Understanding PPP Loan Forgiveness

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Understanding PPP Loan Forgiveness

What ASCs need to know

The US Small Business Administration (SBA) issued two interim final rules on May 22. The first focuses on Paycheck Protection Program (PPP) loan forgiveness, and the second on procedures for SBA’s review of loans and responsibilities for lenders and borrowers.

The interim rules follow the PPP Loan Forgiveness Application that the SBA released on May 15. Forgiveness is not automatic, and borrowers must submit the application to their lender. ASCA recommends ASCs continue to work with their legal team and lender to ensure that they are in compliance with the PPP and its loan forgiveness program.

Under the authorizing legislation, PPP funds must be spent during an eight-week period to qualify for forgiveness. Additionally, 75 percent of the funds must be spent on payroll costs to qualify for full loan forgiveness. Several bills to modify both of these requirements have been recently introduced in Congress but, for the time being, it is safe to assume they are and will be in effect.

Forgiveness is based on the employer maintaining or quickly rehiring employees and maintaining salary levels, and will be reduced if full-time headcount declines, or if salaries and wages decrease. An exemption from the loan forgiveness reduction was added for borrowers who made a good-faith, written offer to rehire a worker who was declined.

ASCs might want to keep in mind a few key points from the interim rule on loan forgiveness.

  • Payroll Period:
    • Borrowers may seek forgiveness for payroll costs for the eight weeks beginning on either: (1) the date of disbursement of the borrower’s PPP loan proceeds from their lender or (2) the first day of the first payroll cycle in the covered period.
    • Payroll costs are considered paid on the day that paychecks are distributed or the borrower originates an automated clearing house (ACH) credit transaction. Additionally, payroll costs incurred during the borrower’s last pay period of either of the time frames described above are eligible for forgiveness if paid on or before the next regular payroll date.
  • Treatment of Compensation to Furloughed Employees:
    • SBA clarifies that if a borrower pays furloughed employees their salary, wages or commissions during the covered period, those payments are eligible for forgiveness as long as they do not exceed an annual salary of $100,000, as prorated for the covered period. Hazard and bonus pay are also forgivable expenses.
  • Caps on Compensation to Owner-Employees and Self-Employed Individuals:
    • The amount of loan forgiveness requested for owner-employees and self-employed individuals’ payroll compensation can be no more than the lesser of 8/52 of 2019 compensation (i.e., approximately 15.38 percent of 2019 compensation) or $15,385 per individual in total across all businesses with:
      • owner-employees capped by the amount of their 2019 employee cash compensation and employer retirement and healthcare contributions made on their behalf;
      • Schedule C filers capped by the amount of their owner compensation replacement, calculated based on 2019 net profit;
      • general partners capped by the amount of their 2019 net earnings from self-employment (reduced by claimed section 179 expense deduction, unreimbursed partnership expenses, and depletion from oil and gas properties) multiplied by 0.9235.
    • No additional forgiveness is provided for retirement or health insurance contributions for self-employed individuals, including Schedule C filers and general partners.
  • Eligible Non-Payroll Costs:
    • Non-payroll costs are eligible for forgiveness, subjected to the percentage rule stated above, if such costs were paid during the covered period or incurred during the covered period and paid on or before the next regular billing date, even if the billing date is after the covered period.
  • Loan Forgiveness Amount and Attempted Rehires:
    • Borrower may exclude any reduction in full-time equivalent (FTE) employee headcount that is attributable to an individual employee who refused to rejoin the borrower if:
      • the borrower made a good faith, written offer to rehire such employee (or, if applicable, restored the reduced hours of such employee);
      • the offer was for the same salary or wages and same number of hours as earned by such employee in the last pay period prior to the separation or reduction in hours;
      • the offer was rejected by such employee;
      • the borrower has maintained records documenting the offer and its rejection; and
      • the borrower informed the applicable state unemployment insurance office of such employee’s rejected offer of reemployment within 30 days of the employee’s rejection of the offer.
    • A borrower’s loan forgiveness will not be reduced if an employee is fired for cause, voluntarily resigns or voluntarily requests a schedule reduction.
    • As noted above, a reduction in FTE employees reduces the loan forgiveness amount by the same percentage as the percentage reduction in FTE employees. Follow these steps to calculate the number of FTEs and reference period to make the comparison. However, for FTEs and salary levels that were reduced between February 15, 2020 and April 26, 2020, borrowers who eliminate those reductions by June 30, 2020, or earlier, can avoid a reduction to their loan forgiveness.
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The first rule describes the time frame for the review and the forgiveness application. Lenders have 60 days from receipt of the borrower’s loan forgiveness application to issue a decision to SBA and request payment from the agency for the forgivable amount.

The second rule includes more detailed information about the SBA’s and lender’s review of PPP loans.

  • SBA can review any PPP loan to determine if a borrower was in fact eligible, to check if the amount loaned was correct, and to check if the forgiveness amount was accurate. SBA may undertake this review at any time. It is important to note that a borrower must retain PPP documentation in its files for six years after the date the loan is forgiven or repaid in full and permit authorized representatives of SBA to access such files upon request.
  • If SBA determines that a borrower is ineligible for a loan, then the loan may not be forgiven. Similarly, if there is a determination that the amount of the loan or forgiveness were incorrect, then the lender will be instructed to deny the forgiveness application in whole or in part.
  • SBA may directly request information, or request information through the borrower’s lender. In either instance, the borrower has a chance to respond, and SBA will publish an appeals process.

Despite all the possibilities for review, there is a safe harbor for borrowers with loans less than $2 million according to the US Department of the Treasury frequently asked questions (FAQ) document updated earlier this month. The answer to question 46 of the FAQ states, “Any borrower that, together with its affiliates, received PPP loans with an original principal amount of less than $2 million will be deemed to have made the required certification concerning the necessity of the loan request in good faith.” However, loans greater than $2 million may be audited by the Treasury Department.

In the response to question 48, the SBA states that it is extending the deadline for lenders to electronically upload the initial SBA Form 1502 reporting information to the later of: (1) May 29, 2020, or (2) 10 calendar days after disbursement or cancellation of the PPP loan.

For more information, write Steve Selde.