While the second round of Paycheck Protection Program (“PPP”) funding remains available for new applicants, the first round is about to enter a new phase—loan forgiveness. Under the PPP, up to the full amount of the loan may be forgiven if the borrower spends proceeds on eligible payroll, mortgage, rent, and utilities expenses in the eight weeks following loan origination (subject to certain limitations, including that not more than 25% of forgiveness may be based on eligible non-payroll expenses). Forgiveness will be reduced for employer reductions in headcount and for certain reductions in salaries/wages in excess of 25% for any employee making less than $100,000 on an annualized basis during the eight-week period as compared with pre-COVID-19 conditions. To facilitate the forgiveness process, the SBA has now issued a PPP Forgiveness Application (SBA Form 3508). Borrowers that plan to seek forgiveness should carefully review the form and its instructions in advance of submission to their lenders or current servicers.
To request forgiveness, a borrower must submit the SBA PPP Loan Forgiveness Calculation Form, which includes basic information about a borrower’s PPP loan and a summary calculation of the forgiveness amount, as well as a schedule to further support the forgiveness calculation. Borrowers must also submit documentation supporting eligible payroll and non-payroll expenses and number of full-time equivalent (“FTE”) employees both before the COVID-19 crisis and during the eight-week forgiveness period; and borrowers will have to maintain, but not submit, certain additional supporting documentation addressing reductions in loan forgiveness for headcount or salary/wage reductions. The SBA has also provided a more granular worksheet to guide borrowers through the forgiveness calculations, though the worksheet does not have to be submitted with the application. Finally, the SBA has issued an optional PPP Borrower Demographic Information Form that may be submitted by borrowers, but is not a requirement for forgiveness.
It is worth noting that certain aspects of the application provide additional flexibility to PPP borrowers. In particular:
- for administrative convenience, borrowers with biweekly (or more frequent) payroll schedules may choose—at their discretion—to align the eight week forgiveness period with their payroll schedules, rather than start it on the day the loan is disbursed;
- borrowers can use—again, at their discretion—a simplified FTE calculation methodology that assigns a weight of 1.0 to employees who work 40 hours or more per week and 0.5 for employees who work fewer hours, rather than a more fulsome FTE calculation; and
- borrowers can seek forgiveness for payroll and non-payroll expenses incurred, but not paid, during the covered period if they are paid by the next regular payroll or billing date.
While the PPP application materials include various instructions as to the calculation of relevant values, we nevertheless expect additional guidance—in the form of further rulemaking and/or FAQ responses—from the SBA, given the way the program has been implemented to date.
The forgiveness application also requires the borrower (and the individual “authorized representative” executing the form) to make several certifications to the SBA. Certifications include statements regarding the eligibility of expenses claimed as the basis for forgiveness, the use of PPP loan proceeds for authorized purposes, the borrower’s verification of payroll and non-payroll costs and submission of verification documents (including that any tax documents submitted are versions the borrower has or will submit to the IRS and/or state tax or workforce agencies), and the truth and correctness of all information in the application and supporting documents. Additionally, a borrower also must self-identify if it, together with its affiliates, received PPP loans in excess of $2 million, which determines whether the borrower falls into a previously defined Safe Harbor from SBA enforcement (or referral to other enforcement agencies) related to the borrower’s certification that “[c]urrent economic uncertainty [made the PPP loan] request necessary to support the ongoing operations of the Applicant” and may also be used in connection with the SBA’s announced plans to audit of each PPP loan in excess of $2 million.
While the certifications are not necessarily as broad as those submitted during the PPP loan application process, certain terms may be susceptible to subjective assessment (such as the level of scrutiny necessary to have “accurately verified” payroll and non-payroll costs). Given the SBA’s frequent issuance of additional guidance applicable to the PPP program, borrowers should take care in assessing program compliance and in maintaining documents that demonstrate compliance.
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