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Payroll Protection Program Loan Forgiveness

The Small Business Administration (SBA) continues to issue updates (with the latest issued May 15) and provide guidance for the Paycheck Protection Program (PPP) loan forgiveness regulations. To be reimbursed, the lenders, not the SBA, will be granting loan forgiveness, but they must comply with SBA guidance. Borrowers should be working with their lenders to complete the application.

What the CARES Act Says

Section 1106 of the Coronavirus Aid, Relief, and Economic Security (CARES) Act provides for the forgiveness of a portion of a PPP loan. It states the following:

Forgiveness. An eligible recipient shall be eligible for forgiveness of indebtedness on a covered loan in an amount equal to the sum of the following costs incurred and payments made during the covered period:

(1) Payroll costs.

(2) Any payment of interest on any covered mortgage obligation (which shall not include any prepayment of or payment of principal on a covered mortgage obligation).

(3) Any payment on any covered rent obligation.

(4) Any covered utility payment.

The amount of eligible nonpayroll costs that may be forgiven cannot exceed 25 percent of the payroll costs forgiven.

The covered time is the 8-week period that begins on the date the lender makes the first disbursement of the PPP loan to the borrower. The borrower may use the Alternative Payroll Covered Period, which for borrowers with a biweekly or more frequent payroll, is the 56-day period beginning with the first day of the pay period following PPP loan disbursement.

Loan Forgiveness

The SBA has developed a Loan Forgiveness Application with four components: (1) the PPP Loan Forgiveness Calculation Form, (2) PPP Schedule A, (3) the PPP Schedule A Worksheet, and (4) the (optional) PPP Borrower Demographic Information Form. All borrowers must submit components (1) and (2) to their lender.

The application is relatively complex and is expected to require a fair amount of time to complete, especially if the number of employees and total wages paid at the beginning of the covered period is different at the end of the covered period. In anticipation of the complexity, the American Institute of CPAs has developed an Excel spreadsheet to help borrowers and lenders make the required calculations.

In addition to the application, borrowers are required to submit documentation to substantiate the numbers included on the application. Borrowers must verify the number of full-time equivalent employees on the payroll during the period. They must also verify eligible cash and noncash benefit payments to include bank statements documenting the amount of cash compensation; tax forms; and payment receipts, cancelled checks, or account statements documenting the amount of any employer contributions to employee health insurance and retirement plans that the borrower included in the forgiveness amount.

For nonpayroll expenses, the application instructions state that the borrower “must provide documentation verifying the existence of the obligations/services prior to February 15, 2020, and eligible payments from the Covered Period for the following categories:

  1. Business mortgage interest payments: Copy of lender amortization schedule and receipts or cancelled checks verifying eligible payments from the Covered Period; or lender account statements from February 2020 and the months of the Covered Period through one month after the end of the Covered Period verifying interest amounts and eligible payments.
  2. Business rent or lease payments: Copy of current lease agreement and receipts or cancelled checks verifying eligible payments from the Covered Period; or lessor account statements from February 2020 and from the Covered Period through one month after the end of the Covered Period verifying eligible payments.
  3. Business utility payments: Copy of invoices from February 2020 and those paid during the Covered Period and receipts, cancelled checks, or account statements verifying those eligible payments.”

The CARES Act Section 1106(f) provides, “No eligible recipient shall receive forgiveness under this section without submitting to the lender that is servicing the covered loan the documentation required under subsection (e).”

Answers from the Small Business Administration

The SBA also recently updated its Frequently Asked Questions for Paycheck Protection Program Loans. Question 31 reminds borrowers that they must certify in good faith that current economic uncertainty makes this loan request necessary to support the ongoing operations of the applicant. Borrowers must make this certification in good faith, taking into account their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business. However, Question 46 provides, “SBA, in consultation with the Department of the Treasury, has determined that the following safe harbor will apply to SBA’s review of PPP loans with respect to this issue: Any borrower that, together with its affiliates, received PPP loans with an original principal amount of less than $2 million will be deemed to have made the required certification concerning the necessity of the loan request in good faith.”

This article represents the information provided by the SBA on May 15, 2020. However, SBA has indicated that it will be issuing regulations and additional guidance.

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