Clarifying the CARES Act: Key Considerations for PPP Loan Forgiveness — and a Calculator

May 3, 2020

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Your Paycheck Protection Program (“PPP”) funds have hit the bank — now what? A prime advantage of the PPP loan is that your loan may be fully or partially forgiven if loan proceeds are used for designated business expenses and purposes. We believe most borrowers intend to operate their business over the next few months with the goal of loan forgiveness. It is expected that the Small Business Administration (“SBA”) will release additional guidance on the forgiveness program, so currently there are aspects subject to interpretation. Below we discuss several key forgiveness considerations and insights to keep in mind as you start to spend your PPP loan money. 

In addition, after you have read the below advisory, please take a look at the PPP Loan Forgiveness Calculator we created to illustrate various factors businesses will want to assess before applying for CARES Act loan forgiveness under the PPP program. Please carefully review the cautionary statements in the calculator regarding its use.  As of the date this advisory, being May 4, 2020, and as discussed below, there continue to be a number of items subject to interpretation in the CARES Act that pertain to forgiveness.  The calculator relies on certain assumptions and is being made available to provide initial assistance to companies looking to start calculatingCl possible forgiveness amounts.

What Are Some of the Key CARES Act Forgiveness Provisions That Companies Are Hoping for SBA Guidance On?

• 25% Non-Payroll Costs Cap. With respect to the requirement that no more than 25% or more of the PPP loan be used on non-payroll costs, if more than 25% of the loan is used on such costs, will that result in the entire PPP loan being unforgiven or just the excess required to bring the percentage back down to 25%.
• Paid and Incurred. The CARES Act references forgiveness of the sum of both payments made during the period, as well as costs incurred. Will this be interpreted such that a company can apply for forgiveness as to costs incurred during the eight week period but not paid until after, or amounts paid during the period that were incurred prior thereto, or prepayments of qualified expenses that are to be incurred after the eight week period. 
• FTEE. How will the CARES Act be interpreted to define full-time equivalent employees (“FTEE”)? We believe based on the use of ”equivalents” it is likely to include all full-time employees (those in excess of 30 hours per week) as well as part-time employees that can be aggregated to exceed 30 hours per week (i.e. if you have two part-time employees working 15 hours per week then they would be aggregated to count as one FTEE).
• Salary/Wage Comparison. With respect to the salary/wage 25% reduction analysis, the CARES Act refers to comparing actual salary/wages during the last full quarter vs. the amount paid during the eight week period. We believe this will be interpreted to compare the annualized rates for proper comparison as opposed to compensation over two different length time periods.
• Restoration. How will the SBA otherwise interpret the June 30 restoration rules regarding certain hiring/rehiring or salary/wage resetting prior to June 30, 2020? For example, will just the rate of salary/wages have to be restored by June 30, 2020, or will the compensation in relation to the reduced rate have to be repaid prior to the restoration?

Unforgivable? Stay Mindful of the Ways That Your Loan May Not Be Forgiven.

Here are a few ways that all or a portion of your PPP loan may not be forgiven:

• Breach, Default, or Misrepresentation. All or a portion of your PPP funds may be deemed unforgivable due to a breach or default under the SBA promissory note or a misrepresentation in respect to your PPP loan application or any of the related materials, including as to eligibility.
• Use of Proceeds. If you use the loan proceeds for anything other than payroll costs and qualified mortgage interest, rent, and utilities payments, then the amount used for the other allowable use, such as to pay interest on other qualified debt, may not be forgiven. Also to the extent your PPP funds are used for any non-permitted use, then they will need to repaid immediately, such as payment of excess compensation, principal debt balances, federal withholding taxes, foreign compensation, or using loan funds for certain qualified sick and family leave wages for which credit is allowed under the Families First Coronavirus Response Act.
• Reduction in FTEE. If your average number of FTEE reduce from the baseline, your PPP forgiveness amount is reduced in proportion to such reduction if you are unable to avail yourself of the applicable FTEE restoration/cure/rehiring rules.  Even if your FTEE count reduces which would otherwise proportionally lower your forgiveness amount, the CARES Act has a provision that disregards such reduction in the event that your total FTEE headcount reduction between February 15, 2020 and April 26, 2020 is restored in full through FTEE replacement or rehiring by June 30, 2020.   Further, in recent guidance issued by the SBA, it advised that a borrower’s forgiveness amount will not be reduced with respect to an employee that was laid off, in the event that the borrower makes a good-faith written offer to rehire the employee which is rejected.
• Employee Wage Cuts.  Remember that the amount forgiven will be reduced by the amount of any reduction during the eight week period of greater than 25% in total salary or wages of any employee that made less than $100,000 annualized in 2019, and you are unable to avail yourself of the salary/wage restoration/cure rules.  Even if the result of the 25% salary/wage calculations would otherwise lower your forgiveness amount, the CARES Act has a provision that disregards such reduction in the event that the applicable employees whose rate of salary/wages was decreased between February 15, 2020 and April 26, 2020, have such rate restored in full by June 30, 2020.

If a portion of your loan was properly used but not eligible to be forgiven, then it will become an unsecured loan if not returned. Such unsecured loan will accrue interest at 1%, and payments will be deferred for six months, after which there typically will be eighteen substantially equal monthly payments of principal and interest.

Understand the Key Difference – Permissible Proceed Uses vs. Forgivable Uses

It is important to note a distinction between the two types of uses for the PPP loan proceeds — forgivable uses and unforgivable but allowable uses. Summarized below are the key differences:

• Forgivable Use. The uses that qualify as to forgiveness are payroll costs, and to the extent qualified (i.e. the underlying agreement is for the borrower and was in place before February 15, 2020), mortgage interest, rent obligations and utility payments. 
• Allowable Use, yet Unforgivable. The allowed use that is not subject to forgiveness is interest on any debt obligations incurred before February 15, 2020 (aside from eligible mortgage interest as noted above). Such amounts will not be forgiven and thus will result in the unsecured loan.

Stay Prepared for the Loan Forgiveness Request Process

You will need to submit a forgiveness request to your lender that includes a certification during the submission period which will be described in your loan documents.  It is expected to be either July 1 through August 15, 2020, or the period between 60 and 90 days following your loan disbursement.  The request will include the amount requested to be forgiven, as well as information relating to amount of payroll costs and other forgivable uses, the average number of FTEEs for the baseline period, the FTEEs at certain dates on and after February 15, 2020, and salary and wage information.  The lender and SBA may also request documentation verifying payroll tax filings reported to the IRS and state income, payroll, and unemployment insurance filings; cancelled checks, payment receipts, transcripts of accounts, or other documents verifying payments on forgivable uses. Your lender should respond to your request within sixty days from receipt. It is recommended that you refer to your PPP promissory note which will provide what information is specifically required for your PPP loan.

Key Considerations and Best Practices When Using and Managing PPP Loan Proceeds.

• Track FTEEs.
  • Determine FTEEs for Purposes of CARES Act Forgiveness. While the CARES Act does not define full-time equivalent employees we believe based on the use of ”equivalents” it is likely to include all full-time employees (those in excess of 30 hours per week) as well as part-time employees that can be aggregated to exceed 30 hours per week (i.e., if you have two part-time employees working 15 hours per week then they would be aggregated to count as one FTEE).
  • Choose Your Baseline Test Period. You need to determine your FTEE baseline by first counting your FTEEs for the applicable baseline test period. A company can pick baseline test periods between either (a) February 15, 2019 through June 30, 2019 or (b) January 1, 2020 through February 29, 2020. Seasonal employers should use the 2019 period.   
  • Examine FTEE Count. After determining your baseline test period, review your current FTEE count to determine if you need to rehire to maximize PPP loan forgiveness, for example by ensuring the eight week average FTEE figure equals or exceeds that of the baseline.  Note you can rehire and pay employees, even if they are not working. If you had FTEE Count reductions that would otherwise reduce forgiveness, determine if the FTEE restoration rule is satisfied, or if you made a good-faith written offer to rehire which the former employee rejected.

• Carefully Calculate Salary Reductions.
  • As to the salary reduction provision, you need to determine the total base salary or wages of each employee for the last full quarter before the date you receive your loan. This will allow you to properly track the impact of the 25% reduction limitation.
  • Remember this only applies with respect to employees who did not receive (during any single pay period) more than $100,000 in annualized salary or wages in 2019.
  • To the extent your business already reduced wages as a result of COVID-19, you will remain eligible for loan forgiveness if your wages go back to pre-crisis levels before June 30, 2020. If you had salary/wage reductions that would otherwise reduce forgiveness, determine if the salary/wage restoration rule applies and it is satisfied.

• Record and Monitor Use of Loan Proceeds.
  • Place the PPP loan proceeds in a separate payroll or other deposit account to ensure you can properly track the use of proceeds.
  • Coordinate with any third parties that process payroll (such as a payroll processing company or leasing company) to ensure that the PPP loan proceeds are utilized to make the payments.
  • To the extent possible, maintain documentation for each time you use money from the loan to prove the use is allowable and if applicable, forgivable. Additionally, monitor the usage of your loan proceeds to ensure that proceeds are not used impermissibly. For example, proceeds should not be used for certain qualified sick and family leave wages for which credit is allowed under the Families First Coronavirus Response Act.

• Consider Other Ways to Maximize Forgiveness.
  • Use the PPP loan proceeds to pay for forgivable uses first, and then use the remainder (if any) towards other allowed operating uses.
  • Prioritize payroll, as at least 75% of loan proceeds must be used for payroll expenses in order to be eligible for full forgiveness.
  • If possible, time the receipt of the loan proceeds to maximize the number of payroll periods included in the eight week timeframe. To the extent you cannot time receipt of funding exactly with a payroll period be sure to document the exact amount of prorated PPP proceeds used to partially fund any payrolls during the 8 week period.
  • Track constantly your monthly FTEE average during the eight week period, as well as any salary or wage changes.
  • Monitor regularly the SBA’s website for developments and updates on loan forgiveness, including interim rules, as well as maintaining communication with your PPP lender as to the forgiveness procedures.

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About the Authors: Chad Porter, Mark Manning, Amanda Adam

Chad Porter is a partner in Burns & Levinson’s Finance, Middle-Market M&A and Private Equity, Securities Law, and Business & Transactions groups. He specializes in mergers and acquisitions, commercial financing arrangements, private equity investments and transactions, securities transactions and compliance, general business affairs, and business disputes. He can be reached at cporter@burnslev.com or 617.345.3686.

Mark Manning is a partner in Burns & Levinson’s Corporate, Venture Capital & Private Equity, and Intellectual Property Groups. Clients look to Mark Manning to achieve the best results in their most complex commercial transactions and internal business and legal issues. He regularly leads merger and acquisition transactions on behalf of both buyers and sellers, providing him with deep insight into what drives both sides of a deal – a perspective that helps him efficiently facilitate practical solutions to issues that keep deals from getting done. He can be reached at mmanning@burnslev.com or 617.345.3468.

Amanda Adam is an associate in the Business, Finance and Transactions department and a member of Burns & Levinson’s corporate practice group. In her pro bono work, Amanda has represented clients with asylum and immigration matters, CORI sealings, and low-income debt cases. She can be reached at aadam@burnslev.com or 617.345.3556.