Best Practices for PPP Loan Forgiveness
May 16, 2020
The Paycheck Protection Program (PPP) has provided temporary funding for many businesses of various sizes and across many industries. Once borrowers have received approval and funding (if not sooner), they should focus on maximizing the amount of loan proceeds that will be forgiven.
Use of Proceeds
Borrowers are permitted to use PPP loan proceeds for the following expenses during the 8-week period beginning on the date of funding (the “Covered Period”):
- Payroll costs include salary, wages, vacation, parental, family, medical, and sick leave, and health benefits;
- Mortgage interest, provided the mortgage was effective before February 15, 2020;
- Rent, provided the lease agreement was effective before February 15, 2020; and
- Utilities, provided the utility service began before February 15, 2020.
Pursuant to guidance from Treasury and the Small Business Administration (SBA), at least 75% of the loan proceeds must be used on payroll costs. To the extent more than 25% of the loan proceeds are spent on non-payroll costs, such excess will not be forgiven and must be repaid at the 1% interest rate. Given the frequency of updates to SBA and Treasury guidance, borrowers and their advisors should monitor developments on this rule, as it may be changed or refined.
Borrowers with employee reductions during the Covered Period, in comparison to their base periods will not be eligible for full forgiveness. For these purposes, a borrower must elect one of two base periods, either (i) February 15, 2019 through June 30, 2019 or (ii) January 1, 2020 through Feb. 29, 2020.
The relevant fraction results from dividing the average monthly number of full-time equivalent (FTE) employees during the Covered Period by the average monthly number of FTE employees during the base period elected by the borrower. If the fraction is equal to or greater than 1, this means the employee count remained the same or increased during the Covered Period in relation to the base period and the otherwise forgivable amount remains unchanged. If the fraction is less than 1, the employee count has decreased during the Covered Period in comparison to the base period. In this case, the otherwise forgivable amount is multiplied by the fraction to determine the adjusted forgivable amount.
The forgiveness amount will be reduced with respect to the compensation of any employee earning an annualized salary of less than $100,000 during the Covered Period if the total wages and salary of such employee are reduced by an amount in excess of 25%, as compared to the total wages and salary of that employee during the last full quarter in which the employee was employed immediately prior to the Covered Period (i.e., immediately prior to the date of funding). In such a case, the forgiveness amount is reduced by the amount by which the compensation reduction exceeds 25%.
If a borrower has a reduction in employees or salary between Feb. 15, 2020 and April 26, 2020, the borrower can eliminate a potential reduction in forgiveness amount by rehiring the affected employees (or hiring other employees) or restoring full wages, as applicable, by June 30, 2020. For an employee reduction, the borrower does not necessarily need to rehire the same employees, provided the borrower attains the previous number of full-time equivalent employees. In the event a borrower’s terminated employee rejects a written offer from the borrower to re-hire the employee in good faith at the same salary and for the same number of hours, the forgiveness amount will not be reduced with respect to such employee. The borrower must document the written offer and rejection of the offer.
Similarly, if the total salary and wages of one or more employees during the Covered Period is reduced from the total salary and wages for such employees on Feb. 15, 2020 and, on or before June 30, 2020 the borrower restores such employees’ total wages and salary to 100% of the wages and salaries prior to the reduction, the reduction in the forgiveness reduction that originally would have resulted will not be applied.
Borrowers must apply to their lenders for loan forgiveness. Lenders are required to respond to borrowers within 60 days. Borrowers must prepare to submit the following documents with their PPP forgiveness applications. Various lenders may have additional requirements, so borrowers should verify application and documentation requirements with their lenders:
- Documents that substantiate the number of full-time equivalent employees on payroll and their pay rates for the relevant periods borrowers have used to meet the staffing and pay requirements:
- Payroll reports (internal reports and/or reports from payroll service providers);
- Payroll tax filings (IRS Form 941);
- State income, payroll, and unemployment insurance filings; and
- Documents verifying any retirement and health insurance contributions.
- Documents verifying eligible mortgage interest, rent, and utility payments (canceled checks, payment receipts, account statements)
Additional Recommended Documentation
Borrowers may find some or all of the following practices helpful and appropriate:
- Consider opening a separate bank account to deposit and disperse the PPP loan proceeds.
- Keep accurate records of all expenditures from the PPP loan proceeds during the Covered Period. Borrowers should retain documentation for expenditures that may arguably not be forgivable, in case of a dispute or disallowance on these or other items or an update in guidance.
- Maintain a file of all correspondence involving terminations, offers to hire and re-hire, and responses to such offers. Document contemporaneously any communications from prospective hires/re-hires that are not in writing.
- Consider running an off-cycle payroll that ends on the last business day of the Covered Period to ensure all eligible payroll costs are included in the forgiveness application.
- Consider using a separate code block for non-payroll costs that will be paid for using PPP loan proceeds. This will help sort such items and track them to make sure they do not exceed 25%.
- Borrowers should maintain continuous communications with their lenders about their anticipated forgiveness processes. These processes likely will evolve and vary from lender to lender.
- Borrowers should consult with counsel and/or other professionals to advise them and possibly represent them to maximize the amounts forgiven by lenders. Particularly with evolving guidance, lenders may vary in terms of how much risk they may be willing to take under scrutiny from the SBA, Treasury, and the public.
Borrowers may recall that they were required to certify in good faith in their applications that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.”
- In addition to the public relations impact on borrowers who may be perceived as unworthy of the loans, numerous fraud charges against borrowers have been reported in connection with PPP loans.
- Under SBA guidance, borrowers who return their loan proceeds in full on or before May 18 are deemed to have made that certification in good faith.
- Similarly, any borrower that (together with its affiliates) received PPP loans with an original principal amount of less than $2 million are deemed to have made the required certification concerning the necessity of the loan request in good faith.
- If the SBA determines during its review that a borrower did not have an adequate basis for certifying the necessity of its loan, the SBA will seek repayment of the outstanding loan balance and inform the lender that the borrower is not eligible for loan forgiveness. According to the FAQs, the SBA will not pursue administrative enforcement or referrals to other agencies for borrowers who return their loan proceeds after receiving notification from the SBA.
- The SBA has released the loan forgiveness application instructions, which requires additional certifications. Strong documentation is key to support these certifications.
The SBA is expected to issue regulations and guidance to further assist borrowers as they complete their applications, and to provide lenders with guidance on their responsibilities. RMG will continue to monitor these and other developments.