PPP Loan Forgiveness: A Comprehensive Guide for Businesses

The CARES Act (or the “Act”) instituted the Paycheck Protection Program (PPP), which provides loans between April 3, 2020 and June 30, 2020 of up to $10 million at 1% interest to employers with (1) 500 or fewer employees residing in the U.S. (in some cases the number of employees can be higher if the company meets SBA small company size standards), or (2) a maximum tangible net worth of $15 million as of March 27, 2020, and an average net income of $5 million or less over the previous two fiscal years. There are also other company size rules that should be considered, especially for Restaurant and Hospitality companies as well as affiliated businesses. (See Anchin Update dated March 31, 2020).  The PPP Loans are intended to help companies who are impacted by the COVID-19 pandemic to retain their employees and assist in covering certain specified qualified costs. The PPP loan amount is based on 2.5 times the borrower’s average monthly payroll costs as defined (see below).

Now that many eligible companies have applied for a PPP loan, and some have started to receive their loan proceeds, it is time to turn our attention to the rules for loan forgiveness.  As most companies learned during the two weeks following the passage of the CARES Act, the Act and related rules and guidance issued left many ambiguities as to how to compute the eligible loan amount.  Therefore, we should expect that the rules regarding PPP loan forgiveness, which are summarized below based on the Act and the Treasury Department’s and SBA’s Interim Rule, could likely change as well.

The CARES Act provides that PPP loans can be forgiven up to 100% of the amount borrowed if the company meets certain criteria, including:

• Loan proceeds are used to cover “payroll costs”, mortgage interest, rent paid on leases, and utility costs that are paid over the eight-week period that begins the date the loan is made (the “benefit period”);
• Employee headcounts are maintained;
• Compensation levels are maintained for employees earning $100,000 or less; and
• Not more than 25% of the loan amount is used for qualified non-payroll costs.

Based on U.S. Treasury and SBA Interim rules and guidelines, if a portion of the loan is not forgiven, the remaining amount of the loan is due and payable within 2 years, accruing interest at 1% per annum. Interest and principal payments are deferred for a 6-month period from the date of the loan, though interest will accrue during that 6-month deferment period.  The Act further provides that the amount forgiven will be tax-free for federal purposes.

The maximum amount of your PPP loan that is eligible for forgiveness is equal to the amount spent on qualifying expenses during the eight-week benefit period. Qualifying expenses include:

• “Payroll costs” including salary, wages, and commissions (up to a maximum annualized amount of $100,000 per employee), group healthcare benefits, medical or sick leave, retirement benefits, and state or local taxes assessed on the compensation of employees. Payroll costs should also include severance pay and bonuses, subject to the annualized cap, subject to further SBA guidance.
• Interest on mortgage obligations (for mortgages originated prior to February 15, 2020)
• Rent under a lease agreement (for leases in force prior to February 15, 2020)
• Utilities (electricity, gas, water, transportation, telephone and/or internet – placed in service prior to February 15, 2020)

It is noted that many companies may own the real estate their business occupies, often in a separate affiliated entity.  It is not yet known whether the qualifying expense in this scenario will be the rent paid to the affiliate or the interest on the mortgage the affiliate pays, which is likely a smaller amount.  Hopefully, the SBA will provide clearer instructions in their final guidance to be issued.

Calculation of Loan Forgiveness Reduction

The PPP loan program is intended to support employers to continue to pay their workers. The amount of the loan forgiveness will be reduced based on the following calculations:

• Loan Forgiveness Reduction Based on a Decrease to Employee Headcounts

  A reduction to the loan forgiveness will be made if the average number of full-time employee equivalents (FTEs) per month during the eight-week period is less than the average number of employees per month during the look-back period (which can be February 15, 2019 to June 30, 2019 or January 1, 2020 to February 29, 2020, at the borrower’s discretion).  The average number of FTEs per month is calculated based on the average number of FTEs for each pay period falling within a month.

  See the Anchin Alert dated March 31, 2020 for details on this calculation.

  The reduction in loan forgiveness for reduction in headcount can be avoided if the reduction in FTEs that was made during the period between February 15, 2020 and April 26, 2020 is restored by June 30, 2020. Keep an eye out for further guidance on this issue from the SBA.

• Loan Forgiveness Reduction Based on Reduction in Salaries For Each Employee

  There will be a reduction to the loan forgiveness amount for each employee – who earned annualized wages during 2019 of less than $100,000 (or $8,333.33 per month) – by the percentage reduction in annualized wages of more than 25% as compared to their most recent full quarter (i.e., Q1 2020).

  The reduction in loan forgiveness for a reduction in wages can be avoided if the borrower restores by June 30, 2020 the same wages the employee was earning as of February 15, 2020 as compared to wages paid between February 15, 2020 and April 26, 2020. Keep an eye out for further guidance on this issue from the SBA.

• Loan Forgiveness Reduction Based on Use of Funds – Payroll Costs vs. Non-Payroll Costs

  Pursuant to U.S. Treasury and Interim SBA rules, at least 75% of the loan proceeds must be used for payroll costs. The amount of PPP loan forgiveness will be reduced to the extent loan proceeds are used for qualified non-payroll costs in excess of 25% of the total amount eligible for forgiveness.It is currently unclear if the 25% cap is applied on the loan amount or the amount eligible for forgiveness.

PPP Loan Forgiveness Application

A PPP loan recipient seeking loan forgiveness will be required to submit the following to their lender:

• A formal application yet to be released by the SBA;
• Documentation verifying the number of full-time equivalent employees on payroll and pay rates for the referenced periods including payroll tax filings to the IRS, state income, payroll and unemployment insurance filings and payroll registers, among other support;
• If you work with a PEO, you should save your payroll invoices supporting the payroll costs, employee benefits, and retirement benefits paid;
• Documentation supporting other covered expenses (mortgage interest, rent, utilities) including canceled checks, payment receipts, account statements, invoices, and/or other documents;
• Certification from your company representative that the documentation presented is true and correct and the amount for which forgiveness is requested was used to retain employees, and /or make payments on a covered expense (interest on a mortgage, rent or utilities); and
• Any other documentation the SBA determines necessary

The PPP lender is required to make a decision on loan forgiveness no later than 60 days after an application has been submitted. PPP loan amounts forgiven will be paid by the Small Business Administration (SBA) directly to the lender.

What happens if PPP Loan funds are misused?

Pursuant to the SBA Interim Rules, if PPP funds are used for unauthorized purposes, the SBA will direct you to repay these amounts. If you knowingly use the funds for unauthorized purposes, you will be subject to additional liability such as charges for fraud. If a shareholder, member, or partner uses PPP funds for unauthorized purposes, the SBA will have recourse against these individuals for the unauthorized use.

Final SBA Rules on PPP Loans and Loan Forgiveness

In its interim rules dated April 2, 2020, the SBA stated that it will issue additional guidance on loan forgiveness. The SBA is required to issue final guidelines on loan forgiveness within 30 days of March 27, 2020, the day the CARES Act was enacted. Additional guidance may change and/or clarify the manner in which loan forgiveness and related reductions in loan forgiveness are calculated.

Our Anchin COVID-19 Resource Team continues to monitor the ongoing flow of clarifications and changes to the PPP Program by the Treasury. Please contact your Anchin Relationship Partner for additional information or contact us at [email protected].

Disclaimer: Please note this is based on the information that is currently available and is subject to change.