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Paycheck Protection Program – Loan Forgiveness Application

May 18, 2020

Matthew M. McDonald and Elizabeth W. Bucilla

Paycheck Protection Program – Loan Forgiveness Application

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On May 15, 2020, the SBA released the loan forgiveness application which Borrowers must submit to apply for forgiveness of a Paycheck Protection Program (PPP) loan. 

The application has four components:

(1) The PPP Loan Forgiveness Calculation Form

(2) PPP Schedule A

(3) The Schedule A Worksheet, which provides background addressing the calculations in Schedule A

(4) An optional PPP Borrower Demographic Information Form

Borrowers are required to submit sections (1) and (2) of the document to their lender to apply for forgiveness.

The application also supplements previous guidance to provide additional information regarding the calculation of loan forgiveness and what documentation should be submitted in connection with the forgiveness application, including:

Alternative Payroll Covered Period

Previous guidance indicated that the covered payroll period would begin on the date when the Borrower initially received the PPP loan from the lender. As an alternative and in order to maximize the amount of eligible forgiveness, a Borrower with a bi-weekly (or more frequent) payroll schedule may elect to calculate eligible payroll costs using the eight-week period that begins on the first day of their first pay period following their PPP loan disbursement date. For example, if the Borrower received its PPP loan proceeds on Monday, April 20, and the first day of its first pay period following its PPP loan disbursement is Sunday, April 26, the first day of the alternative payroll covered period is April 26 and the last day of the alternative payroll covered period is Saturday, June 20. Additionally, if the Borrower chooses to use the alternative payroll covered period it should be aware that the eight-week period commencing on the PPP loan disbursement date will still apply for purposes of evaluating forgiveness relating to non-payroll costs (as indicated on the application).

What Constitutes a Payroll Cost Eligible for Forgiveness?

In addition to cash compensation of up to $100,000 for each individual employee, the Borrower may include the following payments as non-cash compensation payroll costs: (i) the total amount paid by the Borrower for employer contributions for employee health insurance, including employer contributions to a self-insured, employer-sponsored group health plan, but excluding any pre-tax or after tax contributions by employees, (ii) the total amount paid by the Borrower for employer contributions to employee retirement plans, excluding any pre-tax or after-tax contributions by employees, and (iii) the total amount paid by the Borrower for employer state and local taxes assessed on employee compensation (e.g., state unemployment insurance tax).

What Constitutes a Non-Payroll Cost Eligible for Forgiveness?

Eligible nonpayroll costs include (i) “business mortgage interest payments”, defined as payments of interest (not including any prepayment or payment of principal) on any business mortgage obligation on real or personal property incurred before February 15, 2020, (ii) “business rent or lease payments”, defined as business rent or lease payments pursuant to lease agreements for real or personal property in force before February 15, 2020 and (iii) “business utility payments”, defined as business payments for a service for the distribution of electricity, gas, water, transportation, telephone or internet access for which service began before February 15, 2020. An eligible nonpayroll cost must be paid during the covered period or incurred during the covered period and paid on or before the next regular billing date, even if the billing date is after the covered period.  Consistent with prior guidance, eligible nonpayroll costs are not to exceed 25% of the total forgiveness amount.

Safe Harbor for the Reduction of Eligible Forgiveness

In accordance with the CARES Act legislation authorizing the PPP, the forgiveness application provides a “safe harbor” for the otherwise mandated reductions in eligible forgiveness based on corresponding reductions relating to the number of employees or reductions concerning salary and wages. The application exempts the Borrower from loan forgiveness reduction in the event that, not later than June 30, 2020, the Borrower restores its full-time equivalency (FTE) employee levels or salary and wages, as applicable, to those in the Borrower’s pay period that included February 15, 2020. Furthermore, the application explains that the Borrower will not have a reduction in eligible forgiveness as a result of salary and wage reductions where the reductions did not amount to more than 25% during the covered period or alternative covered payroll period as compared to February 15, 2020.

Additionally, the application clarifies that FTE reductions will not apply to the Borrower’s forgiveness calculation where either the applicable position was filled by a new employee prior to June 30, 2020 or the Borrower has documented a position for which (i) the company made a good faith, written offer to rehire an employee during the applicable period which was rejected by the employee or (ii) any employees who during the applicable period were fired for cause, voluntarily resigned or voluntarily requested and received a reduction of their hours.

More Certifications Are Required

In addition to the initial certifications that the Borrower was required to provide in connection with the application for a PPP loan, the forgiveness application requires that an authorized representative of the Borrower must provide additional good faith certifications regarding its use of funds and the information and documentation provided with the application. Among other things, the required certifications expressly acknowledge that knowingly making a false statement to obtain forgiveness is punishable under the law. The Borrower must also self-identify on the application whether the Borrower, together with its affiliates, received PPP loans with an original principal amount in excess of $2 million. Consistent with previous guidance, those Borrowers who receive more than $2 million may undergo additional review by the SBA and other governmental agencies.

Required Documentation

The application provides much-needed clarity regarding what documentation the Borrower should expect to provide when they apply for forgiveness. First, the Borrower must verify the eligible cash compensation and non-cash benefit payments by providing bank account statements or payroll reports, tax forms for the applicable period and payment receipts documenting employer contributions to employee health insurance and retirement plans. Next, the Borrower must document the company’s average number of FTE employees between either February 15, 2019 and June 30, 2019 or January 1, 2020 and February 29, 2020 by providing documents such as tax filings (typically, Form 941). The application also summarizes various additional documents which should be provided to support business mortgage interest payments, business rent or lease payments and business utility payments eligible for forgiveness. Finally, the application instructs the Borrower to maintain additional documentation for a period of six years after the date the loan is either forgiven or repaid in full to demonstrate amounts paid to employees and the forgiveness calculation and in the event that the SBA requests additional information for the purpose of evaluating the Borrower’s eligibility for the PPP loan and loan forgiveness.

The SBA Focus Group of the COVID-19 Task Force at Klehr Harrison stands ready to assist you in your business and legal needs. We will continue to provide additional information and guidance as the PPP loan program is implemented.

Co-authors Matthew McDonald, partner and Elizabeth Bucilla, associate are members of the Corporate & Securities Department at Klehr Harrison.