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How to Get PPP Loan Forgiveness for Small-Business Clients Under the New Rules

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The year-end stimulus package included significant changes to how the PPP loan forgiveness program works. PPP loan forgiveness is determined based on how the small-business client spent the loan proceeds. Importantly, at least 60% of the loan must be used for payroll costs (note that thisthreshold was reduced from 75% under the CARES Act by the Paycheck Protection Program Flexibility Act (PPPFA), passed in early June 2020).

The Small Business Administration has also released a form version of the loan forgiveness application, but that form was released before enactment of the PPPFA. Every PPP lender can use its own version of the SBA form application.

At the most basic level, after the small-business owner completes the application for loan forgiveness, the lender has 60 days to decide whether the borrower qualifies. The SBA then has an additional 90 days to provide funding for the lender.

Importantly, the original SBA loan forgiveness application mentions the original eight-week period, which has now been extended. Presumably, the application will be updated to reflect this change.

The loan application also now requires employers to certify whether they received loans in excess of $2 million (also considering loans by affiliates). Generally, if the loan amount was $2 million or less, the government will presume that it was made in good faith — i.e., that the borrower did not have a viable alternate liquidity source. The provisions in the Consolidated Appropriations Act of 2021 — the broader spending bill that included $900 billion in virus relief — imposed a firm $2 million cap on the amount of any PPP loan.

Employers must certify that loan amounts were used to cover eligible expenses and that the borrower has accurately confirmed payments made for both payroll costs and non-payroll costs.

The application itself contains a worksheet to help small-business clients calculate their loan forgiveness amount, as well as any reductions that may be necessary because the employer reduced its workforce or employee salaries. The document also provides a cure provision for employers who impermissibly reduced workforce (and may wish to bring employees back to work) or salary levels.

The employer must provide documentation to show the payroll costs it paid out during the relevant period — whether in the form of bank records or reports from a third-party payroll service. IRS payroll tax filing forms (i.e., Form 941) and state quarterly wage reporting forms, as well as payment receipts, canceled checks or other account statements showing contributions to employee retirement accounts or health care are also necessary.

Importantly, employers will be required to document the number of full-time employees between Feb. 15, 2019 and June 30, 2019, compared with the same period in 2020. Two methods are available for counting FTEs: employers can elect to (1) assign “1” for every employee working at least 40 hours per week and “0.5” for all other employees, or (2) divide the average number of hours worked weekly by each employee by 40, rounding up to the nearest tenth (up to a maximum of “1” per employee).

For employers that used funds to pay costs such as rent or mortgage interest, copies of lender amortization schedules, account statements and/or lease agreements must be submitted with the application.

Planning Points

  • There is a potentially important divergence between the SBA loan forgiveness application and the actual terms of the PPPFA. While the SBA loan forgiveness application indicates that 75% of the “forgiveness amount” had to be used for payroll costs, the terms of the new law, which was released after the application, says that 60% of the “loan amount” must be used for payroll costs. This difference can be significant for small-business clients who only anticipated requesting forgiveness for part of the loan. (However, there are rumors that the IRS will release business-favorable guidance to clear up the divergence.)
  • In a surprise move, the SBA has begun asking PPP lenders to issue loan necessity questionnaires to recipients of loans of at least $2 million. The questionnaires are detailed and request significant information, and were issued without warning. It’s expected that these information requests might be used in enforcement of PPP loan requirements or in determining eligibility for forgiveness. According to the SBA, the forms will be used to evaluate whether a recipient’s loan was made necessary by economic uncertainty.  Information provided in the forms must be certified under threat of criminal action for false statements. The questions essentially ask borrowers to certify actual detrimental economic impact. Borrowers will also have to provide information about local COVID-19 shutdown orders, other CARES Act aid, financial information and compensation to highly compensated owners and employees. Upon receipt, the borrower has only 10 days to complete the questionnaire and submit supporting documents.
  • Determining eligibility for loan forgiveness is much more complex than expected. In response, the SBA released a streamlined application (Form 3508S) that can be used by business owners who borrowed $50,000 or less. Borrowers of small loans will no longer be required to reduce their loan forgiveness value if they reduced the salary or wages of an employee earning less than $100,000 during the covered period. Similarly, these borrowers will not be required to reduce the amount forgiven if they reduced their number of full-time equivalent employees during the covered period.
  • Small loan recipients are still required to calculate the amount of their forgiveness and retain applicable documentation — remembering that the SBA may ask to see supporting documents even if they are not required to be submitted with the application. All documentation that would support the small-business owner’s loan forgiveness should be maintained for at least six years after the date the loan was forgiven (or repaid).
  • The stimulus bill includes a new provision for a “simplified” forgiveness application for loans under $150,000. This new application must still be developed by the SBA and will likely change or eliminate the requirements and documentation procedures above for businesses with loans under the threshold amount.

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