PPP Loan Forgiveness Changes Following New Guidance Issued by the SBA and Treasury

Jerad T. Whitt

On January 6, 2020, the U.S. Small Business Administration (SBA) and the Treasury Department issued new Interim Final Rules in connection with the Economic Aid to Hard-Hit Small Businesses, Nonprofits and Venues Act (Economic Aid Act), which extended and increased funding for the Paycheck Protection Program (PPP). The rules were divided into two parts – one addressing the new round of funding for first time borrowers (“Business Loan Program Temporary Changes; Paycheck Protection Program as Amended by Economic Aid Act”) and one addressing second draw loans for certain existing PPP borrowers (“Business Loan Program Temporary Changes; Paycheck Protection Program Second Draw Loans”).

The Economic Aid Act and the new Interim Final Rules largely maintain the same parameters as the prior round of PPP funding, with a few key changes. Significantly, the Economic Aid Act and the Interim Final Rules modified the definition of eligible costs, simplified the loan forgiveness process for certain small loan borrowers, and made changes to the calculation of loan forgiveness based on the percentage of the loan used for payroll costs. The discussion below is limited to these changes to loan forgiveness eligibility criteria, and does not address eligibility or other requirements for second-draw PPP loans. Additionally, although the Interim Final Rules made changes to the eligibility requirements for first time borrowers, these changes are largely intended to address particular concerns for a narrow set of potential borrowers (such as publicly traded companies, lobbying firms, or companies owned by certain politicians and their families), for most borrowers the eligibility criteria for first time PPP borrowers remains largely the same.

PPP loans may be fully or partially forgiven (including interest) only if the borrower uses loan proceeds for forgivable purposes. In order to be eligible for full forgiveness, borrowers must maintain then current employment and employee compensation levels, unless an applicable safe harbor or exemption applies. Forgivable purposes include:

• Payroll costs (except qualified wages used in determining the Employer Retention Credit);
• Interest paid on mortgages incurred before February 15, 2020;
• Rent paid on leases dated before February 15, 2020; and
• Certain covered expenditures, described below, incurred during the loan forgiveness period.

These additional eligible expenses now include four new types of expenses, as follows:  

1. Covered operations expenditures. Payments for any business software or cloud computing service that facilitates business operations, product or service delivery, the processing, payment, or tracking of payroll expenses, human resources, sales and billing functions, or accounting or tracking of supplies, inventory, records and expenses.
2. Covered property damage costs. Costs related to property damage and vandalism or looting due to public disturbances that occurred during 2020 that was not covered by insurance or other compensation.
3. Covered supplier cost. An expenditure made by an entity to a supplier of goods that are: (a) essential to the operations of the entity at the time at which the expenditure is made, or (b) made pursuant to a contract, order, or purchase order that was either (x) in effect at any time before the covered period with respect to the loan, or (y) with respect to perishable goods, in effect before or at any time during the period.
4. Covered worker protection. These are operating or capital expenditures that are required to facilitate the adaptation of the business activities of an entity to comply with requirements established or guidance issued by the Department of Health and Human Services, the CDC, or OSHA during the period beginning on March 1, 2020 and ending on the date on which the national emergency declared by the President under the National Emergencies Act expires. Eligible costs are those related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to Covid–19.

The Economic Aid Act also changed the “loan forgiveness period” such that the borrower can choose the length of the period, so long as it is between 8 and 24 weeks following disbursement of the PPP loan. The SBA also did away with the “alternative covered period” concept, as it is no longer applicable.

Additionally, borrowers who receive an Economic Injury Disaster Loan (EIDL) are no longer required to deduct EIDL Advance Amounts from the eligible loan forgiveness amount under the PPP, so an EIDL will no longer reduce the amount of loan forgiveness a borrower is entitled to. If an existing PPP borrower had EIDL Advance Amounts deducted from its forgiveness amount for a PPP loan that has already been forgiven, the SBA will refund this amount, with interest.

To receive full loan forgiveness, at least 60% of the PPP loan must be used for payroll costs, and no more than 40% of the forgiveness amount may be attributable to non-payroll costs. This 40% cap refers to 40% of the forgiveness amount, not 40% of the total loan amount. For example, if a borrower receives a $100,000 PPP loan and uses $54,000 (54%) of it on payroll costs, the maximum amount of loan forgiveness will be reduced to $90,000. Payroll costs ($54,000) must constitute 60% of the forgiveness amount, so the remaining 40% which can be attributed to non-payroll costs is only equal to $36,000 ($54,000 + $36,000 = $90,000). The borrower must then repay $10,000 ($100,000 - $90,000 = $10,000).

Borrowers with PPP loans of $150,000 or less now have a simplified loan forgiveness application process. These small loan borrowers may submit a shorter forgiveness application (which the SBA has not yet published) certifying that they meet forgiveness criteria and other PPP requirements. This short form application will include the number of employees the borrower retained because of the loan and the estimated percentage of the loan amount spent on payroll costs. Qualifying borrowers will not be required to submit additional documentation beyond this short, one-page certification in order to qualify for loan forgiveness, but will be required to retain relevant employment records for a period of 4 years and other relevant business records for a period of 3 years. The SBA expressly notes that it may review and audit these records for fraud.

For more information or assistance, please contact a member of the KMK Law Coronavirus (COVID-19) Response Team.