An Overview of Loan Forgiveness Under the Reopened PPP

On January 19, 2021, the Small Business Administration (SBA) and the Department of the Treasury (Treasury) issued the Interim Final Rule on Loan Forgiveness Requirements and Loan Review Procedures as Amended by Economic Aid Act (the New Forgiveness Rule). The New Forgiveness Rule both updates and consolidates various previously issued Paycheck Protection Program (PPP) regulations related to loan forgiveness. Although much of its text consists simply of a restatement of those previously issued regulations, the New Forgiveness Rule also implements some significant new modifications and other requirements under the recently enacted Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (the Economic Aid Act).^[1] A high-level overview of the forgiveness regime as set forth in the New Forgiveness Rule is provided below, highlighting certain of those new elements.

Loan Proceeds Eligible for Forgiveness

Up to 100 percent of a borrower’s PPP loan proceeds may be eligible for forgiveness if used for “payroll costs”^[2] during the covered period (as described below), subject to certain requirements and limitations described below. Additionally, up to 40% of loan proceeds may be used for specified eligible nonpayroll costs expended during the covered period (or incurred during the covered period and paid on or before the next regular billing date). Expenditures on eligible nonpayroll costs in excess of 40% of loan proceeds are permitted but not eligible for forgiveness.^[3] Eligible nonpayroll costs include:

1. Interest payments on any business mortgage obligation or real or personal property that was incurred before February 15, 2020 (but not any prepayment or payment of principal).
2. Payments on business rent obligations on real or personal property under a lease in force before February 15, 2020.
3. Business utility payments for the distribution of electricity, gas, water, transportation, telephone, or internet access for which service began before February 15, 2020.
4. Covered operations expenditures, which include payments for any business software or cloud computing service that facilitates business operations, product or service delivery, the processing, payment, or tracking of payroll expenses, human resources, sales and billing functions, or accounting or tracking of supplies, inventory, records and expenses.
5. Covered property-damage costs, which include costs related to property damage and vandalism or looting due to public disturbances that occurred during 2020 that was not covered by insurance or other compensation.
6. Covered supplier costs, which include expenditures made by the borrower to a supplier of goods for the goods that (A) are essential to the operations of the borrower at the time at which the expenditure is made; and (B) is made pursuant to a contract or order (i) in effect at any time before the covered period with respect to the applicable covered loan or (ii) with respect to perishable goods, in effect before or at any time during the covered period.
7. Covered worker protection expenditures, which include an expenditure made to facilitate compliance with requirements or guidance established by the DHS, CDC, OSHA or any state or local agency related to worker safety due to COVID-19.

The foregoing items iv through vii were added pursuant to the Economic Aid Act.

Covered Period

A borrower may select a covered period between 8 weeks and 24 weeks, which commences upon disbursement of the PPP loan proceeds. The flexibility on the part of a borrower to choose a particular covered period within that range was a feature added pursuant to the Economic Aid Act. 

As discussed in our previous alert, the reopened PPP is available both to first-time borrowers and, subject to stricter conditions and limits, to borrowers that previously received a PPP loan (second draw borrowers). The covered period for a first draw loan may not overlap with that for a second draw loan. Additionally, the borrower must have received a first draw loan and have used the full amount of such loan on or before the disbursement of the second draw loan.

Owner-Employees

Generally, up to $100,000 of an employee’s annualized pay, as prorated for the applicable covered period, may be included for forgiveness purposes. Thus, for an eight-week covered period, forgiveness for an employee’s salary and wages would be capped at $15,385 ($100,000 times 8/52), and for a 24-week covered period, the cap would be $46,154 ($100,000 times 24/52). 

However, for an owner-employee with a 5 percent or greater ownership stake in a borrower or a self-employed individual, forgiveness is capped at 2.5 months’ worth of that individual’s 2019 or 2020 compensation (capped at $100,000 on an annualized basis, as prorated for the relevant covered period). For example, for an eight-week covered period, the amount of loan forgiveness requested for an owner-employee’s or self-employed individual’s payroll compensation is capped at eight weeks’ worth (8/52) of 2019 or 2020 compensation or $15,385 ($100,000 times 8/52), whichever is less, in total across all businesses. For a 24-week covered period, the amount would be capped at 2.5 months’ worth of 2019 or 2020 compensation – thus, up to $20,833 ($100,000 times 2.5/12) – in total across all businesses.

Reductions to Loan Forgiveness Amount

A borrower’s loan forgiveness amount may be reduced based on reductions in (i) the number of full-time equivalent (FTE) employees or (ii) employee salary or wages during the covered period, each as described in greater detail below. However, no forgiveness reduction will apply if, as applicable, the borrower (A) was able to eliminate the reduction in employee headcount or salary on or before December 31, 2020 (or, for a PPP loan made on or after December 27, 2020, no later than the last day of the covered period); (B) has offered to restore employee hours at the same salary or wages, even if the employees have not accepted; (C) fired an employee for cause or had an employee that voluntarily resigned or voluntarily requested a schedule reduction; (D) has a PPP loan of $50,000 or less; or (E) is able to certify in good faith that the reduction in FTE employees is due to a reduction in business activity during the covered period that stems from compliance with COVID-related hygiene requirements or guidance.

Reduction in Number of FTE Employees

A reduction in FTE employees during the covered period will reduce the loan forgiveness amount by the same percentage as the percentage reduction in FTE employees, subject to the foregoing exceptions as applicable. The reduction is calculated by comparing the average number of FTE employees during the covered period to the average number of employees during a reference period as selected by the borrower. The reference period may be, at the election of the borrower, either (i) February 15, 2019 through June 30, 2019, or (ii) January 1, 2020, through February 29, 2020. (In the case of a seasonal employer, however, the employer may, alternatively, select any consecutive 12-week period between February 15, 2019, and February 15, 2020, as the reference period.) 

Reduction in Employees’ Salary or Wages

A salary or wage reduction in excess of 25 percent will generally result in a reduction in the loan forgiveness amount, absent an exception. Specifically, for each employee who was not paid more than the annualized equivalent of $100,000 in any pay period in 2019 (or for any employee hired in 2020 or 2021, regardless of salary), the borrower must reduce the total forgiveness amount by the total dollar amount of the salary or wage reductions that are in excess of 25 percent of the base salary or wages of the employee during the most recent full quarter during which the employee was employed before the covered period (the reference period), subject to the exceptions enumerated above for restoring reduced wages or salaries. This reduction calculation is performed on a per employee basis, not in the aggregate.

The following example from the New Forgiveness Rule provides an illustration. A borrower that uses a 24-week covered period reduced a full-time employee’s weekly salary from $1,000 per week during the reference period (i.e., the most recent full quarter during which the employee was employed before the covered period) to $700 per week during the covered period. The employee continued to work on a full-time basis during the covered period. In this case, the first $250 (25 percent of $1,000) would be exempted from the loan forgiveness reduction. Reduction in the forgiveness amount based on the reduction in that employee’s salary would therefore be $1,200 (the remaining $50 weekly reduction multiplied by 24 weeks). 

Forgiveness Application Process

To receive loan forgiveness, a borrower must complete and submit a loan forgiveness application to its lender. PPP loan forgiveness forms have been released by the SBA and can be accessed here. The new forgiveness forms have been released pursuant to the Economic Aid Act, including a simplified 3508EZ form for borrowers with loans of not more than $150,000. Some lenders may have their own forgiveness forms, so borrowers may wish to work with their lender to determine which form is correct for their loan.

Once the forgiveness application is submitted, the lender has 60 days to determine the eligible forgiveness amount and submit its decision to the SBA. The SBA then has 90 days to review the application and, if it agrees with the lender’s assessment, remit payment to the lender matching the forgiven amount. Any amount that is not covered by the SBA’s payment to the lender will remain outstanding on the borrower’s loan and must be repaid.

Timing of Application for Forgiveness

A borrower may submit a loan forgiveness application any time on or before the maturity date of the loan if the borrower has used all of the loan proceeds for which the borrower is requesting forgiveness.  However, if the borrower does not apply for forgiveness within 10 months after the last day of the maximum covered period of 24 weeks (or if the SBA determines that the loan is not eligible for forgiveness, either in whole or in part), then deferral will cease and the borrower will be required to begin making payments under the loan. Additionally, a borrower must have applied for forgiveness for a first draw loan before (or simultaneously with) applying for forgiveness for a second draw loan of greater than $150,000.

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The New Forgiveness Rule notes that it should be interpreted consistently with, among other materials, the SBA’s sets of Frequently Asked Questions (FAQs) regarding the PPP. As of this writing, further revisions to certain FAQs are expected. It is also possible that additional interim final rules regarding loan forgiveness and other facets of the PPP may be issued in the future, similar to the iterative series of interim final rules that characterized previous phases of the PPP. We will continue to monitor developments.

^[1] We previously summarized relevant parts of the Economic Aid Act (available here) and the SBA’s and Treasury’s recent Interim Final Rule on Second Draw Loans from January 6, 2021 (available here).

^[2] “Payroll costs” consist of compensation to employees (whose principal place of residence is the United States) in the form of salary, wages, commissions or similar compensation; cash tips or the equivalent (based on employer records of past tips or, in the absence of such records, a reasonable, good-faith employer estimate of such tips); payment for vacation, parental, family, medical, or sick leave; allowance for separation or dismissal; payment for the provision of employee benefits consisting of group health care or group life, disability, vision or dental insurance, including insurance premiums, and retirement; payment of state and local taxes assessed on compensation of employees; and for an independent contractor or sole proprietor, wages, commissions, income, or net earnings from self-employment, or similar compensation.

^[3] A borrower may not use PPP loan proceeds to pay amounts other than payroll costs, eligible nonpayroll costs, or other permitted purposes for SBA 7(a) loans.