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How to navigate the PPP forgiveness process

On Behalf of | Jun 26, 2020 | Business Law

Borrowers and lenders are now preparing to process applications for forgiveness of PPP loans.

In the past month, the government has taken several steps to convert PPP from a loan program to more of a grant-with-strings program. But borrowers will still be obligated to repay their PPP loans if they do not successfully complete the forgiveness application.

Here are answers to some frequently-asked questions:

How will the forgiveness-application process work, in general?

A borrower will submit to its lender one of two SBA applications. The lender has 60 days to perform a good-faith review of the application, determine the amount to be forgiven, and issue the decision to SBA.

If forgiveness is appropriate, then SBA will issue a payment to the lender (in the amount of the forgiveness) within 90 days of submission of the lender’s decision to SBA. A borrower should then seek return of its blue-ink promissory note.

If forgiveness is rejected (in part or whole), then the lender is required to provide notice to the borrower. Within 30 days of receiving that notice, the borrower may notify the lender that it wants SBA to review the lender’s determination. Within 5 days, the lender must notify SBA of the borrower’s request for SBA review.

When can I apply for forgiveness?

Anytime between now and 10 months after the 24-week covered period ends.

Is there a potential downside to an early application? Yes, if you have not restored headcount or salary as of the date of application.

  • FTE headcount – By applying early, you will have locked in your employee headcount as of the date of the application, and you will be foregoing the December 31, 2020 safe harbor to restore the headcount.
  • Salary/wage reduction – By applying early, you will have locked in any reductions in employee pay. The December 31, 2020 safe harbor will not apply, and the reduction in the borrower’s forgiveness will be extrapolated to the end of the covered period (see examples on page 18 of this Interim Rule).

However, if neither of the forgiveness reductions is a potential issue, an early application will clear the loan off your balance sheet quicker.

Which application do I complete?

SBA Form 3508EZ (instructions found here) – This simplified application is used only if any one of the following three criteria is true:

  1. Borrower is self-employed without other employees, and did not include any employee salaries in the average monthly payroll calculation.
  2. Borrower:
    1. did not reduce salary/wages by more than 25% during the covered period, as compared to the period between 1/1/20 and 1/31/20; AND
    2. did not reduce the number of average paid hours between 1/1/20 and the end of the covered period. For the second criteria, employers may ignore reductions arising from either:
      1. An employee’s refusal to return to work, and
      2. An employer’s inability to rehire a similarly qualified employee for an unfilled position.
  3. Borrower:
    1. did not reduce salary/wages by more than 25% during the covered period, as compared to the period between 1/1/20 and 1/31/20 (excluding employees earning at least $100,000); AND
    2. was unable to operate during the covered period at the same level of business activity as before 1/15/20, due to COVID-19, social distancing requirements, or any other work or customer safety requirement related to COVID-19.

SBA Form 3508 – Borrowers will use the long-form application if none of the 3 criteria above is true. See instructions here.

What is the scope of a lender’s review?

A lender has the following duties in determining forgiveness:

  • Confirm receipt of the borrower certifications (see applications).
  • Verify that the borrower’s documentation supports the calculations of payroll and nonpayroll costs (see below).
  • Confirm the borrower’s calculations of the payroll and non-payroll costs, including limits on owner compensation (i.e., check the math)
  • Confirm that the borrower made the correct 60%/40% calculation.

If the lender discovers errors or a lack of substantiation, the lender and borrower are work together to remedy the issue.

Besides the application, what documents should a borrower gather?

  • Payroll costs (Must be delivered to lender with forgiveness application.)
    • Wages – Reports from third-party payroll processor or payroll tax filings (Form 941).
    • Health insurance and retirement contributions – Account statements and canceled checks.
  • Non-payroll costs (Must be delivered to lender with forgiveness application.)
    • Mortgage interest – Lender account statements (both from February 2020 and the covered period).
    • Rent/lease payments – The lease agreement and canceled checks (both from February 2020 and the covered period).
    • Utilities – Invoices and account statements (both from February 2020 and the covered period).
  • Full-time equivalents (Records that must be maintained, but not delivered to lender with application.)
    • Payroll processor statements or Form 941s to establish the number of FTEs, during one the following periods of time:
      • 2/15/19 – 6/30/19, or
      • 1/1/20 – 2/29/20, or
      • For seasonal employers, one of the following:
        • 2/15/19 – 6/30/19, or
        • 1/1/20 – 2/29/20, or
        • Any consecutive 12-week period between 5/1/19 and 9/15/19.
    • Correspondence with employees who refused job offers, restoration of positions, or restoration of hours.
    • Evidence of firings for cause, voluntary resignations, and employee’s requests for reductions in hours.
    • Support for the inability to operate at the same business level, due to COVID-19–on a location-by-location basis, if necessary. This would likely include a borrower’s financial records.

Cavitch will be advising borrowers and lenders on PPP forgiveness applications. For more information, please contact me at [email protected].

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