To believe the reports and news stories, the Paycheck Protection Program (“PPP”) has been a success in that thousands of small businesses have been able to take advantage of the relief it provides, but the road was less than smooth. The prevailing thought is that a second tranche of funding will soon become available from Congress and the Small Business Administration (“SBA”). If your company was one that did receive funding, you traversed the first hurdle. Now, your company must determine the best means in which to utilize the funds, while concurrently considering the best way to maximize forgiveness.
As general guidance, you must use the funds received in the manner prescribed in the Interim Final Rule (the “Rule”) originally issued on April 2 and published on April 15. The Rule provides, among other things, that the funds be used within eight weeks of receipt (the “Use Period”) and spent on approved expenses; such expenses being those disclosed on your funding application, but identified by the SBA and Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) to be the Forgivable Expenses. If you adhere to the Rule, the PPP is structured in such a way the vast majority, if not all, of the funds should be forgiven. The Rule contemplates a company’s use of the funds to include payroll and related costs, mortgage interest, rent and utilities (“Forgivable Expenses,” as more fully detailed in the Rule). In accordance with the Rule, in order to request subsequent forgiveness, during the Use Period, at least 75% of the funds must be used for payroll costs and no more than 25% of the funds may be used for the other Forgivable Expenses. Put another way, the funds are to be used for existing expenses incurred post-funding.
Calculating Your Forgiveness Amount
Given the rather swift consideration, negotiation, and ultimate implementation of the PPP, it is not surprising that the Rule provides very little specific guidance regarding loan forgiveness. It is anticipated that the details will begin to emerge and changes may be forthcoming, at least until borrowers begin applying for loan forgiveness. What appears to be established is that upon receipt of an application for forgiveness, lenders will have 60 days to make a decision on loan forgiveness. Based on the lender’s decision, any amount considered unforgivable should be governed by the standard terms of all PPP loans, which include the following: 1% interest for the entire period of the loan, 2-year maturity, and 6-month deferment of payments.
Anticipated Documentation Likely Required to Calculate Loan Forgiveness
Although there are presently no hard and fast rules, it is likely that the items noted below will be required to calculate loan forgiveness. Not only would businesses need to certify that the following documentation is true and accurate, but also that at least 75% of the amount for which forgiveness is requested was used for payroll costs included in the Forgivable Expenses. The items will likely include:
- Payroll reports from your payroll provider;
- Payroll tax filings (Form 941);
- Income, payroll, and unemployment insurance filings from your state;
- Documents verifying any retirement and health insurance contributions;
- Evidence of business rent;
- Evidence of business mortgage interest payments on real property;
- Evidence of business utility payments during the 8-week covered period.
Forgiveness is the single largest advantage to businesses when it comes to PPP, in that it provides small businesses some possibility of at least maintaining status quo in the face of the COVID-19 pandemic. Ultimately, with respect to forgiveness, lenders will make the final decision, subject to information provided by borrowers and guidance and rulings from the SBA; however, you can begin to prepare now by retaining your records and ensuring you are following the guidelines that have been issued to date.
If you have questions, contact your WHP attorney for guidance as this remains a developing situation.
This article provides an overview and summary of the matters described therein. It is not intended to be and should not be construed as legal advice on the particular subject.