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Borrowers will cheer SBA’s forgiveness application

On Behalf of | May 17, 2020 | Business Law

Here are my main takeaways from the SBA’s forgiveness application, which was released May 15 and supplemented May 22, and then updated again June 15:

  • Paid vs. incurred
    • Statutory language/previous guidance: The CARES Act said that a borrower will earn forgiveness credit for “costs incurred and payments made” during the 24-week covered period.
    • Questions raised: Does a certain cost need to be both incurred and paid in the 24-week period? If so, the first payroll might not count (incurred prior to 24-week period), and the last payroll period might not count (paid after the 24-week period).
    • Resolution: The SBA will use an expansive interpretation, so that a cost can result in forgiveness if it is either incurred or paid during the covered period. For example, to obtain forgiveness on payroll, either: (a) pay is distributed within the 24-week period (whether by paycheck delivery or ACH initiation), or (b) the wages must be earned during the 24-week period (as long as they’re paid before the next regular payroll date). Because a cost need not be both “incurred and paid” during the 24-week period, forgiveness will be available for prepayments (other than for mortgage interest) and payments of arrearages, as long as they’re made during the covered period.
  • Employee bonuses/hazard pay
    • Statutory language/previous guidance: The definition of “payroll costs” is fairly broad. The CARES Act does not specifically prohibit the payment of bonuses.
    • Questions raised: Borrowers who might not fill their forgiveness bucket have wondered: Can I just issue bonuses at the end of the period?
    • Resolution: Yes, but each employee’s pay can only result in forgiveness to the extent it does not exceed an annualized $100,000 during the covered period. The pre-payment of a bonus that is otherwise contractually due to the employee, if paid during the covered period, would also appear to be a forgiveness credit.
  • Rent for personal property
    • Statutory language/previous guidance: The CARES Act allows forgiveness for “covered rent obligations,” which had a mostly circular definition of “rent obligated under a leasing agreement.”
    • Questions raised: Is rent for personal property (i.e., vehicles) a forgivable expense? In the context of interest payments, the CARES Act explicitly included loans obtained to purchase personal property. The statutory silence for rent expenses led some to believe that rent would only apply to real estate, under the rule of construction of expressio unius est exclusio alterius (the explicit mention of one thing is the exclusion of another).
    • Resolution: Yes. Forgiveness can be obtained for personal property rent (subject to 60%/40% limitation).
  • Full-time equivalents
    • Statutory language/previous guidance: The CARES Act limits a borrower’s forgiveness by a ratio to reflect a reduction in headcount. To calculate headcount, the CARES Act uses a familiar term of “full-time equivalent employees” (FTEs).
    • Questions raised: Is this the same FTE definition used in the Affordable Care Act (which is based on a 30-hour work week)?
    • Resolution: No. SBA provides two alternative formulas (at the borrower’s election):
      • Enter the average number of hours paid per week, divide by 40, and round the total to the nearest tenth. The maximum for each employee is capped at 1.0.
      • 1.0 for employees who work 40 hours or more per week and 0.5 for employees who work fewer hours.
  • Forgiveness reductions for employees not laid off
    • Statutory language/previous guidance: The CARES Act reduces forgiveness for an employer who does not restore the FTE count by June 30, 2020.
    • Questions raised: Many borrowers will have employees who refuse to come back to work, who are fired for reasons unrelated to Covid-19, or who quit. Will the borrower be punished for a lower FTE count when the reduction is beyond the borrower’s control?
    • Resolution: No.
      • A borrower can exclude from the FTE calculations an employee if:
        • (1) the borrower made a good faith, written offer to rehire such employee (or, if applicable, restore the reduced hours of such employee) during the covered period or the alternative payroll covered period;
        • (2) 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;
        • (3) the offer was rejected by such employee;
        • (4) the borrower has maintained records documenting the offer and its rejection; and
        • (5) 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.
      • Similarly, there will be no reduction for an employee who is fired for cause, voluntarily resigns, or voluntarily requests a reduced schedule during the covered period or the alternative payroll covered period.
      • Last, SBA recently added another exemption: “If you were unable to operate between February 15, 2020, and the end of the Covered Period at the same level of business activity as before February 15, 2020 due to compliance with requirements established or guidance issued between March 1, 2020 and December 31, 2020, by the Secretary of Health and Human Services, the Director of the Centers for Disease Control and Prevention, or the Occupational Safety and Health Administration related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID-19.”
      • If any of these people was replaced, however, then the position should be included within FTE calculation.

SBA also introduced new guidance and rules in the forgiveness application:

  • Owner limitation – Everyone is aware of the prorated $100,000-per-employee forgiveness limitation. SBA added another limitation for owners, partners, and self-employed individuals. For these workers, forgiveness also cannot exceed eight weeks’ worth of 2019 compensation (in spite of the 24-week period). This provision is most likely to hurt shareholders in S-corporations, who often minimize their W-2 wages for FICA tax purposes.
  • Documentation for forgiveness – Borrowers should prepare now to prove up their forgiveness. Specifically:
    • For payroll costs,
      • bank account statements,
      • third-party payroll provider reports,
      • IRS Form 941,
      • state employee wage reports and unemployment filings, and/or
      • checks or account statements for health insurance or retirement contributions.
    • For other costs, have the following documentation, both for February 2020 and the 24-week period:
      • Mortgage interest –
        • Lender amortization schedule,
        • Receipts,
        • Cancelled checks, or
        • Lender account statements.
      • Rent –
        • Current lease agreement,
        • Receipts, or
        • Cancelled checks
      • Utilities –
        • Invoices,
        • Receipts,
        • Cancelled checks, or
        • Account statements.
  • Alternative 24-week period – Borrowers who disburse payroll every two weeks (or more frequently) may delay the start of their 24-week period until the first day of the first pay period after their PPP loan is disbursed. This will allow for a simpler computation for payroll costs forgiveness, but it might not be advantageous based on the paid/incurred rule mentioned above. An ideal 24-week period would begin on the day before a payroll, not the day after. You want to include a payroll that is partially accrued before the 24-week period begins, if possible.
  • PPP loan increases – Separately, last week, the SBA set forth a procedure for increasing a borrower’s PPP loan for the reason that the original principal balance did not account for partner compensation. Many lenders excluded partner compensation until the SBA clarified on April 14 that it could be included. Another reason to increase the loan would be if a seasonal employer received a loan prior to the April 28 change in alternative criterion.
  • No double-whammy – A borrower who cuts an employee’s hours could conceivably be dinged for both the reduction in headcount and the cut in compensation. However, in this instance, the SBA will consider the person’s pay to not have been cut (unless hourly rate was reduced).

I will be staying on top of PPP developments. Please email me at [email protected] with any questions.

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