SBA Issues Paycheck Protection Program Loan Forgiveness Application

May 19, 2020

On May 15, 2020, the Small Business Administration (SBA), in consultation with the Department of Treasury, issued the Paycheck Protection Program (PPP) Loan Forgiveness Application and a corresponding set of instructions. As the SBA noted in its release, the form includes “several measures to reduce compliance burdens and simplify the process for borrowers.” 

The form clarifies a number questions regarding loan forgiveness including the following:

  • Addition of “Alternative Payroll Covered Period”: The SBA previously clarified that the “Covered Period” is the eight-week period beginning the date of the PPP loan disbursement (the CARES Act referred to loan origination). In addition to this period, however, the form provides for an “Alternative Payroll Covered Period” that can be used, which is the eight-week period beginning on the first day of the first pay period following the date the PPP loan was disbursed. A borrower may elect to use this alternative period as noted in the form itself where questions allow for such an election. 
  • “Costs Incurred” and “Payments Made” Clarification”: Pursuant to the CARES Act, a borrower is eligible for loan forgiveness for eligible “costs incurred and payments made during the covered period.” Given this language, a borrower did not know whether forgiveness applied only if an item was incurred and paid for or if forgiveness applied if an item was either incurred or paid. The form clarifies that if a borrower incurs but does not pay a payroll cost during the covered period (or alternative covered period) then the cost is still eligible for forgiveness if the payroll cost is paid on or before the next regular payroll date occurring after the end of covered period (or alternative covered period). With respect to nonpayroll costs, if the cost is not paid during the covered period, the cost must be incurred during the covered period and paid on or before the next regular billing date.
  • Reduction in Loan Forgiveness: While the CARES Act itself did not provide for a limitation on loan forgiveness in the event that at least 75% of the PPP loan proceeds are used for payroll costs, the SBA guidance included such limitation “in light of the Act’s overarching focus on keeping workers paid and employed.” The SBA’s guidance did not state whether such failure would result in partial loan forgiveness or no loan forgiveness. The form suggests that a borrower is eligible for partial forgiveness even if that more than 25%of proceeds are used for nonpayroll costs. Specifically, the form states that “Eligible nonpayroll costs cannot exceed 25% of the total forgiveness amount” so a borrower can apply with a forgiveness total pursuant to which nonpayroll costs comprise 25%.
  • Full Time Employee Reductions: Pursuant to the CARES Act, a borrower’s loan forgiveness is reduced in the event of employee reductions unless the borrower restores employment levels by June 30. The form repeats this safe harbor and notes it applies if the borrower restores its employment level to the level in the pay period that included February 15, 2020. The form also expands the exceptions to the FTE reduction to include not only positions for which a good-faith written offer to rehire was made and rejected but also those employees who were fired for cause, voluntarily resigned or voluntarily requested and received a reduction of their hours.
  • Salary Reductions: Pursuant to the CARES Act, a borrower’s loan forgiveness is reduced in the event of certain salary reductions during the covered period.  With respect to salary reductions, the form makes clear the borrower is to make such calculation “only for employees whose salaries or hourly wages were reduced by more than 25% during the Covered Period or the Alternative Payroll Covered Period as compared to the period of January 1, 2020 through March 31, 2020.” The salary reduction worksheet also repeats that employees who in any single pay period during 2019 earned wages or salary at an annualized rate of pay in an amount more than $100,000 are not considered for purposes of determining whether any forgiveness amount is to be reduced because of a salary reduction.

The SBA notes that it will issue additional regulations and guidance to further assist borrowers with loan forgiveness as well as to aid lenders with understanding their responsibilities. We will provide a further update upon release of such regulations and guidance.

For more information on this or other matters, please contact:

Andrew C. Gold at +1 212 592 1459 or [email protected]
Eric A. Stabler at +1 212 592 5982 or [email protected]
Patrick J. O’Sullivan, Jr. at +1 212 592 1503 or [email protected]

© 2020 Herrick, Feinstein LLP. This alert is provided by Herrick, Feinstein LLP to keep its clients and other interested parties informed of current legal developments that may affect or otherwise be of interest to them. The information is not intended as legal advice or legal opinion and should not be construed as such.