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UPDATED - Client Alert: Six Steps to PPP Loan Forgiveness

Date: September 2, 2020

Click here for a one page guide to PPP Loan Forgiveness.


This article was originally published on May 19, 2020, and we are re-releasing it to include pertinent updates since then. We encourage you to review our other articles for more detailed information about the current state of the PPP.

Congratulations, you received a loan under the Paycheck Protection Program (“PPP”)! Now you want to maximize your ability to take advantage of the opportunity to have up to 100% of the loan forgiven. The following guide provides overall concepts to consider in using your PPP loan proceeds. Please reach out to the authors or your other professional advisors if you have questions about your specific situation.

In large part, the practices of your lender will drive the actual application process.  You should review your PPP loan documentation to see if your lender has set out any specific requirements. After you apply for forgiveness, by law your lender must provide you with a response within 60 days.

Recordkeeping and Required Documents for Forgiveness

The documentation you will need to support PPP loan forgiveness will mirror the documentation you provided to your lender to support your qualifying Payroll Costs for purposes of determining your maximum PPP loan amount. Your lender may have additional requirements, and the SBA will likely continue to provide further guidance. You should keep an eye out for further notices and instructions from your lender regarding the PPP loan forgiveness process.
  • Documents verifying the number of full-time equivalent employees (“FTEs”) on payroll and their pay rates, for the periods used to verify you met the staffing and pay requirements:
    • Payroll reports from your payroll provider
    • Payroll tax filings (Form 941)
    • Income, payroll, and unemployment insurance tax filings with your state
    • Documents verifying any retirement and health insurance contributions
  • Documents verifying your eligible interest, rent, and utility payments (canceled checks, payment receipts, account statements)
  • Proof of the applicable lease, utilities service, and/or mortgage

Which Forgiveness Application is Right for You?

SBA has released both a long form and a streamlined (“EZ”) PPP Loan Forgiveness Application. In the full application, borrowers must work through an employee-by-employee analysis of FTE and wage/salary reduction calculations, and analyze each potential safe harbor. The EZ Application does not require an employee-by-employee analysis and, instead, is available to borrowers who do not have an FTE or wage/salary reduction, or, if they have an FTE reduction, are eligible for the new safe harbors provided in the Flexibility Act or the refusal to return to work safe harbor.

Borrowers, by default, must use the full application unless they can certify to one of the following three statements:
  1. The borrower is a self-employed individual, independent contractor, or sole proprietor who had no employees at the time of the PPP loan application and did not include any employee salaries in the computation of average monthly payroll in its PPP loan application.
     
  2. The borrower did not reduce annual salary or hourly wages of any employee by more than 25% during the Covered Period or Alternative Payroll Covered Period compared to the period between January 1, 2020 and March 31, 2020 (where “employee” means only employees that did not receive, during any single period during 2019, wages or salary at an annualized rate of pay in an amount more than $100,000) AND either

    a.  the borrower did not reduce the number of employees or the average paid hours of employees between January 1, 2020 and the end of the Covered Period, ignoring (i) reductions that arose from an inability to rehire individuals who were employees on February 15, 2020 if the borrower was unable to hire similarly qualified employees for unfilled positions on or before December 31, 2020 and (ii) reductions in an employee’s hours that the borrower offered to restore and the employee refused; or

    b.  the borrower was unable to operate during the Covered Period at the same level of business activity as before February 15, 2020, due to compliance with requirements established or guidance issued between March 1, 2020 and December 31, 2020 by the Secretary of Health and Human Services, the Director of the Centers for Disease Control and Prevention, or the Occupational Safety and Health Administration, related to the maintenance of standards of sanitation, social distancing, or any other work or customer safety requirement related to COVID-19.
While eligibility for the EZ Application is not dependent on loan size, borrowers seeking $2 million or more in forgiveness may still want to use the full forgiveness application. This is because the SBA has stated that it will audit each such application, and in connection with an audit, the borrower likely will still have to provide the same information that is required in the full forgiveness application.

For more information about the different forgiveness applications, please refer to our June 18, 2020, article.

Consider Whether to Apply for Forgiveness Early

According to the latest guidance, borrowers may submit a forgiveness application earlier than following the full covered period, if the borrower has used all of the loan proceeds for which the borrower is requesting forgiveness.

However, if a borrower requests forgiveness early and has reduced any employee’s salary or wage in excess of 25%, the borrower must account for the excess salary reduction for the full 8 or 24 week covered period. So, if an employee’s excess wage reduction is $50, and a borrower applies for forgiveness after 12 weeks, the borrower must still reduce its forgiveness by $1,200 for that employee ($50 x 24 = $1,200).

Unfortunately, there is no guidance to-date regarding how or whether the FTE calculation would change as a result of an early forgiveness application.

Practically speaking, lenders may not be ready to accept early forgiveness applications and, according to industry insiders, may delay accepting forgiveness applications at all to see whether Congress or Treasury permits automatic forgiveness for smaller loans.

For more information on early forgiveness, refer to our June 24, 2020, article.

Calculating Eligible Forgiveness


STEP 1: Track eligible costs incurred and paid during the 8- or 24-week period following the loan funding.

Eligible costs are:
  • Payroll Costs
    • Gross compensation, from salary, wages, commissions, tips, etc. limited to an amount annualized to $100,000 per employee. Mathematically, this works out to a maximum of $15,384.62 per employee under an 8-week covered period, or $46,153.86 per employee under a 24-week covered period. If using a 24-week covered period, owner-employee replacement compensation is limited to $20,833.
    • Payment for leave
    • Separation or dismissal allowances
    • Employee benefits
    • Group health care coverage
    • Vacation Pay
    • State and local tax payments that you make – e.g., state unemployment taxes.
    • Planning Tip: For determining only Payroll Costs, you may elect to use an Alternative Payroll Covered Period that matches your regular payroll schedule.
  • Mortgage interest for mortgages in effect prior to February 15, 2020.
  • Rent under a lease in effect prior to February 15, 2020.
  • Utilities
    • Electricity, gas, water, transportation, telephone, internet
    • Service must have been established prior to February 15, 2020
       

STEP 2: Use Payroll Costs to establish forgiveness floor:

  • 60% of your expenditures eligible for forgiveness must have been on Payroll Costs.
  • Planning Tip: Plan to spend at least 60% of PPP loan proceeds on Payroll Costs to maximize loan forgiveness.
     

STEP 3: Calculate maximum potential loan forgiveness:

  • Taking into account the forgiveness floor, the maximum potential forgiveness is equal to the amount spent on all eligible costs.
     

STEP 4: Calculate any decrease in FTEs for the 8- or 24-week covered period:

  • First, determine the average number of full-time equivalent employees you had per month for:
    • The 8- or 24-week period following your initial loan disbursement, (A)
    • February 15, 2019 to June 30, 2019, (B1)
    • and January 1, 2020 to February 29, 2020. (B2)
  • In calculating "A" you may add back as retained employees two different categories of workers, which are:
    • For people who you laid off or put on furlough, if you have made a written offer to rehire the person for the same salary/wage and number of hours as before they were laid off, and that person rejects your re-employment offer, you will be allowed to exclude this employee when calculating forgiveness.  You must have documentation of your offer and the former employee’s rejection of the offer.
    • Any worker who voluntarily resigned, voluntarily requested and received a reduction in hours, or who you fired for cause.
  • Then, take A and divide that by B1. Do the same with B2. Take the largest number you obtain. If you are a seasonal employer, you must divide by B1.
  • If you get a number equal to or larger than 1, you successfully maintained your headcount and meet this requirement.
  • If you get a number smaller than 1, you did not maintain your headcount and your forgivable expenses will be reduced proportionately.
  • For example, a 10% drop in FTEs results in a 10% decrease in the amount of the loan forgiveness.
     

STEP 5: Calculate any reduction in payroll for the 8- or 24-week covered period:

  • You must maintain at least 75% of total salary per employee.
  • This requirement will be individually assessed for every employee that did not receive more than $100,000 in annualized pay in 2019.
  • If the employee’s pay over the 8- or 24-week covered period is less than 75% of the pay they received during the most recent quarter in which they were employed, the eligible amount for forgiveness will be reduced by the difference between their current pay and 75% of the original pay.
     

STEP 6: Consider any rehiring or wage restoration:

  • You can rehire any staff that were laid off or put on furlough and reinstate any pay that was decreased by more than 25% to meet the requirements for forgiveness. You have until June 30th to do so.  
    The information contained here is not intended to provide legal advice or opinion and should not be acted upon without consulting an attorney. Counsel should not be selected based on advertising materials, and we recommend that you conduct further investigation when seeking legal representation.