PPP Loan Forgiveness: The SBA’s Application Form Includes New Guidance and Details

On Friday, May 15, the Small Business Administration (“SBA”) released its much-anticipated Paycheck Protection Program (“PPP”) Loan Forgiveness Application, which largely reflects and confirms existing guidance contained in Interim Final Rules and FAQs, but also provides additional clarity. Although lenders are free to use their own form if it is substantially the same as the SBA’s form, the SBA’s forgiveness application provides new details on the timing of eligible costs and the manner in which forgiveness requests should be documented and calculated.

Timing of payments to qualify as an eligible cost

The SBA has used the application to clarify an ambiguity in the statute and previous guidance over whether a particular cost must be paid during the covered eight-week period in order to be eligible for forgiveness, or if it simply must be incurred.

Consistent with the statutory language establishing the PPP, the application states that both payroll and non-payroll costs may be eligible for forgiveness if they are either paid or incurred during the eight-week period. The SBA notes that payroll costs are “paid” the day paychecks are distributed to employees or direct deposit transactions are initiated; payroll costs are “incurred” on the day the employee earns the pay. In the forgiveness application, the SBA clarifies its view that, if a payroll cost is incurred but not paid during the final pay period of the eight-week period, it is eligible for forgiveness if it is paid on or before the next regular payroll date. Similarly, a non-payroll cost incurred but not paid prior to the end of the eight-week period is still eligible for forgiveness if it is paid on or before the next regular billing date, even if that date is after the end of the eight-week period.

Documentation Requirements

The application lays out strict, detailed documentation requirements for borrowers requesting forgiveness of their PPP loans, some of which must be submitted with the application and some of which must simply be maintained.

Documents that must be submitted with loan forgiveness application

• Payroll costs: To document cash compensation paid to employees, borrowers must provide either bank account statements or third-party payroll reports showing the amount of cash compensation paid to employees during the eight-week forgiveness period. For state and local taxes on employee compensation that were paid by the borrower, they need IRS Forms 941 and quarterly state wage reports and unemployment insurance tax filings. For employer contributions to employee health care and retirement plans, borrowers must submit payment receipts, cancelled checks, or account statements documenting the contributions.
• Non-payroll costs: Borrowers must submit documentation to: (1) verify that the particular obligation or service was in place prior to February 15, 2020, and (2) show the eligible payments were made during the eight-week forgiveness period.
• Mortgage interest payments (principal is not eligible): Lender amortization schedule and receipts or cancelled checks verifying the payments made during the eight-week period; or monthly lender account statements from February 2020, the months encompassing the eight-week period, and the month after the end of the covered period showing both interest amounts and payments made.
• Rent or lease payments: Current lease agreement and receipts or cancelled checks verifying payments made during the eight-week period; or landlord account statements from February 2020, the months encompassing the eight-week period, and the month after the end of the covered period showing the payments.
• Business utility payments: Invoices, as well as cancelled checks or account statements from February 2020 and the months of the covered eight-week period. The application lists the categories of utilities eligible for forgiveness as electricity, gas, water, transportation, telephone, and internet access.
• Number of FTEs during the “reference period”: Borrowers must submit documentation to show the average number of full time equivalent (“FTE”) employees on payroll per month during the period of either: (1) February 15, 2019 through June 30, 2019; or (2) January 1, 2020 through February 29, 2020. The form does not mandate the specific documentation to be provided, but suggests that Forms 941 or state quarterly wage reports or unemployment insurance tax filings are sufficient.
• Note: The application instructs that an FTE is equivalent to a 40-hour-per-week employee, while anything less than that will be counted as .5 of an FTE.

Documents that must be maintained, but not submitted

• Application FTE worksheet: The application includes a “worksheet” that allows the borrower to calculate total cash compensation during the eight-week period, average FTEs during the eight-week period, and any reduction in salary or FTEs as compared to the reference period that would result in the borrower’s loan forgiveness amount being reduced. The worksheet includes this information for each eligible employee. Borrowers must keep either the worksheet or an “equivalent” document. Along with the worksheet itself, the borrower must maintain documents supporting each individual piece of information and calculation on the worksheet.
• Personnel decisions: Borrowers must also maintain documentation showing any job offers to employees, refusals of those offers, firings for cause, voluntary resignations, or written requests by employees for reductions in hours.
• Loan necessity: Borrowers that received a loan of US$2 million or more will be expected to demonstrate the basis for certifying that the uncertainty of the economy made the loan request necessary to support ongoing operations. These documents will likely be sector-specific and could include near- and mid-term revenue and cash-flow projections, the impact of COVID-19 on the business’ ability to compete with larger competitors, and borrowers’ ability to access other sources of liquidity. Borrowers that received a loan of less than US$2 million are presumed to satisfy this requirement for the SBA’s purposes.

All required documents, including those previously submitted with the loan application and those demonstrating loan eligibility, must be maintained for at least six years from the date the loan is either forgiven or repaid in full. Borrowers must also permit the SBA and its Office of Inspector General to access any of the files upon request.

Certifications

Borrowers must complete a number of certifications as part of the forgiveness application. These largely mirror the certifications on the initial loan application. For example, a borrower must certify that loan proceeds for which forgiveness is requested were used only for authorized purposes, including that no more than 25% of the forgiveness request was used for non-payroll costs.

It is worth noting that the SBA has faced criticism from both borrowers and the SBA Office of Inspector General regarding its establishment in the Interim Final Rule of a 25% maximum for forgiveness of non-payroll expenses. Nonetheless, the forgiveness application makes clear that the SBA has decided, at least for the moment, to maintain this particular requirement.

Audits of PPP Loans

The application contains a box borrowers must check if they received a loan, in combination with their affiliates, in excess of US$2 million. The SBA has repeatedly stated that it will audit all loans of US$2 million or more after the borrower submits a forgiveness application to determine compliance with the requirements of the CARES Act.

It is also likely that the SBA will conduct risk-based testing of loans below the US$2 million threshold. According to the SBA’s most recent report, there are approximately 30,000 loans greater than US$2 million and another 50,000 loans between US$1 million and US$2 million.

The SBA will likely apply greater scrutiny to certain loans based on particular risk factors. Borrowers should be mindful of the likelihood their situation will draw scrutiny and have solid documentation that supports their loan applications. To identify higher-risk loans, the SBA may rely on the following:

• Borrower’s public profile: A public profile can identify borrower’s financial health, time of operations, and potential risks based on negative news;
• Loan amount: The SBA will likely focus on higher dollar loans. Loans modified to be just below the US$2 million threshold may also be scrutinized to the extent they suggest a borrower’s intent to avoid scrutiny.
• Suspicious Activity Reports: As a financial institution regulator, the SBA may be able to access FinCEN’s Bank Secrecy Act database, including reports from lenders on potential suspicious activity by borrowers.

While the SBA’s issuance of the PPP forgiveness application provides some needed clarity surrounding the process and content required for forgiveness requests, we expect additional guidance will continue to be issued as borrowers, lenders, and the SBA identify other open questions.