Sean Bryan Authors Article on Payroll Protection Program Loan Forgiveness

Sean Bryan’s column—entitled “Application Posted for Payroll Protection Program Loan Forgiveness”—addresses the U.S. Treasury Department's guidance on the loan forgiveness application.

Over the April 15 weekend, the Treasury Department posted a Loan Forgiveness Application for Payroll Protection Loans.  This doesn’t provide formal guidance on outstanding forgiveness issues, but it both provides some direction and poses some issues to be carefully considered. The forgiveness application requires several types of information and will require planning or effort to obtain or create. 

First, it requires technical information to match the forgiveness with the loan and to confirm compliance with the CARES Act loan forgiveness provisions.  This includes the SBA loan number (obtainable from the lender), the amount of the loan, whether at least 75% of the PPP loan was used for payroll, the total number of employees at the time of the PPP loan application (presumably because this should match the number of employees used on the loan application) and the total number of employees at the time the loan forgiveness application is submitted (if less than the first number, then forgiveness may be reduced).  While there may be some perceived need for haste in applying for loan forgiveness, borrowers have until June 30 to rehire employees to minimize or avoid a penalty for not rehiring all employees, so carefully consider the best time to apply for loan forgiveness to maximize employee rehires.

If a borrower applied for an Economic Injury Disaster Loan from the SBA and received an advance, this must be disclosed (including the EIDL application number).  Any advance under the EIDL program is a grant rather than a loan and will reduce PPP loan forgiveness.

Loan forgiveness is only for payments during the 8-week “covered period” beginning on the day of the PPP loan disbursement.  For purposes of determining when payroll is paid, the general rule is that payroll payments during such 8-week period are eligible for forgiveness.  The instructions include an alternative payroll covered period for administrative convenience of employers with biweekly (or more frequent payroll) by starting the 8-week period on the first day of the first pay period following the PPP loan disbursement.  For employers with multiple payroll regimes, it appears that a choice must be made.  The instructions provide that payroll is deemed paid on the date payroll checks are distributed or direct deposited, and that payroll costs are deemed incurred on the day payroll is earned.  Importantly, payroll costs incurred but not paid during the 8-week covered period are eligible for forgiveness.  Similarly, non-payroll costs funded from PPP loans (rent, mortgage interest, and utilities) either must be paid during the 8-week covered period or paid on or before the next regular billing date, even if due after the end of the covered period. 

As with the PPP loan application, the forgiveness application requires borrower certifications initialed by an individual, including that if the funds were knowingly used for unauthorized purposes, the government may pursue repayment and/or civil or criminal fraud charges. 

The application lists the documentation required to be provided to lenders in connection with the forgiveness application; this includes (i) for payroll -  bank statements or payroll service reports, applicable payroll tax forms, and payment receipts or canceled checks for contributions to employee health insurance or retirement plans, and (ii) for non-payroll costs - amortization schedules and receipts or canceled checks for mortgage interest, lease agreements and canceled checks for rent, and utility invoices.  An unexpected requirement for disclosure is a list of all employees, their individual cash compensation, and any salary/wage reduction on a per-employee basis, plus documentation supporting all of such disclosed information.  It also requires a list of every employee who received compensation greater than $100,000 in 2019 on an annualized basis.  Finally, for “demographic purposes”, there is optional disclosure that includes listing all principals and management of a business and all owners of 20% or more of the equity of a borrower (including limited partners).  It is not currently clear whether this information is protected under the tax laws or is subject to Freedom of Information Act requests, but presumably, this very confidential information will be maintained as confidential.

The application requires checking a box if the PPP loan (aggregated with PPP loans of affiliates) is greater than $2 million.  In a less than theoretical issue, Treasury and the SBA previously issued FAQs creating a safe harbor that the need for PPP loans less than $2 million is deemed to be certified in good faith, and that PPP loans greater than $2 million will be reviewed by the SBA.  This leaves in limbo any PPP loan of $2 million exactly, but presumably, such loans will not be reviewed merely by reason of the amount of the loan.  The placement of this question on the forgiveness application implies that only a request for forgiveness will trigger the review, but that is not what the FAQs provide.  It is interesting that the review of PPP loans has not yet been included in any Interim Final Rules of the SBA, but only in the less official FAQs.

No doubt, additional and formal guidance will be issued on PPP loan forgiveness as these issues and disclosures are debated publicly.

Click the link below to access the PPP Loan Forgiveness Application