Expansion of the payroll protection program (PPP) loans has emerged as a key form of relief provided by the CARES Act, but amid the euphoria and confusion of rolling out a brand new program in the midst of a crisis, some large questions linger, not the least of which is — once you get the funds how the forgiveness will rules apply. As lenders start to disburse funds, and more money may be on the way from Congress, the forgiveness rules are still a work in progress that require careful navigation with only a limited map to help.
Overall, PPP loans provide relief in the form of the federal government paying for certain costs (Covered Costs) of a small business over an eight-week period (the Eight-Week Period). The PPP program starts when an applicant secures a government guaranteed PPP loan from a lender in an amount equal to 2.5 times its average monthly Payroll costs (the PPP loan). The PPP loan is forgiven to the extent that the business uses the loan for Covered Costs over the Eight-Week Period after the bank makes the first disbursement of loan proceeds. Reductions in employee headcount or salary also may reduce forgiveness of the PPP loan. Lane Powell’s COVID-19 Resource Center includes several articles summarizing PPP loans (as enacted and as revised by the SBA), as well as a spreadsheet for computing the amount and forgiveness components of PPP loans.
After the March 27 enactment of the CARES Act, PPP loan application issues took front and center. The Small Business Association (SBA) and the U.S. Treasury issued several types of guidance, including a summary on the SBA website, a sample application form, an interim final rule (the IFR) and FAQ guidance (the FAQs) — we published an article about the highlights of the FAQs. Despite remaining questions, ambiguities and implementation challenges that are bound to occur in a program this large that was created so quickly, it generally appears that the PPP loan process is well underway — businesses have applied for PPP loans and many already have been approved. In addition, Congress is discussing increasing the original $349 billion allocated for PPP loans by as much as $250 billion.
FAQ 20 requires that “[t]he lender must make the first disbursement of the loan no later than ten calendar days from the date of loan approval.” FAQ 20 also provides that the Eight-Week Period “begins on the date the lender makes the first disbursement of the PPP loan to the borrower.” Some have already received their PPP loan and many others have been told the current equivalent of the check is in the mail. Disbursement of loan proceeds starts the Eight-Week Period when borrowers need to focus on maximizing the amount of loan they will have forgiven.
Unfortunately, there is as much ambiguity and uncertainty concerning PPP loan forgiveness as there was with obtaining a PPP loan (at least before the SBA and the U.S. Treasury provided some clarity). We anticipate that the SBA will provide guidance on forgiveness. In the meantime, this article discusses forgiveness of a PPP loan, based on the statute and limited guidance published to date.
Forgiveness applies to “costs incurred and payments made” for the four items listed below.(CARES Act § 1106(b).)
The four Covered Costs are:
Forgiveness Capped at PPP Loan Amount. The amount forgiven cannot exceed the principal amount of the PPP loan. (CARES Act § 1106(d)(1).)
Reduction in Forgiveness for Reduction in Number of Employees. The forgivable amount generally is reduced if there is a reduction in the number of employees. (CARES Act § 1106(d)(2).) The reduced forgivable amount equals the result of multiplying the sum of the Covered Costs by the ratio of (1) the average number of full-time equivalent employees during the Eight-Week Period to (2) at borrower’s election (a) the average number of full-time equivalent employees from February 15, 2019 to June 30, 2019 or (b) the average number of full-time equivalent employees from January 1, 2020 to February 29, 2020. Special rules apply to seasonal employers.
Reduction in Forgiveness for Reduction in Salary. The forgivable amount generally is reduced by an amount related to a reduction in salary (the Salary Reduction Amount). (CARES Act § 1106(d)(3).) The CARES Act requires businesses to calculate the Salary Reduction Amount, if any, for each employee who received, during any single pay period in 2019, wages or salary of $100,000 or less on an annualized basis. (CARES Act § 1106(d)(3)(B).)
The Salary Reduction Amount equals the excess, if any, of the reduction during the Eight-Week Period over 25 percent of the total salary or wages of the employee during the most recent full quarter during which the employee was employed before the Eight-Week Period — the first quarter of 2020 for PPP loans received in the second quarter of 2020. (CARES Act § 1106(d)(2)(A).)
Impact of Rehiring. The forgiveness amount is “determined without regard” to reductions in forgiveness resulting from a reduction in the number of employees or a reduction in salary, as applicable, during the Eight-Week Period, if the employer eliminates the headcount/salary reduction by June 30. (CARES Act § 1106(d)(5).)
The spreadsheet on our website includes calculations for forgiveness. This allows businesses to play out different scenarios based on current information available about forgiveness. We plan to update the spreadsheet as additional guidance is released.
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