Loan Forgiveness Requirements for the Paycheck Protection Program Are Still Up in the Air

The Paycheck Protection Program’s (PPP) loan forgiveness process is still evolving, with the most recent updates making it easier for businesses with smaller loans to obtain loan forgiveness. Understandably, the prospect of additional changes down the road has left many businesses wondering if it is best to wait it out.

Loan Forgiveness at the Heart

The Coronavirus Aid, Relief and Economic Security (CARES) Act amended Section 7(a) of the Small Business Act to create a new guaranteed, unsecured loan program intended to help small businesses keep workers on their payroll amid the economic challenges caused by the COVID-19 pandemic. The key feature of PPP loans is that they may be forgiven provided that certain conditions are satisfied, namely keeping workers on your payroll.

The CARES Act was drafted and enacted quickly, with Congress working to provide much-needed relief as soon as possible. Unfortunately, the law left a wide range of key issues unaddressed. As a result, the Treasury Department and the Small Business Administration (SBA) have been forced to publish a flurry of interim final rules and frequently asked questions (FAQs) to fill in the blanks. The agencies have also revised their guidance along the way and issued several versions of the loan forgiveness application. Much like everything else related to the COVID-19, the only certainty is that there is no certainty, at least right now.

Current Eligibility

Enacted in June, the Paycheck Protection Program Flexibility Act amended the CARES Act to provide significantly more flexibility for borrowers to qualify for loan forgiveness. The PPP amendments extended the covered period for loan forgiveness from eight weeks to twenty-four weeks after the date of loan disbursement. The forgiveness amount is equal to the sum of the following costs incurred during that period: payroll costs (compensation above $100,000 excluded), mortgage interest, rent obligations and utility payments.

The amendments also lowered the requirements that 75% of a borrower’s loan proceeds must be used for payroll costs and that 75% of the loan forgiveness amount must have been spent on payroll costs during the loan forgiveness covered period. The threshold is now to 60% for each of the requirements.

Additionally, the Paycheck Protection Program Flexibility Act created a safe harbor from reductions in loan forgiveness based on reductions in full-time equivalent employees for borrowers that are unable to return to the same level of business activity they had before February 15, 2020, due to compliance with requirements or guidance issued by the Secretary of Health and Human Services, the Director of the Centers for Disease Control and Prevention or the Occupational Safety and Health Administration related to worker or customer safety requirements related to COVID-19. The amendments also provide a safe harbor from reductions in loan forgiveness based on reductions in full-time equivalent employees to provide protections for borrowers that are both unable to rehire individuals who were employees of the borrower on February 15, 2020, and unable to hire similarly qualified employees for unfilled positions by December 31, 2020.

Loan Forgiveness Requirements

The PPP loan forgiveness application has also undergone several revisions. Following enactment of the PPP Flexibility Act, the SBA revised its loan forgiveness application to reflect the changes. In addition to updating the Full Forgiveness Application, SBA also published a new EZ Forgiveness Application, which requires fewer calculations and less documentation for eligible borrowers. 

Most recently, the SBA streamlined the loan forgiveness process for PPP loans of $50,000 or less. Under the Interim Final Rule, PPP borrowers of $50,000 or less are exempted from any reductions in forgiveness based on reductions in full-time-equivalent (FTE) employees and reductions in employee salary or wages. The SBA also published an alternative Loan Forgiveness Application (SBA Form 3508S) for use by PPP borrowers applying for loan forgiveness on PPP loans with a total loan amount of $50,000 or less (except for those borrowers that together with their affiliates received loans totaling $2 million or greater).

Key Takeaway

SBA began approving PPP forgiveness applications and remitting forgiveness payments to PPP lenders for PPP borrowers on October 2, 2020. Given the existing uncertainty, businesses should consult with their financial and legal advisers and exercise their best business judgment in determining when to apply for loan forgiveness.

For many PPP loan recipients, the most prudent path forward is to begin preparing the forgiveness application while also staying on top of the latest PPP developments. While talks on a further COVID-19 stimulus package have stalled, they are likely to resume in the near future.

At this point, there is no real risk in being patient and waiting for substantial areas of the loan forgiveness process to be further clarified, such as blanket forgiveness and tax deductibility. Borrowers can submit loan forgiveness applications up to 10 months after their covered period ends, which is now 24 weeks after their loan proceeds were received.

Howard D. Bader serves as general counsel for clients in a wide range of industries on an international scale. With over three decades’ worth of legal experience, he has represented clients in numerous legal matters, including commercial litigation, intellectual property, bankruptcy and creditor’s rights and mergers and acquisitions, as well as numerous corporate transactions and business law matters.

Howard D. Bader

(212) 784-6926

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