Paycheck Protection Program Update: Loan Forgiveness Application Released By SBA
On March 27, 2020, the President signed the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) into law providing, among other relief, up to $349 billion to fund loans to small businesses affected by the outbreak of COVID-19 (the “Paycheck Protection Program”). On April 24, 2020, funding for the Paycheck Protection Program was reauthorized in the amount of $310 billion when the President signed H.R.266 – the Paycheck Protection Program and Health Care Enhancement Act into law.
The Paycheck Protection Program provides that borrowers who receive loans through the program must spend the loan proceeds during an eight week period which period is measured from the date that the borrower receives disbursement of the loan proceeds (the “Covered Period”). For some borrowers that received loans during the first phase of the program (which applications were accepted beginning on April 3, 2020), the Covered Period is coming to a close and the time for borrowers to submit their application and necessary supporting documents to have the loan forgiven is near.
On May 15, 2020, the SBA released the Paycheck Protection Program Loan Forgiveness Application (SBA Form 3508) (05/20) (the “Forgiveness Application”), which can be found at: PPP Loan Forgiveness Application. The Forgiveness Application should be completed and submitted to the lender that issued the loan to the borrower (or if the loan was thereafter transferred, to the party that is servicing the loan). We anticipate that many lenders will make an electronic Forgiveness Application available to borrowers as they did with initial loan applications. We note that although the information required for the application for the loan was somewhat limited the forgiveness application requires substantial and detailed information in support of the forgiveness claim. In the coming days and weeks, we expect the SBA to rollout regulations and further guidance to borrowers to help them complete this eleven page Forgiveness Application. While we await additional guidance, some important takeaways from the Forgiveness Application are detailed below.
- Eligible Payroll Costs
- These costs must be both “paid and incurred” during the Covered Period. It is important to note that this differs from previous guidance which indicated that it was all cash compensation paid to an employee during the Covered Period, subject to the $100,000 annual per employee compensation cap. See Treasury FAQ #32.
- For borrowers that pay their employees biweekly or more frequently, the Forgiveness Application allows the borrower to elect an “Alternative Payroll Covered Period” which period shall begin on the first day of the borrower’s first pay period following the disbursement of the loan proceeds to the borrower. The Forgiveness Application sets forth when this Alternative Payroll Covered Period is applicable in the application
- Eligible Non-Payroll Costs
- Any Eligible Non-Payroll Costs, such as payments of interest on mortgage obligations, rent or lease payments, and permitted utility payments, which are paid in arrears, need not be both incurred and paid during the Covered Period. Rather, the Forgiveness Application provides that these can be “incurred during the Covered Period and paid on or before the next regular billing date, even if the billing date is after the Covered Period.”
- Adjustments for Changes in Workforce and/or Salary/Wage
- Initially, it was anticipated that a reduction in full-time equivalent employees and/or a salary/wage reduction would only cause a reduction in the amount of loan forgiveness allocated to Eligible Payroll Costs. However, the formula set forth in the Forgiveness Application will allocate this reduction to Eligible Payroll Costs and Eligible Non-Payroll Costs. While not ideal, it is certainly better than an all-or-nothing approach.
- Representations and Certifications
- Borrowers should carefully read and understand the representations and warranties set forth on page four of the Forgiveness Application and should discuss any concerns that they may have with their accountant and/or legal advisors. Borrower should have documentation ready in the case that additional information is requested by the SBA during its review of the application.
- Safe Harbor
- The Forgiveness Application contains a section requiring the borrower to check a box “If Borrower (together with affiliates, if applicable) received PPP loans in excess of $2 million”. Treasury FAQs #39, #43 and #46, indicate that loans in excess of $2 million will be subjected to additional scrutiny upon submission of the Forgiveness Application and provides for a safe harbor to repay the loan in full by May 18, 2020 (subject to any additional extensions that may be implemented and the SBA’s final interim rules regarding the safe harbor).
- On the flip side, Treasury FAQ #46 issued further guidance providing “Any borrower that, together with its affiliates, received PPP loans with an original principal amount of less than $2 million will be deemed to have made the required certification concerning the necessity of the loan request in good faith”. It is important to note that this applies to the initial loan application and that all certifications and representations in the Forgiveness Application should be accurately certified.
We continue to closely monitor this developing area and will endeavor to keep our clients updated as the Paycheck Protection Program progresses. Undoubtedly, there will be updates and revisions to the application and the guidance and borrowers should check back regularly before submitting an application for forgiveness. We encourage our clients to reach out not only to us, but also to their local lenders with any questions that they may have regarding the economic assistance programs available and Forgiveness Application.
If you have any questions, please feel free to reach out to our Commercial Finance and Secured Lending attorneys Christine H. Price at (516) 265-1176 or firstname.lastname@example.org, Brett P. Garver at (516) 880-7266 or email@example.com, and Brian P. Boland at (516) 880-7239 or firstname.lastname@example.org.