By: Sarah Pape
The SBA has released the much anticipated PPP loan forgiveness application and instructions (“Forgiveness Application”). You can access the Forgiveness Application through the U.S. Treasury website here: https://home.treasury.gov/system/files/136/3245-0407-SBA-Form-3508-PPP-Forgiveness-Application.pdf.
The release of the Forgiveness Application provides answers to some of the questions we have been asking regarding the process a borrower will have to go through to request forgiveness of its PPP loan. We now know that the SBA will require Borrowers and Lenders to use the SBA approved Forgiveness Application for applying for loan forgiveness. The Forgiveness Application consists of four components: (1) PPP Loan Forgiveness Calculation Form; (2) PPP Schedule; (3) PPP Schedule A Worksheet; and (4) an optional PPP Borrower Demographic Information Form. Borrowers may “complete [the] application electronically through their Lender,” suggesting that some Lenders may create their own online loan forgiveness applications like they did during the loan application stage.
While the release of the application and instructions answers some of the questions about the loan forgiveness process, there are still many unanswered questions. We expect the SBA to be releasing additional rules soon. As we anxiously await the next release, here is a summary of questions answered by the Forgiveness Application:
- Borrowers can use an Alternative Payroll Covered Period. Prior to the release of the Forgiveness Application, we knew that the Covered Period for loan forgiveness would be the 8-week period starting on the first day that the Borrower received the loan funds (the “PPP Loan Disbursement Date”). This led to many questions about how payroll would be calculated. Administratively, one could envision many challenges for those Borrowers whose PPP Loan Disbursement Date was in the middle of a payroll period. Now we know:
- If the Borrower has a biweekly or more frequent payroll schedule, the Borrower may elect to use an Alternative Payroll Covered Period that begins on the first day of the Borrower’s first pay period following the Borrower’s PPP Loan Disbursement Date. The following example is given in the Forgiveness Application: 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.
- Borrowers who elect to use the Alternative Payroll Covered Period should carefully review the instructions in the Forgiveness Application. Some of the instructions reference “the Covered Period or the Alternative Payroll Covered Period.” Other instructions reference only “the Covered Period.” If the reference is to “the Covered Period or the Alternative Payroll Covered Period,” the Borrower must use the Alternative Payroll Covered Period. If the reference is to “the Covered Period,” the Borrower must use the Covered Period, not the Alternative Payroll Covered Period.
- To be eligible for forgiveness, payroll costs must be either (a) paid during the Covered Period or the Alternative Payroll Covered Period or (b) incurred during the Covered Period or the Alternative Payroll Covered Period and paid on or before the next regular billing date, even if the billing date is after the Covered Period or the Alternative Payroll Covered Period. Prior to the release of the Forgiveness Application, it was unclear how the forgiveness would work with varying payroll periods. We didn’t know whether eligible payroll costs would be based on when the employer pays the employee or when the employee earns the pay. Now we know it is both. Per the instructions in the Forgiveness Application:
- Borrowers are generally eligible for forgiveness for the payroll costs paid and payroll costs incurred during the eight-week (56-day) Covered Period or Alternative Payroll Covered Period.
- Payroll costs are considered to be paid on the day that paychecks are distributed or the Borrower originates an ACH credit transaction.
- Payroll costs are considered incurred on the day that the employee’s pay is earned.
- Payroll costs incurred but not paid during the Borrower’s last pay period of the Covered Period or Alternative Payroll Covered Period are eligible for forgiveness if paid on or before the next regular payroll date. Otherwise, payroll costs must be paid during the Covered Period or Alternative Payroll Covered Period.
- Rent payments for rental of personal property are an eligible nonpayroll cost but loan interest payments on loans for the purchase of personal property may not be. Prior to the release of the Forgiveness Application, we knew that the following nonpayroll costs were eligible for loan forgiveness as long as nonpayroll costs did not exceed 25% of the total forgiveness amount: covered mortgage obligations, covered rent obligations, and covered utility payments. Based on the definitions in the CARES Act, we knew that a covered mortgage obligation included mortgages on both real and personal property. But we did not know whether a covered rent obligation would be limited to real property because the definition for covered rent payment did not specify real and personal property like the definition for covered mortgage obligations. Now we know:
- Covered rent obligations include business rent or lease payments pursuant to lease agreements for real or personal property in force before February 15, 2020.
- There has been no substantive change to the definition of covered mortgage obligation. Covered mortgage obligations include 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 (“business mortgage interest payments”).
- We need more guidance for interest payments on loans for personal property that are not secured by a mortgage. For example, if a business obtains purchase money financing to purchase a vehicle or piece of equipment, the loan is not typically secured by a mortgage. Instead, the loan is typically secured by a security agreement and a Uniform Commercial Code filing. Since there is no “business mortgage obligation,” this would not be covered under a strict interpretation of the CARES Act and the Forgiveness Application, but the effect of that seems unfair since a Borrower who chose to lease its vehicles and equipment instead of buying them with financing would have its rent payments covered.
- To be eligible for forgiveness, eligible nonpayroll costs must be either (a) paid during the Covered Period or (b) 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. Similar to the questions on payroll costs, prior to the release of the Forgiveness Application, we did not know how payments for covered mortgage obligations, covered rent obligations, and covered utility payments would be calculated when the date the payment is made and the date the obligation is incurred are different. We did not know whether the accounting would need to be done on a cash or accrual basis. Now we know: any eligible nonpayroll costs must be either (a) paid during the Covered Period or (b) 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.
A couple of other highlights from the Forgiveness Application include:
- Borrowers will have to list separately each employee and the following information for each employee: the last four digits of each employee’s Social Security Number (“Employee Identifier”), total gross cash compensation for the Covered Period or the Alternative Payroll Covered Period, average full-time equivalency (“FTE”), and salary/wage reduction, if any. Details on how to calculate the gross cash compensation and the salary/wage reduction are included in the Forgiveness Application.
- Borrowers must maintain for 6 years after the loan is forgiven or repaid in full: “All records relating to the Borrower’s PPP loan, including documentation submitted with its PPP loan application, documentation supporting the Borrower’s certifications as to the necessity of the loan request and its eligibility for a PPP loan, documentation necessary to support the Borrower’s loan forgiveness application, and documentation demonstrating the Borrower’s material compliance with PPP requirements.” The records must be provided to authorized representatives of the SBA or the Office of Inspector General upon request.
As a reminder, this is not a comprehensive list of all of the requirements for loan forgiveness. Many other requirements are identified in the CARES Act, the Forgiveness Application, and other applicable rules and regulations. Borrowers should take care when completing the Forgiveness Application and consult their accountant and/or lawyer where appropriate. Borrowers should also be sure to stay in close communication with their Lender. Lenders may require a specific format for submission and may also require additional documents to support the request for loan forgiveness.