivalent employees, as required by the statute. Specifically, the actual loan forgiveness amount that the borrower will receive may be reduced if the borrower’s average number of weekly FTE employees during the Covered Period or the Alternative Payroll Covered Period is less than during the borrower’s chosen reference period. There are still open questions on how this workforce reduction calculation works. The borrower is exempt from such reductions if any of the three criteria described below as the “Full-Time Equivalency (FTE) Reduction Calculation” apply. Furthermore, there are certain FTE reduction exceptions that do not count.

  • Full-time equivalent employees:To calculate the average FTE, borrowers take the average number of hours paid per week per individual employee, divided by 40, and round the total to the nearest tenth, capped at 1.0. A borrower may also elect a simplified method that assigns 1.0 for employees who work 40 hours or more per week and 0.5 for employees who work fewer hours per week.
  • Full-time equivalency (FTE) reduction calculation: The three criteria are:
    • No reduction in employees or average paid hours between January 1, 2020, and the end of the Covered Period
    • FTE Reduction Safe Harbor 1
    • FTE Reduction Safe Harbor 2
  • 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:
    • FTE Reduction Safe Harbor 1 - Inability to Restore Levels: The borrower is exempt from the reduction in loan forgiveness based on a reduction in FTE employees 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-19 requirements and guidance, such as state and local government shutdown orders that are based in part on guidance from the three federal agencies), related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID-19. Documentation 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 which document that the reduction in business activity during the covered period stems directly or indirectly from compliance with the COVID-19 requirement or guidance.
    • FTE Reduction Safe Harbor 2 - Restoring FTE Employee Levels: The borrower is exempt from the reduction in loan forgiveness based on a reduction in FTE employees if both of the following conditions are met: (a) the borrower reduced its FTE employee levels in the period beginning February 15, 2020, and ending April 26, 2020; and (b) the borrower then restored its FTE employee levels by not later than December 31, 2020, 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: (a) any positions for which the borrower has 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; (b) any positions for which the borrower made a good-faith, written offer to restore the reduced hours of such employee, at the same salary or wages and same number of hours as earned by such employee in the last pay period prior to the reduction in hours, the employee rejected the offer; and the borrower has maintained records documenting the offer and its rejection; and (c) any employees who, during the Covered Period or the Alternative Payroll Covered Period, (1) were fired for cause, (2) voluntarily resigned, or (3) voluntarily requested and received a reduction of their hours. In all of these cases, include these FTEs only if the position was not filled by a new employee. Borrowers are required to inform the applicable state unemployment insurance office of any employee’s rejected rehire offer within 30 days of the employee’s rejection of the offer. Borrowers must maintain documents to show compliance with these exemptions, which may include the written offer, written record of the rejection, and a written record to hire a similarly qualified individual. Any FTE reductions in these cases do not reduce the borrower’s loan forgiveness.

What to know about forgiveness reductions for compensation reductions: The borrower’s loan forgiveness amount must be reduced due to a statutory requirement concerning reductions in employee salary and wages. Borrowers are eligible for loan forgiveness for certain expenditures during the Covered Period or the Alternative Payroll Covered Period. However, the actual amount of loan forgiveness the borrower may receive may be less, depending on whether the salary or hourly wages of certain employees during the Covered Period or the Alternative Payroll Covered Period were less than during the period from January 1, 2020, to March 31, 2020. If the borrower restores salary/hourly wage levels, the borrower may be eligible for elimination of the salary/hourly wage reduction amount. Borrowers count employees whose salaries or hourly wages were reduced by more than 25% during the Covered Period or the Alternative Payroll Covered Period as compared to the period of January 1, 2020, through March 31, 2020. In the event that salary/hourly wage levels are ultimately restored, then the applicable reduction may be eliminated. There are still open questions on how this compensation reduction calculation works.

What are the consequences for making a false statement to obtain forgiveness of a PPP: The Instructions set out the potential civil penalties and/or criminal fraud charges for the unauthorized use of PPP funds.

Which additional certifications are required for either application: In submitting an application, an authorized representative of the borrower must certify that: (1) the requested forgiveness amount (a) was used to pay costs that are eligible for forgiveness (payroll costs to retain employees, business mortgage interest obligations, business rent or lease payments, or business utility payments); (b) includes payroll costs equal to at least 60% of the forgiveness amount; (c) if a 24-week Covered Period, does not exceed 2.5 months’ worth of 2019 compensation for any owner-employee or self-employed individual or general partner, in each case capped at $20,833; and (d) if the borrower has elected an 8-week Covered Period, does not exceed 8 weeks’ worth of 2019 compensation for any owner-employee or self-employed individual or general partner, in each case capped at $15,385 per individual; (2) if the funds were knowingly used for unauthorized purposes, the federal government may pursue recovery of the loan amounts and/or civil or criminal fraud charges; (3) the borrower has accurately verified the payments for the eligible payroll and nonpayroll costs for which the borrower is requesting forgiveness; (4) the borrower has submitted the required documentation to the lender; (5) the information in the application and in all supporting documents and forms is true and correct in all material respects; (6) the tax forms submitted to the lender are consistent with those that the borrower has submitted or will submit to the IRS and/or state tax or workforce agency; and (7) the borrower understands, acknowledges, and agrees that the SBA may request additional information, and failure to provide the information may result in ineligibility for the PPP loan or denial of the forgiveness application.

Which additional certifications are required for the Form EZ: Additional certifications for Form EZ are: (a) the borrower did not reduce salaries or hourly wages by more than 25% for any employee during the Covered Period or Alternative Payroll Covered Period compared to the period between January 1, 2020, and March 31, 2020. For purposes of this certification, the term “employee” includes only those employees who 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 (b) one of the following two items: (i) 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, and reductions in an employee’s hours that a borrower offered to restore and were refused; and/or (ii) 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, 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), related to the maintenance of standards of sanitation, social distancing, or any other work or customer safety requirement related to COVID-19.

Which additional certifications are required for the Updated Forgiveness Form: The borrower must also certify to the following: (a) the forgiveness amount includes all applicable reductions due to decreases in the number of full-time equivalent employees and salary/hourly wage reductions; and (b) if the borrower checked the box for FTE Reduction Safe Harbor 1 on PPP Schedule A, 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, 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), related to the maintenance of standards of sanitation, social distancing, or any other work or customer safety requirement related to COVID-19.

What to know about document retention: Borrowers are required to retain PPP loan supporting documents for a period of six years after the date that the loan is forgiven or repaid in full. Such information includes payroll documentation, documentation supporting the borrower’s certifications, documentation delivered in connection with, and in support of, the borrower’s loan forgiveness application, and any other records demonstrating material compliance with PPP requirements. We provide further information regarding documents, retention, and record keeping in a separate article - Key Considerations for PPP Documentation.

What to know about the PPP borrower demographic information: The disclosure of this information is optional and voluntary and will have no bearing on the loan forgiveness decision.

Schwabe is committed to providing our clients with up-to-date resources to understand the CARES Act and navigate the COVID-19 pandemic. For more information about the PPP Loan Forgiveness Application, see our one-page overview available for viewing and download, or reach out to one of our attorneys today.

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