The Basics on the PPP Loan Forgiveness
A PPP Loan Borrower is eligible for loan forgiveness upon demonstrating that within the 24 weeks following the loan disbursement at least 60% of the loan funds were used to pay payroll costs, and up to 40% of the loan funds were used to pay rent, mortgage interest and utilities for the business. The Borrower must spend at least 60% of the loan funds on payroll costs to be eligible for loan forgiveness. Alternatively, a Borrower that received his loan before June 5, 2020 may elect to calculate the forgiveness amounts based on the 8 weeks following the loan disbursement date using the same calculation methods.
The total amount of eligible forgiveness can be reduced if the Borrower has reduced his workforce or reduced the wages to his employees during 24 weeks following the loan disbursement. Any reduction in forgiveness can be mitigated upon showing that the Borrower has made the appropriate steps to increase his workforce or increases wages to previous levels before December 31, 2020. For detailed information on PPP Loan Forgiveness and the application process, please see our website: https://www.maselliwarren.com/covid-19-crisis/
Additional Guidance on Payments to Employees
Payroll costs have been broadened to include wages, salaries or commissions paid as:
- Hazard pay or
- to furloughed Employees not working but that remain on payroll.
So long as still paid or incurred within the 156-day covered period and does not exceed $46,154 per employee (24 weeks of salary at annual rate of $100,000) or if elected, 15,835 per individual for the 8 week covered period.
Additional Guidance on Payments to Self-Employed or Owner-Employees
Compensation is capped based on the designation of the employee but cannot exceed 2.5 times the 2019 net profit or up to $20,833, (whichever is lower) for the 24-week covered period. Alternatively, if applicable, $15,385 per individual for the covered period or 8/52 of the 2019 compensation to the same individual, whichever is less.
- For owner-employees, the 2019 compensation cap should include all 2019 cash compensation and employer retirement and health care contributions.
- For C-filers, their 2019 compensation cap is based on their 2019 net profit (as calculated on 2019 IRS Form 1040, Sch C., Line 31). No employer retirement and health care contributions should be included.
- For general partners, the cap is based on 0.9235 portion of the 2019 net earnings and reduced by the section 179 expense deduction, unreimbursed partnership expenses and depletion from oil and gas properties. No employer retirement and health care contributions are included.
[0.9235 x (2019 net earnings – expense deductions)] = salary cap for the covered period
Additional Guidance on Reductions to Forgiveness Amounts
As outlined in previous guidance, Loan Forgiveness can be reduced based on (1) a decrease in salary/wages to employees (the salary/wage reduction) and (2) a decrease in the number of employees (the FTE reduction).
- Exemption 1: The FTE reduction should not include Employees who refused an offer by an Employer to rehire the Employee to the same salary and same number of hours as employed before a lay-off or reduction in hours.
- Employer needs to maintain records of written offer, evidence of prior employment salary and hours worked, and rejection by employee; and
- Employer must also inform the state unemployment insurance office of the employee’s rejection of the offer within 30 days of employee’s rejection. Further guidance on the “reporting” documentation is to be provided by the SBA.
- Exemption 2: The FTE reduction should not include Employees who refused an offer by an Employer to rehire an Employee who was employed prior to February 15, 2020 and the Borrower was unable to hire a similarly qualified employee for those unfilled positions before December 31, 2020.
- Exemption 3: If the Employee is fired for cause, voluntarily resigns or requests a reduced schedule of hours, the Employer should not count these Employees is the FTE reduction. However, the Employer should maintain clear records regarding these particular Employees.
- The Borrower does not have to incur a double penalty for an applicable salary/wage reduction and FTE reduction. Rather the salary/wage reduction applies only to a reduction that was not calculated under the FTE reduction.
- Example provided: If any employee’s hours is reduced from 40 hours to 20 hours a week during the cover period but hourly wage remained the same, the employer should calculate the reduction under the FTE reduction only. The employee is an FTE employee of 1.0 to an FTE employee of 0.5.
- Safe Harbor 1: Any applicable FTE- related reduction in loan forgiveness will not apply if the Borrower, in good faith, was unable to operate between February 15, 2020 and the end of the applicable covered period with the same level of business activity as before February 15, 2020 due to OSHA, CDC, and DHH regulations for safety and sanitation related to COVID-19 issued between March 1, 2020 and December 31, 2020.
- Generally, compare pre-February, 2020 operations to operations after February 15, 2020 and consider what effect the OSHA, CDC and DHH regulations issued had on any diminished business operations.
- Documents demonstrating diminished operations, applicable regulations and exact time periods should be kept by the Borrower, however, these need not be submitted with the loan forgiveness application.
- Safe Harbor 2: Any applicable FTE-related reduction in loan forgiveness will not apply if the Borrower reduced its workforce levels between February 15, 2020 and April 26, 2020 and the Borrower restored or restores its workforce to the same level no later than December 31, 2020 to the pre-February 15, 2020 levels.
- Generally, any reduction in workforce between February 15, 2020 and April 26, 2020 may be restored before December 31, 2020 and have no effect on loan forgiveness.
- Documents demonstrating reduction in FTE employees and restoration of FTE employees should be kep by the Borrower, however, these need not be submitted with the loan forgiveness application.
Two Loan Forgiveness Application Forms
The SBA released two forms to facilitate loan forgiveness: a revised loan forgiveness form and an EZ form. Essentially the EZ form applies when a Borrower does not need to perform complex FTE or employee related calculations. If the EZ conditions are not met, the Borrower should use the revised loan forgiveness application. The most considerable differences between the two forms are that the EZ form includes separate certifications for the below listed options (2) and (3) and does not require Schedule A Worksheet or Schedule A.
ONLY USE THE EZ FORM IF ONE OF THE FOLLOWING CONDITIONS ARE MET:
(1) self-employed with no employees at the time of the PPP loan and did not calculate the loan amount using employee payroll.
(2) borrower did not reduce workforce in salary or hours by more than 25% during the covered period as compared to January 1, 2020 and March 31, 2020 AND did not reduce workforce members between January 1, 2020 and the end of the cover period, without regard to the exceptions and exemptions to loan forgiveness reductions. OR
(3) borrower did not reduce workforce in salary or hours by more than 25% during the covered period as compared to January 1, 2020 and March 31, 2020 AND was unable to operate during the covered period at the same level as before Feb. 15, 2020 due to CDC, DHH or OSHA regulations for COVID19 enacted between March 1, 2020 and December 31, 2020.
Additional Miscellaneous Guidance on Forgiveness
- Loan funds used to prepay mortgage interest are not eligible for forgiveness.
- Documentation can be requested by the SBA and the Lender prior to forgiveness being decided and/or approved.
- Documentation must be maintained for 6 years after the date of the loan is forgiven or repaid, whichever is later, for further SBA review.
Timeline If Loan NOT Reviewed by the SBA Prior to Lender’s Decision on Forgiveness Evaluation
The SBA has allowed for the Lender to review, evaluate and make a decision on a Borrower’s eligibility for Loan Forgiveness prior to submitting the application and supporting documents to the SBA. However, the SBA will review the Borrower’s loan and forgiveness applications either after or prior to the Lender. The general timeline for when the Lender evaluates the eligibility for loan forgiveness prior to the SBA is:
- Borrower submits Loan Forgiveness Application
- Lender has 60 days to review from receipt of “complete” Application
- Lender communicates decision on forgiveness to SBA (See Review by Lender)
- SBA has 90 days to review loan and communicate decision
- Lender will communicate the SBA outcome to Borrower.
Possible outcomes are:
If SBA approves Lender’s determination of forgiveness amount, SBA will remit the funds plus accrued interest on those funds to the Lender.
If SBA needs more information for review on eligibility for loan forgiveness, Lender will communicate SBA’s requests and the Borrower will have an opportunity to provide additional information to the Lender whom will forward the additional information to the SBA. No additional timeline is provided for the SBA’s response time under these circumstances.
If SBA determines that the Borrower is ineligible for forgiveness or for the PPP loan, whether in part or wholly, the Lender will notify the Borrower and the Borrower will have an opportunity to appeal SBA’s determination. Further guidance on the appeal process will be released by the SBA.
- Ineligibility for PPP Loan is governed by SBA rules or guidance available at the time of the loan application made or under the terms of the loan application. If determined to ineligible for the PPP Loan, forgiveness will be denied by SBA.
- The SBA will deduct any EIDL Advance Amounts from the loan forgiveness amount.
- The remainder of the principal balance after forgiveness is applied is due in 2 years subject to 1% interest.
- If the Borrower has made payments and the forgiveness amount exceeds remaining principal balance on the PPP Loan, the Lender shall remit the excess to the Borrower.
Review by the Lender
Lender is required to make a good-faith review of the Loan Forgiveness Application and supporting documentation; however, the burden remains with the Borrower to provide complete and accurate accounting for the loan forgiveness amount sought. The Lender should also engage in trying to settle any disputes in accounting for the forgiveness amount in regards to calculations and/or documentation.
Possible outcomes of Lender’s determination are:
- Approval, in part or fully, as sought by Borrower.
- Denied in full. If denied, the Lender must provide to the SBA a basis for their denial and all supporting documentation and applications submitted by the Borrower.
- The Lender must also notify the Borrower of the Lender’s decision to deny the forgiveness and of their submission of the denial to the SBA.
- The Borrower then may, within 30 days of the Lender’s notice of denial, request the SBA review the Lender’s decision.
- A denial without prejudice subject to review by the SBA. The Borrower may request that the Lender reconsider the application for loan forgiveness.
- Exception: If the SBA has determined that the Borrower was ineligible for the PPP Loan prior to the Lender’s decision, then the Borrower would appeal the SBA determination. Further guidance on Appeal process will be released by the SBA.
Areas of Review by the SBA Under All Circumstances
- The SBA reserved broad discretion to review any PPP loan regardless of the amount of the loan at any time.
- The particular areas to be reviewed are:
- Eligibility as provided under the FAQ 17; 13 CFR 120.110 and 13 CFR 121.103(f) and the applicable loan application and forgiveness loan application.
- The calculation of the loan amount maximums and the use of the loan proceeds were as directed by the CARES Act.
- The calculation and entitlement to the loan forgiveness as request by the forgiveness loan application.
If SBA Review Prior to Lender’s Decision Submitted to SBA.
- The Lender must provide notice to the Borrower within 5 days of receiving written notice from the SBA of review. The Lender must also request from the Borrower a Schedule A Worksheet.
- The SBA will review copies of the Borrower’s loan application, loan forgiveness application and all supporting documentation along with the transcript of the account, the loan note and any other documents related to the loan.
- Lender is to provide the Schedule A Worksheet as requested from Borrower within 5 days of receipt.
- If the loan forgiveness application and supporting documents are received after the SBA review commences, the Lender must forward the application and documents to the SBA within 5 days of receipt.
- Eligibility can be denied in full or for a portion of the PPP loan amount or of the forgiveness amount sought. No timeline is provided on the SBA review – it is unclear if 90-day requirement applies or if review is subject to no timeline.
- If the Borrower is determined to be ineligible for the PPP loan, the processing fee is cancelled if determination is made within 1 year from the loan disbursement date.