Forgiveness in the Time of "Corona": Deciphering the Newly Issued PPP Loan Forgiveness Application

4 min

On Friday, the SBA released its much-anticipated Loan Forgiveness Application, with accompanying instructions and worksheet, for Paycheck Protection Program (PPP) borrowers. As we have discussed in prior articles (including here), the potential for loan forgiveness is arguably the most attractive feature of the program. However, the SBA and Treasury's evolving guidance on loan forgiveness requirements has been a source of concern for borrowers. Perhaps in response to these concerns, as well as those raised in the Inspector General's Flash Report, the SBA introduced through the Application certain measures and modified guidance with the stated aim of "reduc[ing] compliance burdens and simplify[ing] the [forgiveness] process for borrowers."

Although many questions remain about how to interpret the Application and related materials, some noteworthy aspects include:

  • Instructions for calculating expenses to confirm loan forgiveness eligibility and, where eligible, ascertain the amount that is forgivable;
  • New option for borrowers to calculate payroll costs eligible for loan forgiveness using an "Alternative Payroll Covered Period" that correlates with borrowers' regular payroll cycles;
  • Ability to include eligible payroll costs that are incurred but not paid during the forgiveness period, if paid on or before the next regular payroll date, and non-payroll expenses that are paid or incurred but not paid during the forgiveness period, if paid on or before the next regular billing date;
  • Clarification that borrowers are not required to report payments for nonpayroll costs that they do not want to be included in the forgiveness amount;
  • Clarification that mortgage interest and rent payments can include both real and personal property;
  • Formal adoption of the full-time equivalency (FTE) employee Reduction Safe Harbor, which exempts "borrowers who have made a good-faith, written offer to rehire workers," whose offer was rejected, from incurring forgiveness reduction penalties that would otherwise be incurred because of a decrease in the borrower's employment level; and
  • Statutory exemption from the FTE reduction penalty calculation for any employees who "(a) were fired for cause, (b) voluntarily resigned, or (c) voluntarily requested and received a reduction of their hours," but "only if the position was not filled by a new employee."

In addition to completing the Application, borrowers must submit certain documentation, including documents verifying eligible payroll expenses, including bank statements, tax forms, and third-party payroll reports and receipts of benefits payments; documents evidencing FTE numbers for the applicable periods (i.e., payroll tax filings and wage reports); and documentation of nonpayroll expenses, such as amortization schedules and receipts of eligible mortgage interest expenses; leasing agreements and receipts for eligible lease expenses; and utility invoices and receipts for eligible utility expenses. Furthermore, for all such nonpayroll expenses, borrowers must submit documentation "verifying existence of the obligations/services prior to February 15, 2020 and eligible payments from the Covered Period."

The Application also imposes strict document retention requirements on loan forgiveness applicants for purposes of inspection by the SBA and SBA Office of the Inspector General. For a period of six years from the date of forgiveness (or loan repayment in full), loan forgiveness applicants must preserve and be prepared to furnish upon request documentation that would support the facts and figures underlying the applicant's calculations and statements submitted as part of the loan forgiveness application, and underlying worksheets, including documents supporting applicants' salary/wage reduction calculation; documents evidencing job offers and rejections, firings for cause, voluntary resignations, and written requests for a reduced work schedule; and other documents supporting the maintenance or reduction of employment and salary levels, as reflected in the borrower's application.

The loan forgiveness application also requires the applicant to check a box if the borrower (with affiliates, if applicable) received PPP loan proceeds in excess of $2 million. This mechanism presumably relates to the SBA's promise to review all loans in excess of $2 million for compliance with the borrower good faith certification (discussed in more detail here). Notably, the requirement applies to borrowers that "received" loans of more than $2 million, suggesting that borrowers cannot avoid an SBA audit simply by returning a portion of the loan proceeds to get under the $2 million threshold.

Consistent with its practices around the PPP loan application, the SBA has indicated that it will soon issue additional "regulations and guidance to further assist borrowers as they complete their applications, and to provide lenders with guidance on their responsibilities." Notably, the borrower certification states that the borrower eligibility loan forgiveness application "will be evaluated in accordance with the PPP regulations and guidance issued by SBA through the date of this application." The onus is therefore on prospective loan forgiveness applicants to carefully monitor the issuance of forthcoming regulations and guidance.