On May 15, 2020, the SBA issued its Paycheck Protection Program (PPP) Loan Forgiveness Application (available here).
While the term of the “Covered Period” for loan forgiveness has not changed – this is still the 8-week period that starts on the first date of disbursement of the PPP loan – the SBA is permitting employers with biweekly (or more frequent) payroll schedules to use an Alternative Payroll Covered Period (“APCP”) for purposes of calculating and submitting “Payroll Costs.” The APCP starts on the first day of the first pay period following loan disbursement and continues for 8 weeks. This alternative will help employers track Payroll Costs more efficiently (e.g., without the need for proration) and without as much business disruption.
While the SBA did not address all of the open questions on the definition of “Payroll Costs,” the SBA did provide the following clarifications and insights:
This is a significant clarification, as it allows employers to count amounts that are earned and/or paid during the CP/APCP as eligible Payroll Costs; provided that they only count costs that are paid and incurred during the CP/APCP once (i.e., no “double counting”), and so long as the Payroll Costs incurred but not paid during the CP/APCP are paid on or before the next regular payroll date (even if outside the CP/APCP).
For this purpose:
As with Payroll Costs, borrowers may request forgiveness with respect to (i) eligible nonpayroll costs paid during the CP and/or (ii) eligible payroll costs incurred during the CP and paid on or before the next regular billing date, even if the next billing date is after the end of the CP. As with Payroll Costs, costs that are incurred and paid during the CP should only be counted once.
Borrowers may not count prepayments toward their eligible covered mortgage interest obligations on real or personal property, even if permitted by the terms of the mortgage as in effect prior to February 15, 2020.
The CARES Act only specifically references real and personal property in the definition of “Covered Mortgage Obligation.” The application clarifies that the Covered Rent Obligations may also include obligations related to real or personal property.
The SBA provided significant, long-awaited guidance to employers in calculating any reductions to the amount that is potentially eligible for forgiveness as a result of a reduction to salaries or wages.
The SBA also provided some additional guidance regarding how to calculate full-time employee equivalents for purposes of the reduction to headcount calculation. Specifically, employers may either:
When conducting this analysis, note:
The SBA requires the submission of specified documents for the loan forgiveness application, but the SBA also is requiring borrowers to retain additional records, including those that support the borrower’s necessity and eligibility certifications, for six years after the date the loan is forgiven or repaid in full. (Note six years is the statute of limitations for False Claims Act cases.) Borrowers must permit authorized representatives of the SBA, including the SBA Office of Inspector General (OIG) to access such files upon request. Further, the SBA clarified that if a borrower is subject to a waiver of the affiliation rules under the CARES Act, then that same waiver will apply for purposes of determining whether the borrower, combined with its affiliates, had PPP loan(s) over $2M, which will be subject to audit prior to loan forgiveness (FAQ 46).
The loan forgiveness application contains several additional certifications that provide the SBA, DOJ, or SEC with a second opportunity to challenge allegedly false submissions and certifications. These include certifications regarding the number of employees of the borrower at the time the PPP application was submitted and the number of employees of the borrower at the time the loan forgiveness application is submitted, as well as the borrower’s representations regarding its use of the loan proceeds. Like all other facts in a certified request for government funds, these, too, must be true. Since this is the document through which the borrower is seeking to extinguish, or at least reduce, its obligation to repay borrowed federal funds, it is critical that borrowers double check the accuracy of its certifications, clarify any “grey” areas, and build a well-supported, accurate reliance file.
The loan forgiveness application also states, “The Borrower’s eligibility for loan forgiveness will be evaluated in accordance with the PPP regulations and guidance issued by SBA through the date of this application. SBA may direct a lender to disapprove the Borrower’s loan forgiveness application if SBA determines that the Borrower was ineligible for the PPP loan.” As a result, at the time a borrower seeks loan forgiveness, the SBA will also be assessing the borrower’s eligibility for the PPP loan and if the SBA determines the borrower was not eligible for the PPP loan, the SBA may deny loan forgiveness and require the borrower to repay the loan. In such a case, the borrower may also be subject to other civil and criminal penalties as well. Borrowers should take this into account when assessing how to proceed in light of the May 18, 2020 limited safe harbor deadline.
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