PPP Loan Forgiveness Application Release
Late on Friday, May 15, 2020, the Treasury Department and Small Business Administration issued the much awaited Form 3245, Loan Forgiveness Application (the “Application”) with instructions. For a copy of the Application and to view the press release, click here.
We are continuing to evaluate the Application, and will provide additional information in due course if we discover anything in our continuing review of the Application that is material to your forgiveness calculation, or if the SBA issues additional guidance (as promised, in the form of an additional Interim Final Rule). From our initial review, we note the following:
- As more particularly discussed in paragraphs (a) and (b) below, forgiveness still requires that payments of payroll costs and other eligible expenses still must be both “incurred” and “paid” during the eight-week (56-day) “Forgiveness Covered Period” (which commenced on the date that the PPP ;loan funds were received in the employer/borrower’s bank account). Contrary to what some accountants had hoped, the SBA did not adopt a pure “cash method” for these calculations. However, some leeway for payments made after the end of the period, albeit limited, is permitted, and additional guidance on this limited exception, and as to other issues, was given on how this is all to work. Specifically:
a. For payroll costs, these are considered “incurred” on the date that the employee earns the compensation, and they are considered “paid” on the date the employer/borrower either distributes the payroll check to an employee or initiates an ACH transaction (for directly deposited payroll). However, if an employer/borrower uses a bi-weekly or more frequent payroll schedule, then in calculating the employer/borrower’s payroll costs, the employer/borrower can use either the eight-week Forgiveness Covered Period, or can choose to use an “Alternative Payroll Covered Period,” which begins on the first day of the scheduled payroll period following the day on which the employer/borrower received the PPP loan proceeds (an example is included in the instructions). Whichever period the employer/borrower chooses to use, as it pertains to the final carry-over payroll period, the payroll costs earned by an employee (thus, “incurred” during the eight-week Forgiveness Covered Period or during the Alternative Payroll Covered Period) will be considered as “paid” during the period, and thus counted toward forgiveness, as long as the payment is made on or before the next regularly scheduled payroll date (even though that date of payment falls after the end of the Forgiveness Covered Period or the Alternative Payroll Covered Period).
b. For non-payroll costs, there are a couple of issues to note. First, only payment of regularly accrued interest on an eligible mortgage obligation counts toward forgiveness, not any prepaid interest (and of course not any principal payments). Second, the eligible non-payroll costs must be incurred and paid during the eight-week (56-day) Forgiveness Covered Period (there is no alternate period) or incurred during the Forgiveness Covered Period and paid on or before the next regular billing date (even if the billing date is actually after the end of the eight-week period).
c. The requirement that 75% be used for payroll costs (and no more than 25% for eligible non-payroll costs) remains in place. However, the calculation is not based upon 75% of the total PPP loan amount received. Rather, it requires that at least 75% of the amount of forgiveness must be used for payroll costs (i.e., divide the total payroll costs by .75). For example, if the total amount of the PPP loan received is $200,000, but the total amount of loan proceeds used for eligible payroll costs (during either the Forgiveness Covered Period or the Alternative Payroll Covered Period) is only $125,000, then the total amount of forgiveness would be limited to $166,667 ($125,000 ÷ .75). Thus, even if the employer/borrower uses the full amount of the PPP loan proceeds on eligible expenses, the total amount of forgiveness still will be limited to an amount determined by dividing the eligible payroll costs by .75. In other words, the employer/borrower still must have used 75% of the forgiveness amount for payroll costs or risk losing eligibility for a part of the forgiveness.
- Take careful note of all of the certifications that must be given on page 4 of the Application. Any certification that is inaccurate or not given in good faith could allow the SBA or other government agencies to investigate an employer/borrower and possibly impose civil fines or press criminal charges. Likewise, every employer/borrower will be required to certify its understanding that “if the funds were knowingly used for unauthorized purposes, the federal government may pursue recovery of loan amounts and/or civil or criminal fraud charges.” Please note that both of these certifications apply even if the employer/borrower’s PPP loan is under $2 million, and thus even if the employer/borrower met the expanded “safe harbor” published by the SBA in its May 13th FAQ #46.
- A list of the documentation that must accompany the employer/borrower’s Application is given on page 10.
Please contact any member of Trenam Law’s COVID-19 Task Force with questions.