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On May 15, 2020, the Treasury Department posted a PPP loan forgiveness application, and on May 22, 2020, the SBA has followed up with two sets of Interim Final Rules on the topic of forgiveness. The general rules will be addressed in this article, and a follow- up article will discuss the rules for PPP loans under SBA review.
The first Interim Rule addresses loan forgiveness requirements and guidance, legitimizing the provisions of the loan forgiveness application. The timeline for forgiveness is that once a borrower submits the loan forgiveness application and all the required documentation, the lender then has 60 days to review and decide if forgiveness is to be granted. The review process primarily falls on the lender, who is required to confirm receipt of the forgiveness application and all documentation required and confirm correctness of all calculations, which however remain a borrower responsibility and which are attested to by the borrower. Lenders must perform a good-faith review of the calculations and supporting documents, but much of the supporting documentation will have to be taken on faith by the lender; lenders are to work with borrowers to remedy any issues but need not independently verify documented information. The lender may approve (in whole or in part), deny, or deny with prejudice (due to a pending SBA review) the request for forgiveness, and a borrower has 30 days after notice of a denial to request SBA review of such denial. The lender must notify the SBA of the lender’s decision (including any reason for a denial), and if the lender approves the loan forgiveness, it must notify the SBA who then has 90 days to remit the forgiven amount plus interest to the lender unless the loan is at that time under review by the SBA.
The Interim Rule formalizes the instructions from the forgiveness application regarding expenditures of loan proceeds that are eligible to be forgiven and adds some new guidance. The Interim Rule affirms that payroll costs for furloughed employees are eligible for forgiveness, as well as hazard pay and bonuses of employees. Forgiveness of payroll costs for owner-employees and self-employed persons are capped at the lesser of 8/52 of 2019 compensation or $15,385 per individual across all businesses. Specifically, such costs are capped by cash compensation and retirement and health care contributions (owner-employees), compensation replacement (Schedule C filers), and 92.35% of net earnings from self-employment (partners). Non-payroll costs to be forgiven are affirmed, with the warning that pre-payments of mortgage interest are not eligible for forgiveness.
Under the CARES Act, loan forgiveness is reduced to the extent employee numbers or payroll reductions greater than 25% are not restored by June 30, 2020, and the Interim Rule provides substantial guidance on the exceptions to this rule. Forgiveness is not reduced for an employee who was laid off or had hours or salary reduced if after the employer offers to rehire the employee or restore the hours and wages, the employee rejects the offer. It is important to note certain time periods – the offer to rehire must be made during the 8-week period following receipt of the PPP loans and the rejection must be reported to the state unemployment insurance office within 30 days after the employee rejects the offer. The SBA also has determined that an employee termination for cause, by voluntary resignation, or voluntary schedule reduction will not reduce PPP loan forgiveness. One important difference between PPP loan eligibility and forgiveness is that the initial loan calculations include both full-time and part-time employees, but forgiveness is based on “full-time equivalent” employees. This term is not defined by statute, so the SBA is defining it as an employee who works 40 hours or more each week. Employees who work less than 40 hours per week are included based on either (i) the average hours paid per week, or (ii) an equivalency factor of 0.5; either method may be selected but it must be applied consistently.
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