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Six Key Takeaways from the SBA's PPP Forgiveness Update

The most recent PPP loan forgiveness information for allowable expenses during the 8 wk period. Clarification on specific questions asked by businesses.

The US Treasury and the Small Business Administration recently released long-awaited guidance on just how Payroll Protection Loans would be forgiven, a key element of the CARES Act passed by Congress at the onset of the COVID-19 crisis. Fortunately for many small businesses, the guidelines provide clarity on several key questions that have arisen as lenders and borrowers have implemented the PPP over the past several weeks. There are a lot of nuances and details to the guidance, so please speak with legal, financial, and accounting professionals for advice regarding your company’s specific situation. Still, we wanted to summarize the key points:

1 – PPP Forgiveness Covered Period clarification

Initially, eligible payroll expenses had to be paid in the eight weeks following receipt of PPP funds, but that timing doesn’t always line up with a company’s payroll periods. In response, the SBA is allowing borrowers to calculate an alternative period starting at the company’s next payroll period and going eight weeks from that date instead. Note that this alternative covered period is only applicable to payroll costs, which (as before) must account for 75% of the loan proceeds.

2 – Incurred OR paid clarification

The initial CARES Act language and subsequent interim final rules, non-payroll expenses eligible for forgiveness (defined as rent, mortgage interest, and utilities), needed to be paid AND incurred during the eight-week period in order to qualify for forgiveness. In the new guidance, this language was shifted to paid OR incurred, and companies are explicitly allowed to pay expenses incurred during the eight weeks on or before the next regular billing date, even if such date is after the end of the eight weeks.

3 – Full use

The guidance also clarifies that a business owner does not need to spend the full amount of her PPP loan within the eight-week covered period in order to receive any forgiveness – not all of a PPP loan needs to be exhausted for eligible expenses to be forgiven.

4 – Payroll Costs

The CARES Act and subsequent documentation wasn’t very clear on just how a company should navigate the employee and payroll rules in order to maximize forgiveness. After all, the primary purpose of the PPP is to retain jobs and keep workers employed, so the law had consequences on forgiveness if a borrower didn’t maintain headcount and salaries at pre-COVID levels, but they weren’t well defined.

No longer. If a company’s headcount or payroll doesn’t match pre-crisis levels, the amount of forgiveness will likely fall. The forgiveness application includes a worksheet where lenders and borrowers alike can calculate how much their forgivable amount will decline based on a number of factors such as a decline in employee headcount and drops of more than 25% in employee pay for workers who earned less than $100,000 last year. Importantly, the application clarifies the “restoration exemption”. The reduction in loan forgiveness described above is waived when reductions in full-time equivalents or average hourly wages and salaries took place between February 15 and April 26, 2020, or when the number of pre-COVID full-time equivalents and compensation are restored by June 30, 2020. Also, the new guidance clarifies that forgiveness amounts will not be reduced for employee reductions related to offers to rehire that are declined, terminations for cause, or employees who resigned voluntarily. Also, the guidance clarifies the definition of full-time equivalent (FTE) employees and how to count part-timers. To calculate payroll costs, full time means 40 hours per week, while for part-timers, borrowers can either take weekly hours worked and divide by 40 to determine a percentage FTE, or count 40-hour employees as 1 FTE anyone on a part-time basis as a .5.

5 – Self-employed clarification

The guidance also clarifies self-employed individuals or general partners are capped at a total forgivable amount of $15,385 per individual or eight weeks of 2019 income, whichever is less.

6 – Foreign workers clarification

The SBA’s rules around affiliation were a significant source of uncertainty early in the PPP process, particularly around the size and involvement of VC and PE investors. In the forgiveness application, the SBA has clarified that to determine a company “size” for purposes of the under 500-employee eligibility test, employees of the company and all of its domestic and foreign affiliates should be included. This means ALL employees, including those residing outside the US and those of foreign affiliates, should be included in the calculation.

However, because of the confusion when the PPP was first announced, SBA will not find any borrower that applied for a PPP loan prior to May 5, 2020, to be ineligible if they excluded non-U.S employees from their calculations as long as the borrower, together with affiliates, had no more than 500 employees whose principal place of residence is in the United States.

Despite the clarifications included in the forgiveness application, several questions remain. For instance, the eight-week provision is problematic if local orders bar a company from reopening for all or some of that period – should a restaurant rehire and pay laid-off workers although it can’t reopen just to get the forgiveness, and lay them off again afterwards? For such borrowers, flexibility on when to apply the eight weeks would allow them to align their business operations with the intent of the law, which is to save jobs.

Also, continuing a theme evident almost since the ink was dry on the CARES Act itself, borrowers will need to certify in the forgiveness application whether the total PPP loan (including affiliates) was for $2M or more, as well as affirm the information provided was true and correct and that PPP loan proceeds were used for authorized purposes. Importantly, the forgiveness application does not require the borrower to recertify need or economic uncertainty.

The PPP program has clearly had its share of issues, but the core intent remains solid – provide US small businesses with support as they grapple with the impact of COVID-19. Stay tuned – we think additional details will be provided over the next several weeks, and many businesses will ultimately benefit greatly from the program.