On Monday, May 18, 2020, the Small Business Administration (SBA) released an official form of Paycheck Protection Program (PPP) Loan Forgiveness Application, as well as an Interim Final Rule on the Treatment of Entities with Foreign Affiliates. On the same day, President Trump and various members of his administration met with representatives of the restaurant industry to discuss potential modifications to the PPP. On May 14, 2020, the SBA issued an Interim Final Rule expanding PPP loan eligibility to certain electrical cooperatives. The Forgiveness Application, the Interim Final Rules and the meeting with the restaurant industry representatives are discussed below, along with certain other PPP-related recent developments.
Loan Forgiveness Application
Although the SBA has not yet issued a set of regulations specifically addressing loan forgiveness, the Forgiveness Application (which comes after more than $500 billion of PPP loans have already been made) clarifies a number of issues. At a high level, the Forgiveness Application consists of (i) a PPP Loan Forgiveness Calculation Form, (ii) Schedule A, (iii) Schedule A Worksheet, and (iv) an optional PPP Borrower Demographic Information Form, of which borrowers must submit items (i) and (ii) to their lenders. Certain features of the Forgiveness Application are noteworthy.
- Alternative payroll covered period. The Forgiveness Application allows Borrowers with a biweekly (or more frequent) payroll schedule to calculate eligible payroll costs using the eight-week period that begins on the first day of their first pay period following the PPP loan disbursement date. This alternative payroll covered period is at the election of a borrower; the borrower may instead choose to use the eight-week period beginning on the PPP loan disbursement date.
- Guidance regarding forgivable expenditures. Section 1106(b) of the CARES Act specifies that, subject to certain conditions, Borrowers are eligible for forgiveness of PPP loan indebtedness with respect to qualified “costs incurred and payments made” during the eight-week period after disbursement of their PPP loans. The Forgiveness Application clarifies that payroll costs are considered incurred on the day that the employee’s pay is earned, not payable, and provides that payroll costs incurred but not paid during the Borrower’s last pay period during the eight-week period beginning on the date of disbursement of the PPP loan (or alternative payroll covered period referenced above) are eligible for forgiveness if paid after the expiration of the eight-week period but on or before the next regular payroll date.
- Tracking PPP loans over $2 million. The Forgiveness Application requires that, if the Borrower (together with its affiliates, as applicable) received PPP loans with an original principal amount in excess of $2 million, then it must check a related box on the Forgiveness Application. As discussed in a previous client alert, the SBA has stated that (i) for PPP loans under $2 million, the borrower will be deemed to have made the required certification concerning the necessity of the loan request in good faith, but (ii) all PPP loans in excess of $2 million (and other PPP loans as appropriate) will be subject to compliance review by the SBA.
- Required borrower certifications. The Application requires the borrower to make various representations and certifications.
- Calculation of full-time equivalent employees. Section 1106(c) of the CARES Act specifies that the amount of a Borrower’s PPP loan that is eligible for forgiveness will be reduced if the Borrower’s average monthly full-time equivalent employee headcount during the eight-week period after disbursement of its PPP loan is less than its average monthly full-time equivalent employee headcount during one of two optional testing periods. The Forgiveness Application clarifies that a Borrower’s average monthly full-time equivalent employee headcount will be determined by calculating, for each employee, the average number of hours paid per week divided by 40 (with the quotient being rounded to the nearest tenth and the maximum for each employee being capped at 1.0). Alternatively, a borrower may calculate its average monthly full-time employee headcount using a simplified method that assigns a 1.0 for employees who work 40 hours or more per week and 0.5 for employees who work fewer hours.
- Loan forgiveness reduction computation. The PPP Schedule A Worksheet includes detailed instructions for determining reductions in loan forgiveness due to reductions in full-time equivalent employees or in employee salary and wages, as well as the related June 30, 2020 “safe harbor” for restoring wages and employee headcount.
Interim Final Rule on Treatment of Entities with Foreign Affiliates
The May 18, 2020 Interim Final Rule on Treatment of Entities with Foreign Affiliates (i) confirms that employees of foreign affiliates should be included for purposes of determining whether a PPP borrower has more than 500 employees, but (ii) states that the SBA will not find any borrower that applied for a PPP loan prior to May 5, 2020 to be ineligible based on the borrower’s exclusion of non-U.S employees from the borrower’s calculation of its employee headcount if the borrower (together with its affiliates) had no more than 500 employees whose principal place of residence is in the United States.
Previous SBA pronouncements had sown confusion on this issue. Interim Final Rule 1 (originally posted on April 2, 2020) stated: “You are eligible for a PPP loan if you have 500 or fewer employees whose principal place of residence is in the United States[.]” However, the PPP Frequently Asked Question (FAQ) #44, which was posted on May 5, 2020, stated that, “For purposes of the PPP’s 500 or fewer employee size standard, an applicant must count all of its employees and the employees of its U.S and foreign affiliates, absent a waiver of or an exception to the affiliation rules.”
White House Roundtable with Restaurant Executives and Industry Leaders
On May 18, 2020, President Trump, Treasury Secretary Mnuchin, and other White House officials met with executives and leaders of the restaurant industry. The restaurant industry executives in attendance made a number of PPP-related proposals, including the following:
- Extending the eight-week “covered period” for loan forgiveness under the current PPP to 24 weeks.
- Eliminating the requirement under the current PPP that not more than 25 percent of the loan forgiveness amount may be attributable to non-payroll costs.
- Extending the safe harbor deadline for restoring wages and employee headcount from June 30, 2020 to October 31, 2020.
The White House officials in attendance appeared receptive to these proposals, although it is unclear whether the extension of the covered period for loan forgiveness or the safe harbor for restoring wages and employee headcount would apply to borrowers outside of the restaurant industry or could even be implemented absent Congressional action.
PPP Eligibility for Certain Electric Cooperatives
On May 14, 2020, the SBA issued an Interim Final Rule expanding PPP eligibility to certain electric cooperatives. Historically, non-profit organizations were not eligible for SBA Section 7(a) loans, but the CARES Act expanded eligibility under the PPP to tax exempt non-profit organizations described section 501(c)(3) of the Internal Revenue Code (IRC) and tax exempt veterans organizations described in section 501(c)(19) of the IRC. Subsequent FAQs issued by the SBA expanded PPP loan eligibility to certain nonprofit faith based organizations and nonprofit hospitals (FAQ #42) that were not technically tax exempt under subsections (c)(3) or (c)(19) of IRC section 501.
This Interim Final Rule expands PPP eligibility to electric cooperative that are exempt from federal income tax under section 501(c)(12) and that meet the other eligibility requirements under the CARES Act, including the 500 employee limit or the SBA’s “alternative size standard” for the applicable industry, if higher. Under the alternative size standard an electric cooperative is eligible for a PPP loan if, as of March 27, 2020, (i) the maximum tangible net worth of the business was not more than $15 million, and (ii) the average net income after Federal income taxes (excluding any carry-over losses) of the business for the two full fiscal years before the date of application is not more than $5 million. For any electric cooperative that does not have net income, the cooperative’s savings distributed to its owner-members will be considered its net income.
Other Recent Developments
On May 20, 2020, the SBA released the Interim Final Rule on Second Extension of Limited Safe Harbor with Respect to Certification Concerning Need for PPP Loan and Lender Reporting. This Interim Final Rule (i) codifies FAQ #47, which extended the date by which qualifying borrowers may repay PPP loans from May 14, 2020 to May 18, 2020, in order to avail themselves of a safe harbor with respect to the economic necessity certification and (ii) extends the timeframe for submission by lenders of SBA Form 1502 for PPP loans.
 The Forgiveness Application is available here.
 Specifically, these include the following:
- Certification that the dollar amount for which forgiveness is requested:
- was used to pay costs that are eligible for forgiveness (payroll costs to retain employees; business mortgage interest payments; business rent or lease payments; or business utility payments);
- includes all applicable reductions due to decreases in the number of full-time equivalent employees and salary/hourly wage reductions;
- does not include nonpayroll costs in excess of 25% of the amount requested; and
- does not exceed eight weeks’ worth of 2019 compensation for any owner-employee or self-employed individual/general partner, capped at $15,385 per individual.
- Acknowledgement that the federal government may pursue recovery of loan amounts and/or civil or criminal fraud charges if loan proceeds were knowingly used for an improper purpose.
- Verification of the eligible payroll and nonpayroll costs for which the Borrower is requesting forgiveness.
- Confirmation that all required documentation verifying payroll costs, the existence of obligations and service (as applicable) prior to February 15, 2020, and eligible business mortgage interest payments, business rent or lease payments, and business utility payments have been submitted to the Lender.
- Confirmation of the accuracy and completeness of all documents and forms submitted and acknowledgement of criminal and civil penalties for making a false statement to obtain loan forgiveness.
- Confirmation that all tax documents submitted to the Lender are consistent with those the Borrower has submitted/will submit to the IRS and/or state tax or workforce agency, and authorization for the Lender to share the tax information with SBA’s authorized representatives, including authorized representatives of the SBA Office of Inspector General, for the purpose of ensuring compliance with PPP requirements and all SBA reviews.
- Acknowledgement that the SBA may request additional information for the purposes of evaluating the Borrower’s eligibility for the PPP loan and for loan forgiveness, and that the Borrower’s failure to provide information requested by the SBA may result in a determination that the Borrower was ineligible for the PPP loan or a denial of the Borrower’s loan forgiveness application.
 Business Loan Program Temporary Changes; Paycheck Protection Program, 85 Fed. Reg. 20,811, 20,812 (April 15, 2020).
 An official transcript of the event is available here.
 Under the current PPP, loan forgiveness may be available for payroll costs, payments of interest on qualifying mortgage obligations, rent payments on qualifying leases, and utility payments under qualifying service agreements over the eight-week period following the date of the loan.