PPP Loan Forgiveness: Things to Consider

Note: The PPP Flexibility Act introduced some alternate, more flexible loan forgiveness guidelines. However, for existing loan holders, the new guidelines are not mandatory, and you may elect to use CARE Act regulations. This decision is one that you will need to consider based on your business’s own unique circumstances. We will discuss the PPP Flexibility Act in a later post.

Many Arizona businesses have already received their PPP loans and are now wondering how to manage the CARE Act’s loan forgiveness application process as their 8-week period is coming to an end. Based on the SBA and US Treasury’s joint May 22, 2020 Interim Rule, here are some useful tips to consider when approaching your forgiveness application:

  • Determine the exact dates of your 8-week loan period. The beginning of your 8-week period is the day your lender made its first disbursement of your PPP loan. This should have been within 10 days of the date that your application was approved.
  • If you have not been tracking your expenses or how you have allocated your PPP loan funds so far, it is important to start working to determine those figures now because they will be essential for your forgiveness application when it’s time. Some industry professionals have suggested keeping PPP funds in a separate account to make record-keeping easier. There are two broad categories to document:
    1. The costs incurred and paid during this period for payroll, rent, mortgage interest, and utilities.
    2. Recent guidance indicates that payroll expenses include bonuses, hazard pay, and furlough pay for employees.
    3. Payroll expenses are capped at $100,000 per employee. However, the rules are different for owner-employees whose compensation is capped at their 2019 pay levels (ie for S-Corps).
  • Your Full-time Equivalent (FTE) calculation for the 8-week loan period and a base FTE which you can choose as the lower of 2/15/2019 through 6/30/2019, or 1/1/20 through 2/29/20. Full-time Equivalent is the summed number of full-time employees you had during the period and the number of part-time employees that you had who, when averaged together, equal full time employees (for instance 3 employees working 20 hours a week is 1.5 full-time equivalent employees).
    1. Any reduction in the FTE average between the loan period and the base period will lower the amount of loan forgiveness otherwise available to your business.
    2. To maintain your FTE, you can rehire your employees or hire new people; there is no requirement that you rehire the same individuals.
    3. It would be good practice to monitor your FTE throughout your 8-week loan period to make sure you are not surprised or overwhelmed at the forgiveness application stage.
  • Consider the certification that you signed when you filed your PPP application. In that certification, you affirmed your need of the funds given the current economic uncertainty and that the loan was necessary to continue your business operations. A finding that this claim was untrue carries heavy penalties. It would be a good idea to have a pre-written justification for the PPP loan. This can include factors like your industry, the impact of COVID on the industry, the impact of COVID on your business, and whether you are receiving payments from customers.
    1. Some good news is that as of May 13, there is a “safe harbor” presumption for PPP loans under $2 million. This means that the SBA will presume that you made your certification in good faith. Thus, depending on the size of your loan, you will have a greater or lesser need for concern in justifying your loan. However, even if your loan amount was under $2 million, you will be subject to heightened scrutiny if:
      • you or your parent company files with the SEC; or
      • you falsified numbers in your loan application.
    2. Despite the SBA’s good-faith presumption safe harbor, the Department of Justice or Congress may bring their own investigation or charge individuals on their own authority. If you have any concern whether you violated the certification in your loan, contact your attorney. Other parties who can enforce your certification include:
      • Special Inspector General of Pandemic Recovery
      • Pandemic Response Accountability Committee
      • Department of Justice
      • Arizona’s (or another state’s) Attorney General
      • Whistleblowers under the Civil False Claims Act
  • Keep in mind the timeline for the forgiveness application process. Your bank will have 60 days to review your application. Then, after your bank has completed its review of your application, it will send it on to the SBA. The SBA then has 90 days to review your application and give its determination of your loan forgiveness amount. In theory then, payments may be required before you know whether you have some, all, or none of the loan forgiven. Thus, it is important to plan on making some loan payments. However, any payments that you made that were unnecessary because of forgiveness will be refunded to you. You must pay any amount that is not forgiven over 18 months at 1% interest, and the 1% interest does accrue throughout the initial 6-month deferral period.

Disclaimer: the SBA is regularly releasing guidance, and future guidance will likely modify or contradict what is written here. Please contact your legal and accounting professionals for up-to-date and more in-depth information. This post contains high-level suggestions and does not consider or address your individual business’s unique factors and concerns.