Key Insights into Loan Forgiveness Released by the SBA

On May 15, 2020, the Small Business Administration (the “SBA”) released its form of Loan Forgiveness Application (the “Application”) in connection with the Paycheck Protection Program (the “PPP”). Through the Application, the SBA has provided a number of insights and details regarding loan forgiveness under the PPP that were previously unclear or unstated. Below we have outlined the most significant insights and details.

Under previous SBA guidance, the eight (8) week period during which a borrower is required to spend or incur eligible payroll or non-payroll costs to qualify for loan forgiveness began on the date of the disbursement of the loan. This rule created a potential mismatch for borrowers between the date that the eight (8) week period began and that borrower’s regular payroll periods.

In the Application, the SBA has introduced the concept of an “Alternative Payroll Covered Period” for the administrative convenience of borrowers using the PPP. For borrowers that use a biweekly or more frequent payroll schedule, such borrowers may elect to begin their eight (8) week period on the first day of their next payroll period following the disbursement date of the PPP loan. However, the eight (8) week period to incur or spend PPP loan proceeds for eligible non-payroll costs – rent, mortgage interest and utilities – still begins on the date of disbursement of the loan. No alternative eight (8) week period is offered for non-payroll costs.

The plain language of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), which created the PPP, stated that borrowers were eligible to receive loan forgiveness for “costs incurred and payments made” during the eight (8) week period. The Application has clarified that such costs do not need to be both incurred and paid during the eight (8) week period.

For payroll costs that are incurred but not paid during the eight (8) week period, a borrower will be eligible for loan forgiveness of those incurred payroll costs if such payroll is paid on or before the business’ next regular payroll date. The Application states that payroll costs are considered paid on the day that checks are distributed to employees or the date upon which the borrower originates an ACH credit transaction. The Application further states that payroll costs are incurred on the day that an employee’s pay is earned.

For non-payroll costs, the borrower may seek loan forgiveness for amounts either incurred or spent during the eight (8) week period. For those non-payroll costs that were incurred during the eight (8) week period, the borrower must make payment of those costs incurred on or before the next regular billing date.

For the purposes of both payroll and non-payroll costs, the borrower may only count costs incurred and paid once.

The Application has defined a full-time equivalent employee as any employee that is paid for forty (40) hours of work per week. To calculate the average number of full-time equivalent employees during the eight (8) week period, the number of hours each employee is paid for per week is divided by forty (40) (with that number rounded to the nearest tenth). The highest value assignable to an employee is 1.0.

Alternatively, the Application offers another method of calculation. Under this alternative method, any employee that is paid for forty (40) hours or more per week may be assigned a value of 1.0 and any employee paid for less than forty (40) hours per week may be assigned a value of 0.5.  This method of calculation will favor any business that has a number of employees that are paid for fewer than twenty (20) hours per week.

After selecting one of these methods (a borrower must choose one or other and consistently apply such method for the purposes of calculating the number of full-time employees throughout the application), the numbers generated for each employee are aggregated together to arrive at the total number of full-time equivalent employees during the eight (8) week period.

One of the two principal mechanisms by which a borrower’s loan forgiveness amount can be reduced is for having, on average, fewer full-time equivalents during the eight (8) week period than the borrower submitted in its application (which was the average number of full-time equivalents during the period of either (i) January 1, 2020 to February 29, 2020 or (ii) February 15, 2019 to June 30, 2019, at the borrower’s election). The amount of loan forgiveness would be proportionately reduced under this rule if the borrower has fewer full-time equivalents during the eight (8) week period as compared to the chosen benchmark period.

The Application, along with related SBA guidance, has outlined two exceptions to the operation of this rule. First, any previously laid-off employee that receives a good faith, written offer of rehire for the same salary/wages and the same number of hours who rejects such an offer of rehire will not reduce the borrower’s loan forgiveness. The borrower is required to document that employee’s rejection of the offer to rehire. Second, any employee who has (i) been fired for cause, (ii) voluntarily resigned or (iii) voluntarily requested and received a reduction of his or her hours will also not result in a reduction of the borrower’s loan forgiveness.

In addition to the above, borrowers may still avail themselves of the CARES Act safe harbor to restore the number of full-time equivalent employees by June 30, 2020 for any reduction in the number of full-time equivalent employees that occurred between February 15, 2020 and April 26, 2020. If on June 30, 2020, the number of full-time equivalent employees matches that number of full-time equivalent employees for the pay period that included the date of February 15, 2020, then such borrower will not have its loan forgiveness reduced.

The CARES Act defines rent obligations qualifying for loan forgiveness as “rent obligated under a leasing agreement in force before February 15, 2020.” The Application has provided further detail about what type of rent or lease payments qualify for loan forgiveness. In addition to rent or lease payments for real property, the Application has clarified that rent or lease payments for personal property also qualify.

The CARES Act also expressly allows interest payments for mortgages on real or personal property incurred before February 15, 2020 to qualify for loan forgiveness. Payments of principal or prepayments are not allowed.

In the case of both lease or rent payments and mortgage interest payments, such payments have to be for “business” purposes or uses.

The SBA has still not clarified whether there are any limitations on the application of interest payments with respect to personal property mortgages. It remains unclear whether interest payments on secured debt obligations secured by a lien on all assets would be included or if the SBA intends, in later guidance, to restrict qualifying interest payments to a more limited universe of personal property mortgages.

As has come to be expected with the SBA’s stewardship of the PPP, the above items remain subject to change as the SBA provides further guidance that either further clarifies those items or, potentially, provides for outright reversals for those items not otherwise codified by the CARES Act. Additionally, there have been statements by elected officials on Capitol Hill that indicate certain modifications to the CARES Act itself could be forthcoming. Therefore, it is important that borrowers stay abreast the changes to the PPP, including those that pertain to loan forgiveness, as the date for submitting their loan forgiveness applications approaches.

As always, you should feel free to contact us if we can assist in any way.