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Key PPP Loan Forgiveness Details

By JOHN BLAKE, CPA

July 30, 2020

When the Paycheck Protection Program (PPP) was launched as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, it was designed to provide immediate financial relief to companies impacted by forced business closures. The speed at which the program was launched, along with the favorable terms, 1% interest, and the forgiveness feature, made it an attractive option. As of July 24, 2020, the SBA reported that more than 151,000 loans totaling over $17B had been made to New Jersey companies. These are staggering numbers that reflect not only its popularity but also the depth of COVID-19’s impact. Now that the covered period has expired for many borrowers using the eight week period, the attention is shifting to loan forgiveness. New forgiveness applications and accompanying instructions have been released, and last week the SBA issued a Procedural Notice announcing that they will begin accepting forgiveness applications from lenders beginning August 10, 2020.

 Essential Forgiveness Concepts

  • Covered Period – This is the period in which qualifying expenses incurred are available for forgiveness. It starts on the date loan proceeds are disbursed and ends either eight weeks (56 days) or 24 weeks (168 days) from that date. In cases where a borrower has a bi-weekly or more frequent payroll schedule, they can elect the alternative period. Essentially this allows the covered period start date to align with the first pay period following loan disbursement.
  • Cash Compensation – For each employee, the total amount of cash compensation eligible for forgiveness may not exceed an annual salary of $100,000 prorated for the covered period. This means for the 8-week covered period the total is limited to $15,385 per employee and for the 24-week covered period it is capped at $46,154 per employee.  This cap does not include benefits and retirement contributions.
  • Owner-Employee and Self-Employed – For the 24-week covered period, cash compensation cannot exceed two and a half months’ worth of 2019 compensation for any owner-employee, general partner, or the self-employed. This means borrowers that elected the 24-week covered period the amount of cash compensation eligible for forgiveness is limited to $20,833 per individual, and for the 8-week covered period, it is $15,385 per individual.
  • FTE Reduction Safe Harbor – This protects from reductions in forgiveness in full-time equivalent (FTE) employees for borrowers unable to return to the same level of business activity before February 15, 2020, due to compliance with COVID-19 requirements between March 1, 2020, and December 31, 2020.
  • FTE Reduction Exceptions – There are exceptions that borrowers can take to protect against forgiveness reduction in certain circumstances. This includes when the Borrower made a good faith written offer that was rejected by an employee when an employee was fired for cause, for a voluntary request to reduce hours, rejected good faith offer to restore hours, and when the Borrower was unable to hire similarly qualified employees for unfilled positions.

PPP Loan Forgiveness FAQs

Are salary, wages, or commission payments to furloughed employees; bonuses; or hazard pay during the covered period eligible for loan forgiveness?

Yes

Are advance payments of interest on mortgage obligations eligible for loan forgiveness?

No

Can the Borrower switch from the 8 week covered period to the 24 week covered period?

Yes, but they need to secure mutual agreement from the lender.

How will SBA review borrowers require good-faith certification concerning the necessity of their loan request?

When submitting a PPP application, all borrowers must certify in good faith that “[c]urrent economic uncertainty makes this loan request necessary to support the Applicant’s ongoing operations.” SBA, in consultation with the Department of the Treasury, has determined that the following safe harbor will apply to SBA’s review of PPP loans with respect to this issue: Any borrower that, together with its affiliates, that received PPP loans with an original principal amount of less than $2 million will be deemed to have made the required certification concerning the necessity of the loan request in good faith. For this safe harbor, a borrower must include its affiliates to the extent required under the interim final rule on affiliates, 85 FR 20817 (April 15, 2020).

The SBA has determined that this safe harbor is appropriate because borrowers with loans below this threshold are generally less likely to have had access to adequate sources of liquidity in the current economic environment than borrowers that obtained larger loans. This safe harbor will also promote financial certainty as PPP borrowers with more limited resources endeavor to retain and rehire employees. Also, given the large volume of PPP loans, this approach will enable SBA to conserve its finite audit resources and focus its reviews on larger loans, where the compliance effort may yield higher returns.

Importantly, borrowers with loans greater than $2 million that do not satisfy this safe harbor may still have an adequate basis for making the required good-faith certification, based on their circumstances in light of the language of the certification and SBA guidance. SBA has previously stated that all PPP loans more than $2 million, and other PPP loans as appropriate, will be reviewed by SBA for compliance with program requirements. If the SBA determines in the course of its review that a borrower lacked an adequate basis for the required certification concerning the necessity of the loan request, SBA will seek repayment of the outstanding PPP loan balance and will inform the lender that the Borrower is not eligible for loan forgiveness. If the Borrower repays the loan after receiving SBA notification, SBA will not pursue administrative enforcement or referrals to other agencies based on its determination with respect to the certification concerning the necessity of the loan request. SBA’s determination concerning the certification regarding the necessity of the loan request will not affect SBA’s loan guarantee.

What is the maturity date of a PPP loan? 

If a PPP loan received an SBA loan number on or after June 5, 2020, it has a five-year maturity. If a PPP loan received an SBA loan number before June 5, 2020, the loan has a two-year maturity, unless the Borrower and lender mutually agree to extend the term of the loan to five years. The promissory note for the PPP loan will state the term of the loan.

Can the Borrower apply for loan forgiveness before the end of the Covered Period? 

Yes. A borrower may submit a loan forgiveness application any time on or before the loan’s maturity date – including before the end of the covered period – if the Borrower has used all of the loan proceeds for which the Borrower is requesting forgiveness. If the Borrower applies for forgiveness before the end of the covered period and has reduced any employee’s salaries or wages over 25 percent, the Borrower must account for the excess salary reduction for the full 8-week or 24-week covered period.

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While the information on the loan forgiveness process is regularly updated, this information serves as an essential guide to borrowers. The AICPA recently launched a PPP Loan Forgiveness Tool, to help borrowers estimate the expected forgiveness amount. If you have questions about the information outlined above or need assistance with a PPP-related issue, Klatzkin can help. For additional information, click here to contact us. We look forward to speaking with you soon.

The above represents our best understanding and interpretation of the material covered as of the date of this post. Things are moving at a rapid pace, and as such, information is subject to change. This information is provided for informational purposes only and is not intended to be a substitute for obtaining accounting, tax, or financial advice from an accountant.

About the Author

John focuses on helping with the tax needs of real estate, technology and manufacturing, distribution, and wholesale companies. He works with management and business owners to review their business plan, tax planning process, identify additional saving opportunities, and ensure compliance and reporting deadlines are met. Also, John helps educate clients about the new opportunities available...

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