LOAN FORGIVENESS UNDER THE PAYCHECK PROTECTION PROGRAM FLEXIBILITY ACT OF 2020
Loan forgiveness is one of the signature components of the Coronavirus Aid, Relief, and Economic Security Act’s (the “CARES Act”) Paycheck Protection Program (PPP) administered by the Small Business Administration (SBA). The program offers forgivable loans to businesses affected by the COVID-19 pandemic. This article provides an overview of the various loan forgiveness applications under the CARES Act that are available for claiming loan forgiveness for PPP loans. There are three (3) loan forgiveness application formats:
(1) a standard format available here, with instructions available here;
(2) an EZ application available here, with instructions available here; and
(3) the recently introduced Short Application Form 3508S for loans under $50,000 available here.
Standard Application Form
Loans will be forgiven to the extent that loan proceeds have been applied to forgivable expenses that are incurred or paid within a “Covered Period” or “Alternative Payroll Covered Period.” The standard application form generally requires that a borrower calculate the costs eligible for forgiveness, reduce it by certain formulas related to reduction in workforce or pay, and then provides a calculation of the potential forgiveness amount.
Costs Eligible for Forgiveness
The Covered Period consists of either (1) the 24-week period following the first loan disbursement or (2) if a borrower received its PPP loan prior to the passage of the Act on June 5, 2020, the borrower may elect to use the eight-week period following the first loan disbursement. Borrowers with a bi-weekly or more frequent payroll schedule may elect to use the Alternative Payroll Covered Period, which is either (1) the 24-week period beginning on the first day of the first pay period following the first loan disbursement or (2) if a borrower received its PPP loan prior to the passage of the Act on June 5, 2020, the borrower may elect to use the eight-week period following the first loan disbursement. If a borrower elects to use the Alternative Payroll Covered Period, it must use the Alternative Payroll Covered Period throughout the loan forgiveness application whenever possible. Whether eligible borrowers prefer the eight-week period over the 24-week period will depend, in part, on whether using the 24-week period causes issues relating to the reduction in workforce or pay formulas.
Forgivable expenses consist of payroll costs, mortgage interest (but not payments of mortgage principal or advance payments of interest), leasing costs and utilities. Payroll costs must account for at least 60% of the forgivable expenses. Payroll costs may include amounts spent on salary, wages, commission and tips, up to $100,000 per employee on an annualized basis (which is $ 46,154 over a 24-week period and $15,385 over an eight-week period), as well as employee benefits. Employee benefits include healthcare expenses, retirement contributions and state taxes imposed on employee payroll that are paid by the employer. Any non-payroll costs, consisting of utilities, leasing costs and mortgage interest, must arise from arrangements that were in effect as of February 15, 2020.
In order to be eligible for forgiveness, all payroll costs must be either (1) paid during the Covered Period or Alternative Payroll Covered Period, or (2) incurred during the Covered Period or Alternative Payroll Covered Period and paid on or before the next regular payroll date. Similarly, non-payroll costs must be either (1) paid during the Covered Period or (2) incurred during the Covered Period and paid on or before the next regular billing date for such cost.
Reduced Forgiveness for Reduction in Workforce or Pay
PPP loans were meant to help borrowers retain their workers. Therefore, loan forgiveness will be reduced in accordance with certain formulas if the borrower reduces the number of full-time equivalent (“FTE”) employees it has or reduces their salary or hourly wages beyond a specified point.
Loan forgiveness will be reduced in a pro rata manner based upon a borrower’s reduction in the average weekly number of FTE positions during the Covered Period or Alternative Payroll Covered Period from the average number of FTE employees per month from, at the borrower’s election, (1) February 15, 2019 to June 30, 2019, (2) January 1, 2020 to February 29, 2020 or (3) certain other time periods for seasonal employers. Average FTE positions are calculated in accordance with methodology set forth in the loan forgiveness instructions, and exceptions are provided for (1) positions for which the borrower made a documented offer to rehire a former employee, and the borrower was unable to hire similarly qualified employees for unfilled positions on or before December 31, 2020, (2) positions for which the borrower made a documented offer to restore a reduction in hours, at the same salary or wages, and the employee rejected the offer, and (3) employees who were fired for cause or voluntarily resigned.
The application provides certain safe harbors for this FTE loan forgiveness reduction. Specifically, it provides safe harbors that prevent any reduction in loan forgiveness if: (1) the borrower is able to document that it was unable to operate between February 15, 2020 and the end of the Covered Period at the same level of business activity due to compliance with certain COVID-19 related safety requirements or guidance issued by certain federal agencies such as social distancing, or (2) the borrower reduced its FTE employee levels in the period beginning February 15, 2020 and ending April 26, 2020 and then restored its FTE employee levels not later than December 31, 2020 to its FTE employee levels in the borrower’s pay period that included February 15, 2020.
Regarding reduction in pay, if any of the borrower’s employees have had their salary or hourly wages reduced by more than 25% during the Covered Period or Alternative Payroll Covered Period as compared to the period between January 1 and March 31, 2020, the loan forgiveness amount will be reduced on a dollar-for-dollar basis by the amount that there has been a reduction beyond 25% (except to the extent such employee was receiving annualized pay in excess of $100,000 per year). The specific manner of calculating this reduction is set forth in the loan forgiveness application, and borrowers may be eligible for a safe harbor if they subsequently restored salaries or hourly wage levels.
Potential Forgiveness Amounts
The loan forgiveness application states that the amount of the PPP loan that will be forgiven is the lowest of:
(i) all forgivable expenses, reduced as applicable in accordance with the below reduction in workforce or pay formulas;
(ii) the PPP loan amount; and
(iii) payroll costs over the Covered Period or Alternative Payroll Covered Period, as applicable, divided by 0.6.
EZ Application Form 3508EZ (“EZ Form”)
The SBA also released the PPP Loan Forgiveness Application Form 3508EZ (EZ Form) for certain eligible PPP borrowers to use.
The EZ Form is only available to borrowers who fit into one of the following categories:
- Self-employed individuals, independent contractors, or sole proprietors 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 the borrower application form; or
- Borrowers that (1) did not reduce annual salary or hourly wages of any employee by more than 25% during the applicable covered period compared to the period between January 1, 2020 and March 31, 2020 (except for those employees earning an annualized $100,000 or more per year), and (2) did not reduce the number of employees or the average paid hours of employees between January 1, 2020 and the end of the applicable covered period (ignoring certain reductions); or
- Borrowers that (1) did not reduce annual salary or hourly wages of any employee by more than 25 percent during the applicable covered period compared to the period between January 1, 2020 and March 31, 2020 (except for those employees earning an annualized $100,000 or more per year), and (2) were unable to operate during the applicable covered period at the same level of business activity as before February 15, 2020, due to compliance with certain COVID-19 related safety requirements or guidance issued by certain federal agencies such as social distancing.
The EZ Form requires borrowers to do calculations and provide documentation, but in an abbreviated format as compared to the full form, and the certification under the EZ Form is about half the size of the revised full form.
Borrowers will be required to provide support for payroll and non-payroll costs and may be asked to do the same for full-time equivalent (FTE) employee counts. As with the full form, borrowers also need to save documentation for proof of certifications. The EZ Form instructions provide more details.
Short Application Form 3508S
On October 7, 2020, the SBA issued a new further abbreviated PPP loan forgiveness form for borrowers who received PPP loans totaling $50,000 or less in proceeds. Under the new form, borrowers can receive full forgiveness of their loan regardless of changes in employee headcounts or pay rates. The only real requirements are that borrowers must make representations about how they handled their PPP loans and borrowers must back up their spending with documentation.
Under this new simplified application, Form 3508S may be used for borrowers with total PPP loans of less than $50,000 whose affiliates received less than $2 million in PPP loans. Borrowers qualified to use this form will not be subject to reduced forgiveness eligibility as a result of employee or wage reductions. Borrowers must document wages to employees and non-payroll costs during the covered period of 8 or 24 weeks. The short form requires reporting that includes total employees and loan amount, certification that at least 60% of the amount forgiven was utilized to cover payroll costs, and certification that loan proceeds were utilized for utility payments, lease or rent payments, payroll costs or mortgage interest payments.
The SBA also recently confirmed the deferral period after the end of the covered period, for payment of principal, interest and fees by PPP borrowers will be 10 months (not 6 months). This extension will be automatic without the need to amend any notes that may have provided for a shorter period.
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There are many other specific requirements relating to loan forgiveness that may be applicable to your company. There are also many details of these programs that have not yet been clarified by the SBA. We, therefore, encourage you to review the detailed SBA requirements carefully or contact us if you have questions.
For additional information, please feel free to reach out to Robert Lawrence (at 212-519-5103, rlawrence@kanekessler.com), Steven Cohen (at 212-519-5115, scohen@kanekessler.com), Michael Wu (at 212-519-5165, mwu@kanekessler.com) or any partner in our Corporate Department