The Paycheck Protection Program – How to Obtain Forgiveness of Your Loan and Answers to Commonly Asked Questions

April 22, 2020

Under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) the Small Business Administration (SBA) is tasked with administering the Paycheck Protection Program (PPP), a newly created loan program intended to allow employers to continue to pay their employees and assist with certain other expenses.

Beginning on April 16, 2020, the SBA issued a notice on its website that funding for the PPP has lapsed and it is no longer accepting new loan applications. Congress has recently authorized an additional $310 billion of funds for the program and the President is expected to approve the funding shortly.

PPP loans can be forgiven, on a federally tax-free basis, up to 100% of the amount borrowed if the borrower meets certain conditions, including:

  • At least 75% of loan proceeds are used to cover “payroll costs” (defined below);
  • Not more than 25% of the loan amount is used for qualified non-payroll costs such as mortgage interest, rent paid on leases, and utility costs that are paid over the eight-week period after the loan is funded (the “covered period”) – NOTE: Mortgage principal is not a qualified expense;
  • Employee headcount is maintained compared to the look-back period (explained below); and
  • Compensation levels are not reduced by more than 25% for employees earning $100,000 or less.

 Qualifying Expenses

  • “Payroll costs” consists of: (i) salary, (ii) wages, (iii) active partners’ income and (iv) commissions (up to a maximum annualized amount of $100,000 per employee), plus employee group healthcare benefits, medical or sick leave (excluding sick leave covered by tax credits received under sections 7001 and 7003 Families First Coronavirus Response Act,) retirement benefits (e.g. 401(k) contributions), and state or local taxes assessed on the compensation of employees. Payroll costs also include severance pay and bonuses, subject to the annualized cap of $100,000.
  • Interest on mortgage obligations, subject to the requirement that the mortgage must have been originated prior to February 15, 2020.
  • Rent under a lease agreement subject to the requirement that the lease must have been in place prior to February 15, 2020.
  • Utilities such as electricity, gas, water, transportation, telephone and/or internet, provided that they were in place prior to February 15, 2020.

Clients have requested guidance on how to treat lease payments made to an affiliated entity that owns the property. We await further guidance from the SBA whether the lease payment should be treated as the qualified expense, or the interest on the mortgage that is paid by the property owner.

Reduction in Loan Forgiveness

While the full amount of the PPP loan is eligible for forgiveness, it is subject to reduction based on the following:

  • Decrease to Employee Headcount. If the average number of full-time employee equivalents (FTEs) per month during the covered period is less than the average number of employees per month during the comparison period (either February 15, 2019 to June 30, 2019, or January 1, 2020 to February 29, 2020, at the borrower’s discretion). The average number of FTEs per month is calculated based on the average number of FTEs for each pay period falling within a month. – NOTE: The reduction in loan forgiveness related to the reduction in headcount can be remedied if the reduction in FTEs that was made during the period between February 15, 2020 and April 26, 2020 is restored by June 30, 2020.

We have received inquiries from a number of clients regarding reductions in headcount due to employees not returning to work because they wish to avail themselves of the enhanced unemployment benefits (i.e., the additional $600/week). The PPP simply provides that if your average monthly FTEs during the covered period is less than your average monthly FTEs during the comparison period your forgiveness will be reduced proportionately – employers may either hire additional employees or a portion of their loan will not be forgiven.

  • Reduction in Salaries For Each Employee. There will be a dollar-for-dollar reduction to the loan forgiveness amount for each employee – who earned annualized wages during 2019 of less than $100,000 (or $8,333.33 per month) – by the percentage reduction in annualized wages of more than 25% during the covered period, as compared to their most recent full quarter. – NOTE: The reduction in loan forgiveness for a reduction in wages can be avoided if the borrower restores, by June 30, 2020, the same wage rate the employee was earning as of February 15, 2020, as compared to wages paid between February 15, 2020 and April 26, 2020.

A decrease in wages of more than 25% for employees who earned annualized wages during 2019 of more than $100,000 will not affect eligibility for loan forgiveness.

  • Use of Funds. While the CARES Act does not specify what percentage of the PPP loan must be used for payroll costs versus other permitted uses, the SBA’s interim final rules and the PPP loan application state that at least 75% of the loan proceeds must be used for payroll costs and, the amount of PPP loan forgiveness will be reduced to the extent loan proceeds are used for qualified non-payroll costs in excess of 25% of the total amount eligible for forgiveness.

Clients have inquired whether they can pay employees even if there is no work for them – based on the guidance that has been issued to date the answer is a resounding “Yes” as forgiveness is based on the use of 75% of the PPP loan proceeds may be used for payroll costs – there is no requirement that the employees actually do work.

PPP Loan Forgiveness Application

After the covered period ends a PPP loan recipient may request that the loan be forgiven. The borrower will be required to submit the following to their lender:

  • A formal forgiveness application – NOTE: As of the date of this Alert the SBA has not yet released a form of this application;
  • Documentation verifying the number of FTEs on payroll and employee pay rates for both the look-back and covered periods including payroll tax filings to the IRS, state income, payroll and unemployment insurance filings and payroll registers, along with other documentation requested by the lender – NOTE: Employers that use a professional employer organization (PEO) should save payroll invoices supporting the payroll costs, employee benefits, and retirement benefits paid to the PEO;
  • Documentation supporting payment of other qualified expenses (mortgage interest, rent, utilities) including canceled checks, account statements, invoices, payment receipts, and/or other documents requested by the lender;
  • Certification from the borrower’s representative that the documentation submitted is true and correct, and the amount for which forgiveness is requested, was used to retain employees, and/or make payments for qualified expenses; and
  • Any other documentation the SBA or lender determines necessary.

After submitting the application for forgiveness, the lender has 60 days to provide a decision on forgiveness – to the extent any portion of the loan is not forgiven it must be paid back within two years from the funding date at a 1% interest rate, payment is deferred for a period of six months and the loan can be repaid early without penalty.

Remember, the PPP is newly created, and no borrower has been through a request for forgiveness nor has the SBA issued all the guidance that borrowers require. To the extent you have specific questions regarding your PPP loan please contact your lender, as they will ultimately determine forgiveness eligibility.

We have suggested to our clients that they have their PPP loan proceeds funded to a segregated account in order to make tracking payments easier.

Note that employers who receive any loan forgiveness are not eligible for the employer payroll tax deferral. However, the IRS has stated that employers that deferred payment of the employer’s share of Social Security tax prior to the date that the loan is forgiven can retain the benefit of deferral on the employer’s portion of tax that was due prior to loan forgiveness.


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