Most Paycheck Protection Program (“PPP”) borrowers are working toward full forgiveness of their PPP loans and are anxious to get this process started. A borrower generally may submit a loan forgiveness application any time on or before the maturity of the loan if the borrower has used all of the loan proceeds. But that does not mean a borrower should submit a loan forgiveness application as soon as possible. There are many considerations you should take into account when deciding when to submit forgiveness applications to the lender. Patience and adequate preparation might be more than just virtues in the PPP loan forgiveness context; they might lead to financial benefits for borrowers as well. This article discusses the timing considerations and other items that might affect a borrower’s decision to submit the loan forgiveness application to its lender.

Update: On December 27, 2020, the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues ‎Act (the “Economic Aid Act” or “PPP2 Act”) contained in the Consolidated Appropriations Act, 2021 (“2021 Appropriations Act”) ‎was enacted. The PPP2 Act and 2021 Appropriations Act included several changes to forgiveness ‎documents and processes, which may influence a borrower’s timing of applying for forgiveness. The most ‎important are the tax deductibility of expenses, the simplified forgiveness process for loans of $150,000 or less, the ‎expansion of eligible costs and the borrower’s ability to select its covered period within 8 and 24 weeks. In ‎addition, the Economic Aid Act sets aside $284 billion for PPP loans, both new First Draw and Second Draw PPP Loans. See articles “What to Know about the Paycheck Protection Program, Round Two” and “Economic Aid Act: 10 Things to Know about Second Draw PPP Loans

Employee Retention Credit Update: On March 1, 2021, the IRS issued guidance addressing the Employer Retention Credit (“ERC”) as it applies to qualified wages paid after March 12, 2020, and before January 1, 2021, and addressing the interaction with PPP loans. Before a borrower files a loan forgiveness application, a borrower should evaluate which payroll costs should be included in the loan forgiveness applications to maximize the benefits of the ERC and loan forgiveness. See below.

As of January 19, 2021, there were three applications and instructions: (a) PPP Loan Forgiveness Application Form 3508S Revised January 19, 2021 (“Form 3508S”); (b) PPP Loan Forgiveness Application Form 3508EZ Revised January 19, 2021 (“Form 3508EZ”); and (c) PPP Loan Forgiveness Application Form 3508 Revised January 19, 2021 (“Form 3508”). There is also a new form: Paycheck Protection Program Borrower’s Disclosure of Certain Controlling Interest (“Form 3508D”). In addition, on January 19, 2021, the Small Business Administration (the “SBA”) in consultation with the Department of Treasury (the “Treasury”) posted Interim Final Rule on Loan Forgiveness Requirements and Loan Review Procedures as Amended by Economic Aid Act (“2021 Forgiveness IFR”). The 2021 Forgiveness IFR incorporates and restates the prior interim final rules relating to loan forgiveness and makes revisions to conform the prior interim final rules to the amendments made by the Economic Aid Act. In addition and on an ongoing basis, the SBA posts Frequently Asked Questions (most recently updated January 29, 2021) (“FAQs”) and Frequently Asked Questions on Loan Forgiveness (most recently updated 10/13/2020) (“Forgiveness FAQs”). The SBA has stated that the 2021 Forgiveness IFR should be interpreted consistently with the FAQs and the Forgiveness FAQs; however, the Economic Aid Act overrides any conflicting guidance in the FAQs and Forgiveness FAQs, and the SBA will be revising the FAQs and Forgiveness FAQs to conform to the Economic Aid Act “as quickly as feasible[.]” Please note that section 1106 of the CARES Act is now codified as section 7A of the Small Business Act. See our four-part series Forgiveness and Loan Review: “Initial Takeaways and Agency Guidance for the Latest PPP Updates,” “Grounds for SBA Review, the SBA Loan Review Process, and Borrower Items,” “The Lender’s Role in the PPP Loan Review Process,” and “What to Know about PPP Appeals and Next Steps.”

The forms and 2021 Forgiveness IFR are effective immediately, and the rules in the 2021 Forgiveness IFR apply to loans that were made in 2020 but for which the SBA has not yet remitted forgiveness to the lender.

Forms and Readiness of the Small Business Administration (“SBA”) and the Lender

Forms and Process: As of January 19, 2021, there were three types of loan forgiveness application forms: Form 3508, Form 3508EZ, and Form 3508S. Form 3508S is the more simplified forgiveness application for loans of $150,000 or less, ‎and is a one page certification containing the number of employees at the time of the loan application, the number of employees at the time of the forgiveness application, the covered period, amount of loan spent on payroll costs, the requested loan forgiveness amount, and a certification. All the forms were revised to include the following items:‎

  • Expand PPP allowable and forgivable expenses to include “covered operations expenditures” (certain ‎technology expenses), “covered property damage costs”, “covered supplier costs” (certain ‎supplier/vendor expenses essential to the business, including perishable goods), and “covered worker ‎protection expenditures” (worker safety expenses). Exclusion for loans already forgiven.‎
  • Allow borrowers to select their loan forgiveness covered period between 8 weeks and 24 weeks.‎
  • Specify certain group insurance payments as payroll costs, to include group life, disability, vision, or ‎dental insurance.‎
  • Repeal the CARES Act provision that required PPP borrowers to deduct the amount of their Economic ‎Injury Disaster Loan (“EIDL”) advance from their PPP forgiveness amount. ‎
  • Change the December 31, 2020 ‎deadline for PPP loans made after December 27, 2020.‎

For a more complete analysis of the changes, see our article “Asking for Forgiveness: Revised PPP Loan Forgiveness Applications and Guidance.”

SBA Timing: The SBA has released and posted various guidance for borrowers and lenders. We would expect more guidance in the future.

Lender Timing: Even if a borrower is ready to apply for forgiveness, its lender might not be ready to receive and review the “new” loan forgiveness applications. Lenders are allowed ‎to have their own “lender equivalent form” and the new forms were posted on January 19, 2021. Borrowers should check with their lenders as each lender seems to have a different protocol, such as taking applications depending on loan amount or in batches or by invitation only, including some based on the date of the loan. Other banks were not allowing forgiveness applications until the covered period ends‎, which will change with the new requirement that borrowers may select their covered period. Please contact your bank to see what process they are following. In addition, although the SBA and the Treasury have issued some guidance, we expect that more guidance might be needed for lenders to finalize their forgiveness processes.

Time Is on Your Side

Extended Coverage; Deadline for Forgiveness Application: The PPP2 Act and the rules specify that the “loan forgiveness covered period” is the period beginning on the ‎date the lender disburses the PPP loan and ending on any date selected by the borrower that occurs during the period (i) beginning on the date that is 8 weeks after the date of disbursement and (ii) ending on the date that is 24 weeks after the date of disbursement. ‎The covered period extension and change were made with retroactive effect as if it were originally enacted in the CARES Act. Borrowers may submit a loan forgiveness application any time before the maturity date of the loan, which is either two or five years from loan origination. However, if the borrower does not apply for loan forgiveness within 10 months after the last day of the maximum covered period of 24 weeks, or if the SBA determines that the loan is not eligible for forgiveness (in whole or in part), the payments on the PPP loan are no longer deferred and the borrower must begin paying principal and interest. Taking advantage of the borrower’s ability to select its covered period might give a borrower more time to take steps that will help them qualify for full loan forgiveness. This is especially true for the self-employed and owner-employees whose forgiveness is capped at 2.5 months’ worth of compensation (up to a maximum $20,833 per individual in total across all businesses) and the amount of compensation is dependent on the business type. However, it should be noted that waiting might increase the amount of interest a borrower pays with respect to any part of the loan that will not ultimately be forgiven. In addition, there might be other reasons, not to wait—see below.

Guidance May Evolve and More Guidance Is Expected: Because of the constantly evolving guidance with respect to loan forgiveness, borrowers should consider waiting before they file their loan forgiveness applications if they have unanswered questions or issues. For example, six of the provisions in the 2021 Forgiveness IFR were an exercise of rulemaking authority by the Treasury either jointly with the SBA or by the Treasury alone: (1) the additional reference period option provided for seasonal employers; (2) the de minimis exemption provided with respect to certain offers of rehire; (3) the de minimis exemption from the full-time equivalent employee reduction penalty when an employee is, for example, fired for cause; (4) the de minimis exemption from the full-time equivalent employee reduction penalty when the borrower eliminates reductions by December 31, 2020 or, for a PPP loan made after December 27, 2020, the last day of the loan’s covered period; (5) the de minimis exemption from the full-time equivalent (FTE) employee reduction penalty for certain PPP loans of $50,000 or less; and (6) the de minimis exemption from the employee salary and wages reduction penalty for certain PPP loans of $50,000 or less. These concepts are not in the Economic Aid Act. Also, in the past, the SBA interpreted the 60% rule differently from the wording of the statute; however, in the PPP2 Act, it was made clear that borrowers will receive full loan forgiveness if they spend at least 60% of ‎their PPP loan on payroll costs over a time period of their choosing between 8 weeks and 24 weeks. Because new ‎interim final rules and forms are coming out and further pandemic aid bills may still be introduced into Congress, hurrying up the process of filing for loan forgiveness might not be warranted if the forgiveness landscape continues to change. We expect further guidance.

Employee Retention Credit Update: The 2021 Appropriations Act also amended the provisions of the ERC. Prior to that act, PPP recipients were not eligible for the ERC. The 2021 Appropriations Act permits an employer that received a PPP loan to be eligible to claim an ERC, effective retroactive to the original effective date of the CARES Act. On March 1, 2021, the IRS issued guidance addressing the ERC as it applies to qualified wages paid after March 12, 2020, and before January 1, 2021, and addressing the interaction with PPP loans. This guidance is only for 2020. An eligible employer is permitted to elect not to take into account certain qualified wages for purposes of the ERC. However, a PPP borrower is deemed to have made an election for those qualified wages included in the amount reported as payroll costs on the loan forgiveness application. As such, PPP borrowers should carefully evaluate and calculate which qualified wages should be included as payroll costs on the loan forgiveness application in order to maximize the ERC, if the borrower meets the other ERC requirements.

Deductibility of Certain Expenses: The 2021 Appropriations Act clarifies that “no deduction shall be denied, no tax attribute shall be reduced, and no ‎basis increase shall be denied, by reason of the exclusion from gross income provided” by Section 1106 of the ‎CARES Act (which has been redesignated as Section 7A of the Small Business Act). This provision applies to all PPP loans. As we previously outlined, the IRS had taken a firm position ‎that otherwise deductible ordinary and necessary business expenditures that provide for the forgiveness of a PPP ‎loan would not be deductible by the PPP loan borrower. The 2021 Appropriations Act ‎reverses the IRS, and clearly provides that these ordinary and necessary business expenditures are deductible by ‎the borrower.‎ See our article “Consolidated Appropriations Act, 2021: Tax Update.”

Documents Are Critical: The forgiveness applications issued by the SBA require that they be accompanied by detailed documentation and that additional documents be retained and maintained by the borrower. The Economic Aid Act eliminated some of the documentation submissions for loans of $150,000 or less, and the 2021 Forgiveness IFR and the forms have restated and updated the necessary documentation for forgiveness. Please note that if ‎the lender identifies errors in the borrower’s calculations or a material lack of substantiation in the borrower’s supporting documents, the lender is to work with the borrower to remedy the issue. A borrower should take the time to make sure they have both the accompanying documentation and the documents to be retained and maintained available at the time of the submission. Don’t put off getting the “retained” documents together. The SBA has a right to request that retained information as part of its review. If the borrower does not promptly provide documents, this might cause delay and possibly denial of forgiveness. Furthermore, as the rules for PPP loan forgiveness contain so many gray areas, borrowers should also document how a conclusion was reached and what guidance they used to reach the conclusion. See article “Updated Key Considerations for PPP Documentation under the Economic Aid Act.”

Calculations: The borrower is responsible for accurately calculating the loan forgiveness amount, even though most lenders will have their own calculators. The American Institute of CPAs (AICPA) and Biz2Credit, Inc. have put together a PPP Forgiveness Tool, which some borrowers might find helpful to double check their bank’s calculator. We are uncertain whether the tool has been updated—each borrower should confirm. We ‎were not involved with the preparation of this tool. We do not make any warranties regarding the accuracy or propriety of the information that is provided by the tool. Each borrower should seek its own accounting and legal advice regarding its calculations.

Loans At or Over $2 Million and the Necessity Questionnaires: The SBA will review loans at or in excess of $2 million (which includes loans of affiliates that aggregate to $2 million), and the SBA loan forgiveness applications specifically have a box relating to PPP loans at $2 million or more (including affiliates). Starting around October 26, 2020, the SBA asked PPP lenders to provide certain questionnaires to PPP borrowers with loans over $ 2million. Forms 3509 (Loan Necessity Questionnaire (For-Profit Borrowers)) and Form 3510 (Loan Necessity Questionnaire (Non-Profit Borrowers)) are posted on the Treasury site. The purpose of the forms according to the SBA “is to facilitate the collection of supplemental information that will be used by SBA loan reviewers to evaluate the good-faith certification that [a borrower] made on [its] PPP Borrower Application … that economic uncertainty made the loan request necessary. Although both the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) and certain FAQs instructed borrowers to assess their need for the loan at the time of application, the SBA’s forms gather information to assess need both at the time of application and during the use of the funds. This was a surprise for most borrowers who were prepared to provide information about “necessity” at the “time of the application” but were not anticipating scrutiny about necessity over the period of use of the funds. On December 9, 2020, the SBA posted FAQ #53 describing the Necessity Questionnaires, and the SBA clarified the “at the time of the loan application” review, “even if subsequent developments resulted in the loan no longer being necessary” but went on to say that the SBA may take into account “the borrower’s circumstances and actions both before and after the borrower’s certification.” The FAQ also stated that the SBA assessment will be based on the totality of the borrower’s circumstances through a multi-factor analysis. At this time, we don’t have guidance on what these terms mean. 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 there are tight timelines, borrowers should seek legal advice prior to submitting a Loan Necessity Questionnaire or responding to a request for additional information. Borrowers should also consider delaying submission of their forgiveness application until some of the open issues are clarified and they are in a position to respond to the questionnaire.  As a reminder, the determination that the borrower did not have a good faith basis to make the certification will render the borrower ineligible for the loan (and ineligible for forgiveness). For more information, see PPP Loans Over $2 Million and the PPP Necessity Questionnaires.

Furthermore, the SBA has highlighted that borrowers must have “an adequate basis for making the required good-faith certification, based on their individual circumstances in light of the language of the certification and SBA guidance.” The SBA has previously stated that all PPP loans at or in excess of $2 million, and other PPP loans as appropriate, will be subject to SBA review for compliance with program requirements set forth in the PPP interim rules and in the borrower’s PPP loan application. In addition to the Necessity Questionnaire Form information, borrowers should take the time to prepare, gather, and organize these other documents in contemplation of this review. In addition, given the long audit period, borrowers might want to consider purchasing PPP loan insurance to cover a business in the event the SBA subsequently determines that the company was ineligible for the PPP loan at the time of application.

Other Considerations

Loan Documents May Need to Be Amended: Some lenders’ PPP loan documents require a borrower to apply for forgiveness within a certain time period or have set maturity dates or interest payment dates. Some lenders specified explicit terms, such as how much of nonpayroll expenses are forgivable, covenants regarding eight-week covered periods, or a requirement to not take out additional PPP loans. Many of the recent legislative changes altered these previously established loan terms. The SBA released FAQ #52 on October 7, 2020, clarifying that lenders must give immediate effect to the extended deferral period for borrower payments of principal, interest, and fees on all PPP loans, requiring lenders to notify borrowers of the change to the deferral period, and confirming that no formal modification to the promissory note is required for this purpose. With that said, it would be well worth reviewing those documents to determine if they contain other provisions, what the consequences might be for failing to meet the deadlines or covenants, or if the provisions may be extended or corrected with an amendment to the loan document. This may be very important if the borrower has cross default provisions in other loan documents or leases or important contracts, like major supplier/vendor contracts, as these other parties might take advantage of these “technical breaches.” In addition, the lender’s forgiveness applications may require the borrower to certify that the borrower has met all the terms of the loan documents, resulting in a potential false certification if the terms are not changed or updated. In the past, the SBA has been very strict and unforgiving of “technical false certifications.”

Changes to Business Structure: Many borrowers have had to revise their business structure in the face of the pandemic. Changes to a business’s legal structure, a decrease in employee count, or eliminating a division or subsidiary after a borrower takes out a PPP loan might affect the borrower’s ability to receive full or partial loan forgiveness. Depending on the timeline of these changes, it might be beneficial to apply for forgiveness before the changes take place. See also below, on the need for prior lender consent for “changes in business structure.”

M&A Transactions and Changes of Ownership: A PPP loan may have a variety of implications on pending and potential M&A transactions and changes of ownership.

  • Changes of Ownership: The SBA form of promissory note contains certain restrictions and a specific default provision concerning transactions where a borrower “reorganizes, merges, consolidates, or otherwise changes ownership or business structure without Lender’s prior written consent.” Although a lender could use its own form of note, most loan documents preclude a change in ownership, change of ownership, change in business structure, change in control, or change of control during the term of the PPP loan. Typically, no threshold is defined in the loan documents. The SBA issued a procedural notice effective October 2, 2020, to SBA employees and lenders defining a change in ownership as: (a) at least 20 percent of the common stock or other ownership interest of a PPP borrower (including a publicly traded entity) is sold or otherwise transferred, whether in one or more transactions, including to an affiliate or an existing owner of the entity; (b) the PPP borrower sells or otherwise transfers at least 50 percent of its assets (measured by fair market value), whether in one or more transactions; or (c) a PPP borrower is merged with or into another entity. This notice also sets forth when PPP lender and SBA approval are required for SBA purposes. The notice provides for additional requirements but does not replace the loan documents terms. Both the loan documentation and the notice might affect some borrowers who have planned estate planning and gifting programs, redemption programs, and stock or option programs that may change ownership of a company before the loan is forgiven. All transactions since the date of the approval of the PPP loan need to be aggregated for these thresholds. If the PPP loan is in place and approvals are required, SBA approval can be avoided by following some procedures in the notice, including applying for forgiveness and escrowing funds. However, escrowing funds might not be practical for some programs or circumstances. In any event, lender consent will likely be required and will take some time. Per the notice, SBA approval can take up to 60 calendar days, and the SBA will want an explanation as to why funds cannot be escrowed or the PPP loan satisfied. For PPP borrowers contemplating any changes of ownership, please contact your lender to discuss how the lender is handling their loan documents and the SBA notice, what the process is, and whether SBA approval is an option to escrowing funds. The SBA procedural notice clarified some areas, but not all, and some gray areas remain. See PPP Loans and Changes of Ownership, Asset Transactions and Mergers.
  • M&A Transactions: With respect to M&A transactions, the recent SBA procedural notice on “changes of ownership” would specifically pick up a merger, and certain equity and asset transactions. It is unclear whether the notice also addresses new issuances of equity or indirect changes of ownership. The prior SBA procedural notice would have required SBA approval for “any change in the ownership” and may apply in these unclear areas. The standard loan documentation would also pick up these transactions without a threshold. Failure to obtain approvals could result in the denial of PPP loan forgiveness and may result in a demand for immediate repayment of the PPP loan. The recent SBA procedural notice does provide for the filing of a forgiveness application and the escrowing of funds as an alternative to SBA approval. If obtaining approval and filing an application and escrowing of funds are impractical, it might be preferable to delay the transaction timeline in order to obtain forgiveness prior to closing, or to analyze the importance of forgiveness in light of the transaction. There might also be issues in an asset transaction relating to staffing changes and the timing of the forgiveness application. Furthermore, in an M&A transaction, if the parties want to keep the PPP loan in place post-closing, then prior lender and SBA consent will likely be required. In addition, if the loan remains in place post-closing, there are a number of negotiating points that need to be covered regarding the borrower’s compliance with the PPP loan terms, the representations and warranties and indemnifications regarding the loan, and control of the forgiveness application process and submission. These considerations are in addition to the items set forth in the “Changes to Business Structure” section. The SBA procedural notice also addresses situations and other requirements when the new owner or successor has a separate PPP loan and the need for segregating and delineating PPP funds. See PPP Loans and Changes in Ownership, Asset Transactions and Mergers.

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