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PPP Forgiveness Application

On Friday, May 15, new guidance regarding the calculation of forgiveness was issued in the form of a forgiveness application. Withum has provided a detailed analysis of the document in this article. The introduction of this document is significant because it clarifies many questions with respect to how the calculation works. We suspect more guidance will come out but it is fair to assume this is the “bulk” of what we should expect to get. We highly recommend that you read the article summarizing the application, but here are some highlights:

• “Paid and incurred” clarified:  This appears to be a big win for borrowers. 
  • For payroll, all costs paid during the covered period will qualify. So if your loan was funded on May 1, and on May 2 you paid payroll relating to the pay period of April 15^th to April 30^th, that can be included. In addition, you can include payroll “incurred” at the end of your covered period even if it was paid outside of your covered period as long as it was paid within the next regularly scheduled pay run. This allows for more than 8 weeks of payroll to be included in the calculation. That said the $15,385 cap is still in place and the certification specifies that “owners” cannot get more than 8 weeks of salary.
  • For non-payroll costs, a similar result, any cost paid during the covered period will be included, and any cost incurred will also be included as long as it is paid by its “next regular due date.” This also opens the door for more than 2 months of rent, interest, etc. to be included. 
• Introduction of “Alternative Payroll Covered Period”: The application allows for the borrower to elect to use an “alternative” covered period for payroll only. This 8-week period would align with you payroll cycle, starting on the first day of the borrowers normal payroll cycle subsequent to their PPP disbursement. This allows borrowers to cleanly align payroll during the covered period. While this makes sense, it seems that there is now a potential benefit to use a normal covered period given the updated “incurred” rules above, allowing for more than 8 weeks of payroll to be forgiven. 
• “Expiration date” of forgiveness application: The application appears to include an “expiration date” of October 31^st. We cannot be sure, but this seems to indicate that applications are due by no later than that date.
• FTEs defined: FTEs are defined as 40 hours per week. There are two methods (Base Method and Simplified Method) to calculate an FTE. You can see both methods in the article linked above.
• FTE reductions: They have expanded exemptions for the FTE reduction calculation, allowing you to ignore employees who were fired for cause, resigned or requested a reduction in hours. Previously you could only ignore reductions for employees who had rejected your offer to return to work.
• FTE reduction “safe harbor”: This FTE reduction “cure” has been in place since the statute was written but has be a source of confusion. Some have thought it was a drafting error but the application clearly concludes it was not. So what does it mean? Even if the borrower reduces their head count during the covered period, they will be deemed to have restored it fully if:
  • (1) the borrower reduced its FTE employee levels in the period beginning February 15, 2020, and ending April 26, 2020;
  • And (2) the borrower then restored its FTE employee levels by not later than June 30, 2020 to its FTE employee levels in the borrower’s pay period that included February 15, 2020

There is no question it is illogical, but it appears you can lower your headcount during the covered period as much as you want, as long as, on a single day, you have more FTEs than you did during your February 15, 2020 payroll run.

• “75% rule” appears to be clarified:  As we suspected, the 75% calculation does not appear to be binary (meaning if 75% of the loan is not spent on payroll there is no forgiveness). The application clarifies that non-payroll costs cannot exceed 25% of total forgivable costs. Therefore, you can spend as much or as little of the loan that you wish, however, the amount of non-payroll costs that are forgiven will not exceed 25% of total forgivable expenses (the remaining 75% constituting payroll costs). Example: If a borrower receives a $500k loan, and spends $250k on payroll costs, the max forgivable non-payroll costs are $83.3k ($250k/75% – $250k).
• Clarifications on how to calculate “wage reductions”:  The application clarifies how the wage reduction calculation will work. It also clarifies that the wage reduction calculation will only be applied to employees who were employed during the covered period. See the article linked above for details. Importantly, the wage reduction calculation will exclude any employee who “during any pay period” made, on an annual basis, more than $100,000 per year. Presumably this would mean that if an employee received a bonus that put them over $1,923 during 1 week of salary, they would be excluded.

Reminder Section:  (what should I be doing):

• Call your payroll company about claiming the payroll tax deferrals and employee retention credits that were made available in the CARES Act.
• Talk to your payroll company about the Sick Pay Bill (passed prior to the CARE Bill).
• Be in constant communication with your bank (about status of your PPP application).
• Consider speaking with your bank to discuss changes to terms of existing debt facilities. The banking system remains strong.
• If you have already applied for the PPP, start forecasting how you intend to spend the funds and how to qualify for the highest amount of forgiveness possible.

Alston & Bird have released their May 18 COVID-19 update, including the latest news on emergency funding, administrative and regulatory actions, workplace and home issues, and many other topics, as well as to links to all their past updates.

Can I re-apply for a loan if I returned it? – Last week (May 15), the SBA confirmed that a safe harbor exists for borrowers whose loan is less than $2M. The SBA will not question eligibility as all borrowers in this population will be deemed to have made the application in good faith. This was a significant development as many borrowers returned their loans because, while they believed they were eligible, they were uncomfortable with the amount of ambiguity relating to the “eligibility” standards in place and the threat of criminal action. Based on a discussion with a bank this week, we learned that borrowers could re-apply if they returned their original loan and wish to obtain a new one. We recommend discussing with your bank if this applies to you.

How do you treat furloughed employees with respect to loan forgiveness – We have been getting this question quite a bit over the last few weeks: Is a furloughed employee still and employee or considered laid off for purposes of the forgiveness calculation?  Why does this matter? It matters because when you calculate forgiveness you start with determining a ratio of FTEs during the covered period to FTEs during a base period (see forgiveness calculation). If a furloughed employee is considered laid off, then they represent a reduction in FTEs which reduces overall forgiveness. If they are considered an employee, you need to consider whether they add to the FTE count (based on hours worked) and whether they also have a “salary reduction in excess of 25% of compensation” if they make less than $100,000 a year annually. The current guidance does not address this directly, but it is something we are monitoring closely because the forgiveness impact is different under each scenario. Regardless, we believe that if an employee is furloughed, and the company is still covering benefits, then those benefits would be includable as a forgivable expense.

Partnerships can increase their PPP loans – On May 14, the SBA issued an interim final rule that confirmed partnerships can increase their PPP loans if their initial loan amount did not include partner compensation. During the application process there was a lot of confusion regarding what constituted “payroll costs.” Partners in partnerships are technically not considered employees and many lenders excluded the income allocated to partners from the payroll cost definition. This resulted in a significant decrease in their loan amount and also left partners out in the cold when it came to getting compensated from the PPP loan proceeds during the covered period. This clarification allows partnerships to go back to their lender and to request an increase in the loan amount, which is a welcome change for many especially since it appears that funds continue to remain available for borrowers.

Reminder Section:  (what should I be doing):

• Call your payroll company about claiming the payroll tax deferrals and employee retention credits that were made available in the CARES Act.
• Talk to your payroll company about the Sick Pay Bill (passed prior to the CARE Bill).
• Be in constant communication with your bank (about status of your PPP application).
• Consider speaking with your bank to discuss changes to terms of existing debt facilities. The banking system remains strong.
• If you have already applied for the PPP, start forecasting how you intend to spend the funds and how to qualify for the highest amount of forgiveness possible.

Some of the chemicals being used to disinfect jobsite surfaces can cause COVID-19 like symptoms in recently disinfected areas without adequate ventilation and/or other protective measures. MCAA recommends that you train all employees to ask appropriate onsite personnel whether chemical disinfection for COVID-19 has been performed recently in the areas they will be working. When chemicals have been recently used in those work areas, workers should request a Safety Data Sheet (SDS) for the chemical(s) to determine what the health hazards are, and how they can protect themselves. Once they have the SDS(s) they should pay special attention to Section 2 Hazard(s) Identification and Section 8 Exposure Controls/Personal Protection.

Alston & Bird have released their May 15 COVID-19 update, including the latest news on emergency funding, administrative and regulatory actions, workplace and home issues, and many other topics, as well as to links to all their past updates.

There are two new sources for COVID-19 PPE, cloth face coverings, hand sanitizer, etc. for MCAA members. One is the company MONTCO and the other is long-time MCAA partner RESCUE ONE. Both companies are credible, reliable, and have good relationships with MCAA.

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Guidance on Eligibility – FAQ 46 was released on May 13 (full text below) which provided additional guidance on eligibility. Withum has released an article on this FAQ as well given its importance. Shortly after that, FAQ 47 was released which extended the deadline for those who wish to return their PPP funds to May 18^th.

So what are the highlights?

• Safe Harbor for loans below $2M: The big news is that the FAQ indicates that any borrower who received a loan that was less than $2M is “deemed to have made the required certification concerning the necessity of the loan request in good faith.”  This means that there is effectively a safe harbor in place for loans under $2M and those borrowers should NOT expect to have their eligibility questioned.
• What about those who gave back proceeds?:  Many Company’s returned their PPP loans because they were concerned or frightened by what they were reading and hearing about eligibility. This new Safe Harbor begs the question:  Can I (and if so Should I) re-apply for my PPP loan if I returned it? We recommend if you want to explore that, you should discuss with your bank. We don’t know if borrowers can re-apply but certainly this FAQ allows for borrowers to feel more comfortable with the process.
• Important clarity for companies above $2M of loans:  The FAQ provides relief for loans above $2M as well by indicating that while these Borrowers may still be subject to scrutiny regarding eligibility, the recourse for being found ineligible will be repayment of the loan (the SBA will NOT refer the borrower for civil or criminal penalties). Of course, the DOJ could always institute criminal charges on its own initiative, but the SBA is saying they won’t refer the case if the loan is repaid within the safe harbor period. This allows borrowers to at least have the confidence that the penalty is economic (repayment of the loan) rather than punitive. That is a big win for borrowers whose officers/employees have been stressed about this decision while having limited or unclear guidance. Certainly criminal penalties can still be in play for those who did not act in good faith.

“If SBA determines in the course of its review that a borrower lacked an adequate basis for the required certification concerning the necessity of the loan request,SBA will seek repayment of the outstanding PPP loan balance and will inform the lender that the borrower is not eligible for loan forgiveness. If the borrower repays the loan after receiving notification from SBA, SBA will not pursue administrative enforcement or referrals to other agencies based on its determination with respect to the certification concerning necessity of the loan request”

• Extension of repayment date: The SBA extended the date in which Borrowers can repay their PPP loan to May 18^th if they have concluded that they are ineligible. The question now is, why would you? If the penalty for being ineligible is repayment in the future (and is not criminal), and the loan is not personally guaranteed, perhaps the only reason to repay it would be to not saddle the Company with debt.

46. Question: How will SBA review borrowers’ required good-faith certification concerning the necessity of their loan request?

Answer: When submitting a PPP application, all borrowers must certify in good faith that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” 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,20 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. SBA has determined that this safe harbor is appropriate because borrowers with loans below this threshold are generally less likely to have had access to adequate sources of liquidity in the current economic environment than borrowers that obtained larger loans. This safe harbor will also promote economic certainty as PPP borrowers with more limited resources endeavor to retain and rehire employees. In addition, given the large volume of PPP loans, this approach will enable SBA to conserve its finite audit resources and focus its reviews on larger loans, where the compliance effort may yield higher returns. Importantly, borrowers with loans greater than $2 million that do not satisfy this safe harbor may still have an adequate basis for making the required good-faith certification, based on their individual circumstances in light of the language of the certification and SBA guidance. SBA has previously stated that all PPP loans in excess of $2 million, and other PPP loans as appropriate, will be subject to review by SBA for compliance with program requirements set forth in the PPP Interim Final Rules and in the Borrower Application Form. If SBA determines in the course of its review that a borrower lacked an adequate basis for the required certification concerning the necessity of the loan request, SBA will seek repayment of the outstanding PPP loan balance and will inform the lender that the borrower is not eligible for loan forgiveness. If the borrower repays the loan after receiving notification from SBA, SBA will not pursue administrative enforcement or referrals to other agencies based on its determination with respect to the certification concerning necessity of the loan request. SBA’s determination concerning the certification regarding the necessity of the loan request will not affect SBA’s loan guarantee.

Reminder Section:  (what should I be doing):

• Call your payroll company about claiming the payroll tax deferrals and employee retention credits that were made available in the CARES Act.
• Talk to your payroll company about the Sick Pay Bill (passed prior to the CARE Bill).
• Be in constant communication with your bank (about status of your PPP application).
• Consider speaking with your bank to discuss changes to terms of existing debt facilities. The banking system remains strong.
• If you have already applied for the PPP, start forecasting how you intend to spend the funds and how to qualify for the highest amount of forgiveness possible.

The HEROS Act:  We now have new legislation that is in play, the Health and Economic Recovery Omnibus Emergency Solutions (“HEROES”) Act. This was introduced by the House yesterday, you can find expanded text here.  This is obviously a first draft of new legislation and it needs to go through the legislative process.  Right now we believe this was a bill largely authored by Democrats in the House, thus it needs to get Republican support, go through the Senate and get congressional committee level support as well. So what does that mean? At a minimum, expect changes, and it is possible this never actually makes its way into law – e.g., some Republicans have announced that the bill is “dead on arrival”.

There is no way to cover everything from the bill in one email, but for now, let’s break down cover what is most impactful to the middle market:

Massive costs: The Act is a $3 Trillion stimulus package, much larger than the CARES Act ($2.2T) which introduced the PPP to the business community.

Proposed changes to the PPP:

There are several changes suggested in Section 90004 of the Act, here are the most impactful to borrowers:

• Extends the 8-week covered period to 24 weeks. 
• Eliminates the 75/25 rule on use of loan proceeds.
• Establishes a minimum maturity on PPP loans of 5 years (right now the loans have a 2 year maturity).
• Creates a safe harbor for borrowers who cannot rehire in the prescribed timeframe.
• Expands eligibility to all section 501(c) entities.

Additional direct payments to individuals: This means a second round of economic impact payments of $1,200 per family member, up to $6,000 per household.

Enhanced ERC and payroll credits for first responders:  The bill would provide an enhanced employee retention tax credit that encourages employers to keep employees on payroll. There is also a section that introduced tax credits for companies that employ “first responders”.

Enhanced tax credits/deductions: Individual tax credits like the Child Tax Credit and Earned Income Credit would be enhanced. Also additional tax deductions would be introduced for “first responders”.

More EIDL money: $10B would be set aside for the EIDL program to continue to fund businesses.

Business interruption credit for the self-employed:  The bill would provide a 90% refundable individual income tax credit for certain self-employed individuals who have experienced a significant loss of income.

Restoration of the state tax deduction: Individuals have a cap on how much they can deduct on their personal tax returns for state taxes paid relating to income and real estate taxes – the so-called SALT limitation, which is $10k, that was introduced in the 2017 Tax Cuts and Jobs Act. This bill looks to restore individuals ability to take a “full” deduction for all state taxes paid on their returns.

Extension of unemployment benefits: This would extend the federal unemployment benefit program to ensure the weekly $600 federal unemployment payments continue through January 2021. The CARES Act provided for 4 months of this benefit.

Assisting in rent and mortgage payments: $175B would be set aside to assist renters and homeowners make monthly rent, mortgage and utility payments.

Multi-Employer plans get support: Plans would receive financial assistance to keep them solvent for thirty years—with no cuts to the earned benefits of participants and beneficiaries.

Reminder Section:  (what should I be doing):

• Call your payroll company about claiming the payroll tax deferrals and employee retention credits that were made available in the CARES Act.
• Talk to your payroll company about the Sick Pay Bill (passed prior to the CARE Bill).
• Be in constant communication with your bank (about status of your PPP application).
• Consider speaking with your bank to discuss changes to terms of existing debt facilities. The banking system remains strong.
• If you have already applied for the PPP, start forecasting how you intend to spend the funds and how to qualify for the highest amount of forgiveness possible.

Alston & Bird have released their May 13 COVID-19 update, including the latest news on emergency funding, administrative and regulatory actions, workplace and home issues, and many other topics, as well as to links to all their past updates.

Cohen Seglias’ Labor & Employment Group have released a Q&A on the PPP program with an eye towards using and tracking the proceeds.

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