KMK Law Corporate & Securities Blog

UPDATE: On May 22, 2020, the Treasury posted an Interim Final Rule providing more detail on the loan forgiveness process. Notable updates are provided below.

Late on May 15, 2020 the Department of Treasury posted the Paycheck Protection Program Loan Forgiveness Application (“Application”) to its website. The application contains step-by-step instructions with worksheets and schedules to help borrowers calculate the amount of their PPP Loan which is eligible for forgiveness.

The Application contains a few notable clarifications and changes which are generally favorable to borrowers, including:

• Borrowers have the option to use an Alternative Payroll Covered Period that lines up with their payroll periods rather than using the 8 week period that starts the date the loan proceeds were disbursed.
  • UPDATE: The Interim Final Rule made it clear that payments of bonuses or hazard pay to employees making less than $100,000 annualized during the Covered Period or Alternative Payroll Covered Period are allowable expenses and eligible for forgiveness. Additionally, payments of compensation to employees who have been furloughed or are not working are allowable expenses and eligible for forgiveness.
• In measuring number of employees, Borrowers are permitted to calculate FTEs to the nearest 0.1, using 40 hours as the full time standard, or simply count each employee working 40 hours per week as 1.0 and count each employee working less than 40 hours per week are counted as .5. This alternative FTE calculation method will greatly simplify the loan forgiveness calculations for borrowers with a significant number of employees who work variable hours or part time employees, such as restaurants.
  • UPDATE: The Interim Final Rule states the SBA considered using 30 hours as the full time standard, but rejected it in favor of a 40 hour full time standard.
• Added a FTE Reduction Exception that excludes from the FTE count, any employee who (a) was fired for cause, (b) voluntarily resigned, or (c) voluntarily requested and received a reduction of their hours, plus employees who rejected a good faith written offer as described in this blog post.
  • UPDATE: The Interim Final Rule provides clarification that in order to exclude an former employee from the FTE calculation, the borrower must have made a good faith written offer to rehire such employee during the Covered Period or Alternative Payroll Covered Period; the offer must have been for the same salary or wages and same number of hours as earned by such employee prior to the separation or reduction in hours; the offer must have been rejected by such employee; the borrower must have maintained records documenting the offer and its rejection; and the borrower must have informed the applicable state unemployment insurance office of such employee’s rejected offer of reemployment within 30 days of the employee’s rejection of the offer. The Interim Final Rule indicates further guidance on the process for notifying state unemployment agencies will be forthcoming.
• Clarified that the salary/wage reduction calculation is based on the average annual salary or hourly wage, not total wages paid during the applicable periods.
• Loan proceeds can be used to pay interest on business mortgage obligations secured by real or personal property, not just real property.
• Loan proceeds can be used to pay lease payments for real or personal property, not just real property.
• Clarified that payroll costs eligible for forgiveness must be paid or incurred during the 8 week period after the loan proceeds were disbursed or during the Alternative Payroll Covered Period and paid either during the 8 week period or Alternative Payroll Covered Period. Payroll Costs incurred during the last pay period occuring during the Covered Period or Alternative Payroll Covered Period, but not paid during the applicable period, are eligible for forgiveness if paid on or before the next regular payroll date occuring after the Covered Period or Alternative Payrool Covered period.
• Other forgivable expenses (mortgage interest, rent, and utilities) must be paid during the 8 week period or incurred during the covered period and paid before the next regular billing date.
  • UPDATE: The Interim Final Rule clarifies mortgage interest expense cannot be prepaid even if paid during the covered period.  In paying expenses other than Payroll Costs, Borrowers must take care to ensure the non-Payroll expenses do not exceed 25% of the loan amount, or 25% of total expenses paid with loan proceeds if less than the full amount of the loan.
• Clarified what documents borrowers will be required to submit to its lender and retain to verify forgivable expenses and payroll calculations.

Following on the recent guidance stating all loans over $2 million will be subject to heightened scrutiny, the Application contains a box borrowers must check indicating whether or not the borrower’s loan (combined with loans to affiliates) exceeded $2 million.

The last paragraph of the Application states, “The Borrower’s eligibility for loan forgiveness will be evaluated in accordance with the PPP regulations and guidance issued by SBA through the date of this application. SBA may direct a lender to disapprove the Borrower’s loan forgiveness application if SBA determines that the Borrower was ineligible for the PPP loan.”  This statement contradicts the SBA FAQs which provide that “all borrowers must assess their economic need for a PPP loan under the standard established by the CARES Act and the PPP regulations at the time of the loan application.” In effect, the SBA is requiring that borrowers sign a loan forgiveness application agreeing that eligibility for loan forgiveness is based on guidance through the date of the loan forgiveness application. In addition, the Application requires borrowers to retain the required documentation for six years after the date the loan is forgiven or repaid in full, and “permit authorized representatives of SBA, including representatives of its Office of Inspector General, to access such files upon request.” Given the continuous updates and changes to the PPP guidance, borrowers need to ensure they’re fully up to date and informed on all the guidance which may impact them.

The KMK Law COVID-19 team is happy and eager to assist businesses and non-profits in understanding the application and forgiveness process, and will continue to keep businesses and non-profits apprised of further guidance as it is released.