May 19, 2020 – Desperately needed by Paycheck Protection Program (PPP) loan borrowers, on May 15, 2020, the U.S. Treasury Department (Treasury) finally issued the PPP Loan Forgiveness Application (“Form”) and instructions (“Instructions”). Click here for the combined Form and Instructions. While the Form and Instructions answer some of the numerous questions raised since the Coronavirus Aid, Relief, and Economic Security (CARES) Act was passed on March 27, 2020, many unanswered questions remain.
If Treasury and the U.S. Small Business Administration (SBA) hold true to form, additional materials gradually will be issued to resolve other questions, some of which may even contradict prior guidance. In the meantime, we hope that Congress also acts to resolve further issues and questions or improves upon Treasury’s interpretations of the CARES Act.
SBA, Treasury, and Fed Guidance: Starting on March 31, 2020, the Treasury, SBA, and Federal Reserve Bank (“Fed”) have each issued press releases, sporadic interim final rule guidance (“Interim Rules”) and non-binding frequently asked questions (“FAQs”), sometimes with multiple revisions, regarding the brand-new PPP program. The PPP description below is based upon the Form and Instructions, together with the Interim Rules and FAQ (“Guidance”) issued as of the evening before the publication date of this client alert. The explanations below are subject to change based upon further Guidance releases.
THE LOAN FORGIVENESS APPLICATION
Below are questions and answers to consider as you prepare to work through the long and detailed Form and Instructions.
Q: Are we still limited to just eight weeks (the “Covered Period”) within which the PPP loan money must be spent to be forgivable? Yes. The Instructions confirm that it is eight weeks (56 days), starting on the first day the loan is deposited into the business’ account (unless the Alternative Payroll Covered Period is used, see the next question). See Instructions, page 1.
Q: Are borrowers provided any relief on when the Covered Period begins? Limited flexibility has been provided. If a business has a biweekly or shorter payroll cycle, it can adjust its Covered Period to begin on the first day of its first pay period following the date the PPP loan was deposited in its bank account. That is called the “Alternative Payroll Covered Period,” which is then used for multiple purposes throughout the Form. The Alternative Payroll Covered Period allows your eight-week measurement period to line up with your payroll cycles. See Instructions, page 1.
For simplicity’s sake, below we will only talk about the Covered Period, unless we specifically need to refer to the Alternative Payroll Covered Period.
Q: We read that Treasury or Congress might provide relief to restaurants, hotels, and other retail businesses for how they count the Covered Period, or if they can use more than 25% of the PPP loan for rent and still qualify for loan forgiveness. Has that happened? No. There are negotiations in Congress that suggest some change may be coming. But until both houses of Congress approve a new bill that becomes law, every borrower must deal with the current Form and rules available.
Q: Can we count payroll incurred prior to our Covered Period, but paid during our Covered Period, in our eligible payroll costs as forgivable loan expenses? It appears that you may be able to include payroll costs before the Covered Period and paid during the Covered Period. Treasury’s interpretation also permits other flexibility. The Instructions say payroll costs are considered paid on the day that paychecks are distributed or the Borrower originates an ACH credit transaction, and payroll costs are considered incurred on the day that the employee’s pay is earned. The Instructions also say payroll costs incurred but not paid during the last pay period of the Covered Period are eligible for forgiveness if paid on or before the next regular payroll date (even if that next regular payroll date is after the end of the Covered Period). Otherwise, payroll costs must be paid during the Covered Period. Cash compensation is still capped at $100,000 per employee, prorated for the Covered Period. Payroll costs that were both paid and incurred during the Covered Period are counted once (no double counting is permitted). See Instructions, page 2.
Q: Does that also apply to eligible nonpayroll costs? At least for nonpayroll costs incurred during the Covered Period, yes! Subject to the 25% of total loan forgiveness amount, the Instructions say eligible nonpayroll costs 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 that billing date is after the end of the Covered Period). As with payroll costs, eligible nonpayroll costs that were both paid and incurred during the Covered Period are counted once. See Instructions, page 2.
Q: We thought one of the big points of confusion was that the CARES Act required eligible expenses to be “incurred and paid” during the Covered Period, right? That question was hotly debated. The Instructions now refer to eligible expenses as those “paid… or incurred” during the Covered Period, turning Congress’ wording around. See Instructions, page 2.
Not only did Treasury turn that phrase around, note the subtle change made by Treasury that makes a huge difference. Instead of requiring eligible expenses to be “paid and incurred,” the Instructions say those expenses must be “paid… or incurred” during your Covered Period. While Treasury’s interpretation directly conflicts with the CARES Act language, this change may help your business count eligible expenses toward loan forgiveness.
Q: Are there additional beneficial Treasury interpretations, for instance with mortgage obligations? Yes. An eligible nonpayroll cost is mortgage interest paid or incurred in the Covered Period. The Instructions at Line 2 state that business mortgage interest payments apply to mortgage obligations on real or personal property, if in effect on February 15, 2020. This is the first time that Treasury indicated that anything other than real estate mortgage loans were eligible. Treasury is broadly interpreting the word “mortgage” to apply to business loans secured by personal property collateral too. While only the interest portion of a debt obligation payment is an eligible nonpayroll cost, many businesses may benefit as a result from this change. See Instructions, page 2.
Q: Did they also change the way we can look at rent? Yes, again. Another eligible nonpayroll cost is rent. The Instructions at Line 3 make it clear that business rent or lease payments for real or personal property during the Covered Period are eligible, if in effect on February 15, 2020. We had hoped this would be the case, but this is also the first time that Treasury indicated anything other than real estate rent was eligible. Thus, a business’ rent paid on building leases, ground rent, equipment leases, vehicle leases, and other leases, likely can be included among the eligible nonpayroll costs. See Instructions, page 2.
Q: Does it matter if our building is owned by an affiliated company and that is who the rent is paid to? Neither the Form or Instructions, nor any prior Guidance, make any distinction as to who the rent may be paid to and still be included as eligible nonpayroll costs.
Q: What happens if we had an employee voluntarily quit, or who was fired for cause, or who refused a written recall notice? Will that reduce our loan forgiveness? No. Borrowers will not be penalized on the FTE reduction calculation if the employee: (i) refuses to return to work (please note, that the good faith offer to rehire has to be written, and for the same hours and pay as before the layoff), (ii) is fired for cause, (iii) voluntarily resigns, or (iv) voluntarily requests reduced hours. See FAQ #40 and Instructions, page 8.
Q: This sounds like many of our PPP issues are resolved, Treasury helped us on a number of points, and the loan forgiveness application is pretty simple, right? Anything but. The Form is complex and the Instructions and supporting documents are difficult to follow. There are many different measurements and measurement periods that must be calculated and applied on the Form. Depending on your business size, your CFO, controller, human resources department, and possibly your accountant and attorney may all need to be involved in helping you to apply for loan forgiveness.
Q: But there is only one Loan Forgiveness Form, so why is it so complicated? You need to carefully read the entire Form and Instructions before you start. You will quickly realize you must complete the PPP Schedule A and the Schedule A Worksheet because information from those pages must be carried over to complete the Form. You must calculate wages, wage reductions, and work hour reductions separately for each employee, and compare those results to several measurement dates and periods. You have to count FTEs using Treasury’s methods, and measure those at several different dates. You may have to create and submit additional spreadsheets to complete the Worksheet, depending upon how many employees you have. Without completing the Schedule A, Worksheet, and Form, you cannot apply for loan forgiveness.
Q: We have done our homework and are confident we can use 75% of the loan on eligible payroll costs and not more than 25% on eligible nonpayroll costs. Won’t our loan be fully forgiven? Maybe, maybe not. If you did not reduce wages or FTEs, if you successfully compare your FTEs on June 30, 2020 to multiple measurement dates required by the Instructions, and if you meet the Safe Harbor test based on those measurements, only then might your loan be eligible for full forgiveness. But until you work through the Form, you cannot be sure you qualify for full forgiveness.
Many businesses will be surprised after they work through all the Instructions, calculations, and measurements that their loan forgiveness will be reduced, even though they met the 75/25% split.
Q: Can’t we just jump to the Safe Harbors and know if our PPP loan will be forgiven? No. Although the Instructions may let you skip a few calculations as you work through the Form, Schedule A, and Worksheet, you really must complete a full analysis in order to complete the Form that must be submitted (together with supporting documentation) to your lender when you apply for loan forgiveness. Skipping information or blanks on the Form will surely delay your loan forgiveness after you apply.
Q: Are all the measurement periods the same as we previously read about? Some are, but Treasury introduced new measurement periods too. Read the Form and Instructions very carefully. For example, if you chose to use the Alternative Payroll Covered Period described above, you are then required to use that same measurement period any time the Form or Instructions use the phrase “Covered Period or Alternative Payroll Covered Period,” but not if the Form or Instructions only use the phrase “Covered Period.”
You may want to run your numbers under each separate FTE calculation method found in the Instructions to see which is more advantageous to you after you run all the way through the Schedule A, Worksheet, and Form.
Q: That all sounds unreasonably complex for a simple forgivable loan. Can we just forget the whole “eligible cost” thing, use the loan money for what we want, not apply for loan forgiveness, and simply repay the loan over the next two years at 1% interest? That may put your business at significant risk. In the original PPP Loan Application, you certified that the loan proceeds will be used only for business-related purposes of retaining workers, maintaining payroll, mortgage interest, rent, and utilities, and that you would use the loan consistent with the PPP. Further, you certified that if the funds are knowingly used for unauthorized purposes, the federal government may hold you legally liable, such as for charges of fraud.
Similarly, the second certification on the back page of the Form states that if the funds are knowingly used for unauthorized purposes, the government may pursue loan recovery and civil/criminal fraud charges. That means everyone should use the PPP loans solely for the permitted eligible cost purposes (at least 75% for eligible payroll costs and no more than 25% for eligible rent, mortgage interest, and utilities), even though the loan may not be fully forgivable.
Moreover, in the Interim Rules originally published on April 2, 2020, Treasury made it clear that if one of your shareholders, members or partners improperly uses the PPP loan funds for unauthorized uses, the SBA will have personal recourse against that person or entity for that unauthorized use.
The government knows your business received the PPP loan for those specific purposes. The SBA expects you to apply for loan forgiveness under the PPP rules and Guidance, and expects repayment of your loan with interest on the unforgiven portion – and they know where to find you.
Q: Are there any trick questions on the Form? Possibly, so be careful. On the front of the Form:
Q: Didn’t FAQ #46 announced on May 13, 2020 provide small businesses with PPP loans under $2 million a “get out of jail free card”? Only partially. While FAQ #46 deems that small businesses made the Necessity Certification in good faith (click here for more information) for loans under $2 million, there are many other reasons why the SBA may still audit or investigate your loan, regardless of the loan amount. For example, they could examine whether your business was eligible (e.g., the size test) to borrow from the SBA in the first place, or review your loan in depth if you do not apply for loan forgiveness. And, as shown in the Q&A immediately above, Treasury claws back on FAQ #46 to audit your loan if your business and its affiliates have total aggregate PPP loans over $2 million.
Q: When can we apply for PPP loan forgiveness? Believe it or not, the Form never says.
Q: What if the SBA asks for more information after my business applies for loan forgiveness? Is there a time limit to reply? Any SBA written notice should tell you a deadline for submitting your additional information. If you fail to do so, under the final certification on page 2 of the Form and in the final paragraph above the signature line, the SBA may determine that your business was not eligible for a PPP loan in the first place and deny loan forgiveness. You may then owe the entire loan plus interest right away.
Q: Once we get through the PPP loan forgiveness process, how long must we keep our documentation and records? For six years after the later of when the loan is forgiven or repaid in full.
We expect yet further Guidance from Treasury and SBA on how to comply with the required loan use and the loan forgiveness process. Additionally, Congress is debating further changes.
If you try to use a loan forgiveness calculator or spreadsheet as an aid to filling out your Form, Schedule A, and Worksheet (posted online by some accounting firms and financial industry services), please make sure the calculator or spreadsheet was updated after the Form and Instructions were issued on May 15, 2020, and that it is subsequently updated if additional Guidance is issued in the future. Please do your own calculations to double-check everything.
In the final weeks of your business’ Covered Period, use the Form and Instructions as your guide to proper usage of your PPP loan. Start working now on how to fill out your Form, Schedule A, and Worksheet while all your information is fresh. The Form is complex, but necessary for applying for and seeking PPP loan forgiveness. Good luck!
Additional contributors for this material include: Matthew I. Pollack, Steven P. Larson, Ethan Lee Rosenfeld, and Maxwell Berg.
Ulmer’s Banking & Commercial Finance Group is available to provide you with strategic advice and counseling as you navigate the business challenges of the COVID-19 pandemic. Please reach out to our attorneys if you have any questions.
The information provided in this client alert speaks only to the information and guidance we have available as of the date of publication and is subject to change. We will continue to follow further issued guidance and regulations and endeavor to post those updates via our website. Please continue to follow these updates at ulmer.com. This legal update was created by Ulmer & Berne LLP, and is not intended as a substitute for professional legal advice. Receipt of this client alert, by itself, does not create an attorney client relationship. For any questions, or for further information, please contact Alan W. Scheufler at firstname.lastname@example.org, Stephen G. Nesbitt at email@example.com, Bradley D. Kaplan at firstname.lastname@example.org, or Frederick N. Widen at email@example.com.