News & Resources

Publications & Media

“Paycheck Protection” Loans: SBA Advises on How to Ask for Forgiveness

Business Law Alert Patrick J. Maxwell, Melissa McCord, Liz E. Peebles

Small businesses received some welcome instruction from the U.S. Small Business Administration (“SBA”) on the new Paycheck Protection Program (“PPP”), which currently makes available low-interest and potentially forgivable loans to businesses that employ fewer than 500 people (generally). The guidance came in the form of a loan forgiveness application (the “Application”) that borrowers will use to determine and report how much of their loans are potentially eligible for forgiveness. The Application, issued May 15, is found here.

PPP loans are meant to encourage small businesses to keep their workers employed through the COVID-19 crisis. Find our prior alerts about the program here. The Application provides information to borrowers on how to calculate and request forgiveness of all or a portion of their loans. Borrowers and their advisers have struggled to understand the forgiveness aspect of the PPP since the program was enacted as part of the Coronavirus Aid, Recovery, and Economic Security Act (“CARES Act”) that was approved by Congress and signed by the President on March 27, 2020.

If a borrower would like to apply for loan forgiveness, the borrower must spend the PPP loan proceeds on payroll costs (with some exclusions), mortgage interest, rent, and utilities during the eight weeks after the loan is disbursed, and at least 75% of the amount forgiven must consist of payroll costs.

Alternative Measurement Period for Payroll. Under prior guidance, the forgiveness measurement period for payroll costs was defined as the eight weeks starting on the day the PPP loan is disbursed to the borrower.

Now, for convenience, a borrower with a biweekly or more frequent payroll schedule can choose as its measurement period the eight weeks that start on the first day of the borrower’s first pay period following loan disbursement. The alternate measurement period is only for tracking payroll costs, and not for tracking payments on rent, mortgage interest, or utilities. For these other forgivable costs, the forgiveness period will still begin on the date that the loan is disbursed.

If a borrower pays employees twice per month, instead of biweekly, the borrower cannot take advantage of the alternative measurement period for payroll costs.

Accrual or Cash Accounting? Companies have wondered if they must incur the forgivable costs during the eight-week measurement period, or if it is simply enough that the companies pay the costs during the eight weeks. The rules set forth in the Application are as follows:

  1. Payroll Costs: In general, payroll costs are eligible for forgiveness if they are paid and incurred (subject to the exception below) during the eight-week measurement period.
  • Payroll costs are “paid” when paychecks are distributed or ACH credit transactions are initiated.
  • Payroll costs are “incurred” when employees’ pay is earned (in most cases, when employees put in their time).

Borrowers have voiced concern that at the end of the eight-week measurement period, they may have incurred some payroll costs (their employees have earned the wages) but have not paid them (they have not yet sent paychecks because payday will occur sometime after the eight-week measurement period). The Application indicates that such payroll costs are eligible for forgiveness so long as the payroll costs are actually paid on or before the next regular payroll date.

Note that a borrower taking advantage of the alternative measurement period described above would not face this issue because its pay periods and the forgiveness measurement period should align.

  1. Nonpayroll Costs: Payments of mortgage interest, rent, and utilities are eligible for forgiveness if they are paid during the eight-week measurement period or incurred during the measurement period and paid on or before the next regular billing date immediately after the measurement period.

Rental and Mortgage Interest Payments. Interest payments on mortgages and rent payments on leases of real property and personal property are eligible for forgiveness. Prior guidance did not make clear that rental payments on personal property qualified, so the Application broadens the types of rental payments eligible for forgiveness. To qualify, the leases and mortgages must have been in effect on or before February 15, 2020.

Reductions of Loan Forgiveness. Borrowers are penalized on their forgivable loan amount if they have a reduction in their full-time equivalent (“FTE”) workforce or have large salary or wage reductions. The Application outlines how to calculate these forgiveness penalties and provides more detail on applicable safe harbors and exemptions.

  1. FTE Reduction Safe Harbors and Exemptions: The FTE reduction penalty applies if the borrower’s average weekly number of FTE employees during the eight-week measurement period is less than (i) the weekly average from February 15, 2019, to June 30, 2019, or (ii) the weekly average from January 1, 2020 to February 29, 2020. The borrower has discretion to choose either historical comparison period.

The FTE reduction penalty will not apply if a borrower reduces its FTE levels between February 15, 2020, and April 26, 2020, and subsequently restores its FTE levels by June 30, 2020. On its face, this safe harbor permits a borrower to substantially reduce its workforce during the eight-week measurement period without penalty. However, in reality, 75% of the amount forgiven must consist of a borrower’s actual payroll costs, so borrowers that fail to retain FTEs in a sufficient number during the eight-week measurement period may have difficulty obtaining forgiveness for a sizable portion of their loan.

The Application contains a number of additional exemptions to the FTE reduction penalty that were not part of prior guidance and are helpful to borrowers attempting to qualify for forgiveness. A borrower will not face an FTE reduction penalty for reducing the FTE of an employee under the following circumstances, in each case assuming the borrower did not hire a new replacement employee:

  • The borrower made a good-faith, written offer to rehire an employee during the measurement period that was rejected by the employee.
  • The borrower fired the employee for cause.
  • The employee voluntarily resigned or voluntarily requested and received a reduction of hours.
  1. Salary/Wage Reductions: The salary/wage reduction penalty applies if the borrower reduces the salary/wage of any employee by more than 25% during the eight-week measurement period as compared to the period of January 1, 2020, through March 31, 2020. The salary/wage reduction penalty will not apply if the borrower restores the applicable employee’s salary or wages by June 30, 2020.

Again, on its face, this safe harbor permits a borrower to substantially reduce salaries/wages during the eight-week measurement period without penalty. However, practically speaking, borrowers that fail to maintain their pre-pandemic salaries/wages during the eight-week measurement period may have difficulty obtaining forgiveness for a sizable portion of their loan.

Pay Raises and Bonuses to Owner-Employees. Borrowers must certify that the proposed forgiveness amount does not include payroll costs for any owner-employee or self-employed individual/general partner that exceed eight weeks’ worth of 2019 compensation for such owner-employee or self-employed individual/general partner.

For example, if an owner-employee earned $80,000 in annualized compensation in 2019, she cannot include in the Application her own payroll costs if she paid herself at a $90,000 annualized rate during the eight-week measurement period. The implication is that other employees may be eligible for pay raises and bonuses (for example, hazard pay), which many companies anticipate will be permitted, though the SBA still has not expressly addressed whether the pay of non-owner employees can be increased during the eight-week measurement period.

Documentation Requirements. The Application contains a detailed summary of the documents that each borrower must submit with its Application. The borrower will need to submit documentation supporting the costs for which it is requesting forgiveness (payroll, rent, mortgage interest, and utilities) and documentation showing how its wages/salaries and FTEs during the eight-week measurement period compare with the applicable historical periods.

Required documentation may include bank account statements, third-party payroll service provider reports, tax forms, payment receipts, invoices, and account statements. The borrower must retain all records relating to the borrower’s PPP loan, including documentation supporting the borrower’s certifications as to the necessity of the loan request and its eligibility for a PPP loan, for six years after the date the loan is forgiven or repaid. The borrower must make such records available to the SBA upon request.

Additional Information. We expect the SBA to issue more guidance on this topic in the future. The complete text of the CARES Act is here and the supplementary PPP Enhancement Act is here.

For more information, please contact your Quarles & Brady attorney or: