Accordingly, an applicant for forgiveness should (1)



Navigating the PPP Loan Forgiveness ProcessJune 18, 2020The Paycheck Protection Program (PPP) was established by the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The CARES Act allows a qualifying business to receive loans that qualify for 100% forgiveness if the recipient uses the loans to cover certain costs. This update reviews the original qualifications for forgiveness, the recent updates from the Payroll Protection Program Flexibility Act, and what is known about the process of applying for forgiveness.A loan recipient, to qualify for 100% forgiveness of a PPP loan, must use the loan to cover specific expenses. The full amount of a PPP loan eligible for forgiveness is the sum of payments made for “covered costs,” meaning (1) certain payroll costs, (2)?interest on covered mortgage obligations (not including prepayment or payment of principal), (3) any covered rent obligation, and (4) any covered utility payment. Under the CARES Act, which has since been amended, at least 75% of the loan had to be used to cover “payroll costs,” meaning, among other things, salary, wages, commissions, payment for different kinds of leave, payment for the provision of employee benefits, and payment of state and local taxes. The definition of “payroll costs” excludes compensation for an employee whose principal place of residence is outside the United States; compensation of an individual employee in excess of an annual salary of $100,000; federal employment taxes imposed or withheld between February 15 and June 30, 2020; and credits under sections 7001 and 7003 of the Families First Coronavirus Response Act for sick and family leave wages.A loan recipient can reduce the amount of the loan that qualifies for forgiveness if the loan recipient cuts its workforce during the period covered by the PPP loan (the “covered period”). To calculate the amount of the loan that can be forgiven, the sum of payroll costs first is multiplied by the recipient’s average number of fulltime employees during the covered period. That product then is divided, for nonseasonal employers, by the average number of employees per month between either (1) February 15, 2019, and June 30, 2019; or (2) January 1, 2020, and February 29, 2020. For seasonal employers, that product is divided by the average number of employees per month between February 15, 2019, and June 30, 2019. Therefore, if the average number of employees per month during the covered period is less than the average number of employees before the covered period, then the amount of forgiveness will be less than the full amount of the loan. Moreover, the loan recipient cannot qualify for forgiveness beyond the amount of the loan principal. The loan recipient also can reduce the amount of forgiveness for which it is eligible if the recipient decreases employees’ compensation or wages during the covered period. If the recipient reduces—by more than 25% compared to the last full quarter—the wages or salary of any employee who received, during any pay period in 2019, wages or salary at an annualized rate of $100,000 or less, then the amount of the reduction beyond 25% will be subtracted from the total amount of eligible forgiveness under the loan.Under the CARES Act, a recipient who reduced its number of full-time employees or reduced its employees’ wages or compensation between February 15, 2020, and April 26, 2020, might be able to exempt those changes from impacting negatively the amount of the loan that qualifies for forgiveness. Reductions in wages or salary and reductions in employment will not be used to reduce the amount of forgiveness if, by June 30, 2020, the recipient eliminates the reduction in employment or the reduction in wages. For reductions in the number of full-time employees, there is no requirement that the recipient rehire the same person, meaning that a recipient can qualify for this exception by restoring the number of full-time employees. The SBA also has stated that the amount of loan forgiveness will not be reduced if a loan recipient laid off an employee, the recipient offered to rehire the employee at the same salary/wages and same number of hours, and the employee rejected the offer. The loan recipient must put the offer in writing and document the former employee’s rejection of it. To apply for forgiveness, a loan recipient must apply through its lender and provide documentation of its costs. The application must include: (1)?documentation, including IRS payroll tax filings and State income, payroll, and unemployment insurance filings, verifying the number of employees on payroll and pay rates; (2)?documentation verifying payments by the recipient on covered mortgage obligations, lease obligations, and utilities; and (3) certification from the recipient’s authorized representative that the documentation provided is true and that the amount to be forgiven was used in accordance with the program’s guidelines. A loan cannot be forgiven without this documentation. Moreover, a lender must decide within 60 days of receiving an application whether the applicant qualifies for forgiveness. The SBA also recently provided a simplified application form that a borrower should complete and provide to its lender to start the application process.Similarly, the SBA continues to update its guidance regarding the audit process for PPP loans. Recently, the Administration advised that it will audit all PPP loans in excess of $2 million and may, in its discretion, audit any other loan. Borrowers must be prepared to respond adequately to the SBA’s requests for information because, otherwise, the SBA may determine that the borrower was not eligible for the PPP loan. And if the SBA determines that a borrower was not eligible for a loan, it will demand repayment of the loan and may refer the matter to law enforcement. Therefore, a borrower should work with its counsel to respond to the SBA’s requests and to avoid the possible penalties associated with the loan process and responding to the SBA.Last, applicants should be aware of the ongoing legislation designed to alter the process. On June 5, 2020, the President signed the Paycheck Protection Program Flexibility Act (“PPPFA”), which is meant to help small businesses better take advantage of the provisions of the PPP. The PPPFA extends the time loan recipients have to spend PPP funds until the earlier of December 31, 2020, or the end of 24 weeks. Moreover, loan recipients now may use up to 40% of the loan to pay for non-payroll costs. Employers also have until December 31, 2020, to qualify for the safe-harbor provisions by rehiring employees that were employed on February 15, 2020, or to hire “similarly qualified employees for unfilled positions.” And the PPPFA extends the loan maturity date on unforgiveable PPP funds from two years to five years.Accordingly, an applicant for forgiveness should (1)?keep accurate records of how it spent the PPP loan funds over the applicable covered period; (2)?use at least 60% of the loan for eligible payroll expenses during the applicable 24-week period and use, at most, 40% of the loan for other covered expenses; (3)?as the 24-week period wanes, reach out to the lender and fill out a forgiveness application; and (4) prepare to work with counsel to respond to requests from the SBA for information related to the loan and forgiveness applications.The PPP loan forgiveness process remains murky and should benefit from more official guidance. This update is intended only to provide information regarding developments in the law and information of general interest. It is not intended to constitute advice regarding legal problems and should not be relied upon as such. For more information, please visit the SBA's website. For a specific consultation, we encourage you to contact us or we recommend consulting with your tax and accounting advisors. ................
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