The Paycheck Protection Program Loan Forgiveness Saga Continues
Late Friday night, the SBA issued additional Interim Final Rules that provide guidance on: 1) new SBA loan review procedures (“SBA Loan Review rule”) and 2) loan forgiveness requirements (“Loan Forgiveness rule”) established by the new Paycheck Protection Program Loan Forgiveness Application (released on Friday, May 15, 2020).The application, supplemented by the Interim Final Rules, provide much-needed guidance on the forgiveness prong of the Paycheck Protection Program (PPP) established by the CARES Act; however, several open questions remain. These are the next in line behind 13 other Interim Final Rules and 48 Frequently Asked Questions (FAQ’s) issued by the SBA and/or Treasury, and there are references in the latest rules that hint at additional guidance that may be offered through SBA notices posted at a later date on the SBA site.
SBA may Review PPP Loans of Any Size¶
The SBA Loan Review Procedures rule implements a new reporting requirement for lenders when approving or denying a borrower request for loan forgiveness, which includes submitting the schedule (Schedule A) used to determine the borrower’s payroll expenses. In addition, for those loans that the SBA selects for review, the lender will be required to submit information to allow the SBA to review the loans for borrower eligibility, loan amount eligibility, and loan forgiveness eligibility. This last part is important as the new rule specifies that the “SBA may begin a review of any PPP loan of any size at any time in SBA’s discretion.”
Previously issued FAQ #46 indicated that 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.” It also reminds borrowers that the SBA has previously stated that all PPP loans in excess of $2 million, and other PPP loans as appropriate, will be subject to review by SBA for compliance with program requirements set forth in the PPP Interim Final Rules and in the borrower Application Form. This new rule makes it clear that while loans over $2 million are subject to review for the “necessity of the loan request”, any loan may be subject to a review for compliance with eligibility, loan amount, and forgiveness.
According to new SBA loan review procedures, a lender must notify a borrower within five business days of receipt of such a request by the SBA. The rule also states that the SBA may reach out directly to the borrower for such requests. The SBA anticipates issuing a separate interim final rule addressing the appeals process for SBA determinations that the borrower is ineligible for a PPP loan or ineligible for the loan amount OR the loan forgiveness amount claimed by the borrower.
90 Days for Forgiveness?¶
The SBA Loan Review Procedures also include a new provision, which allows the SBA up to 90 days after a lender issues its decision on forgiveness “to review the PPP Loan and Forgiveness Documentation” before making a final determination. The rule calls this review period “appropriate” to prevent fraud or misuse of PPP funds and to ensure the borrower was eligible within the scope of eligible entities “the CARES Act was intended to assist”.
What documentation is required to evidence payroll costs?¶
In addition to the borrower certifications contained in the Loan Forgiveness Application Form, lenders must confirm receipt of the documentation specified in the instructions for aiding in verifying both payroll and nonpayroll costs. The new Loan Forgiveness rule does not expand upon the documentation requirements detailed in the PPP Loan Forgiveness Application; however, it does restate the definition of “payroll costs” provided in the Interim Final Rule on Paycheck Protection Program posted on April 2, 2020 (85 FR 20811). Note that the application itself specifies the documentation required to evidence payroll costs, including:
- Bank account statements or third-party payroll service provider reports documenting the amount of cash compensation paid to employees.
- Tax forms (or equivalent third-party payroll service provider reports) reported, or that will be reported, to the IRS (typically, Form 941) and state quarterly business and individual employee wage reporting and unemployment insurance tax filings reported, or that will be reported, to the relevant state.
- Payment receipts, cancelled checks, or account statements documenting the amount of any employer contributions to employee health insurance and retirement plans.
It is still not clear what documents are required of a sole proprietor or partnership that does not have “payroll,” and does not file 941s.
The Loan Forgiveness Rule also clarifies the caps on loan forgiveness available for owner-employees and self-employed individuals, which is capped at $15,385 per individual in total across all businesses as the loan cannot include amounts in excess of $100,000 annually per employee. It also clarifies the caps for General Partners and self-employed individuals, noting that no additional forgiveness is provided for retirement or health insurance contributions as such expenses are paid out of their net self-employment income.
You can refer also to our FAQs on the PPP page of our website for the most current information on documentation requirements.
What are lenders required to review?¶
According to the separate Loan Review Procedures Rule, lenders are required to perform a good faith review of the borrower’s calculation and supporting documents for forgiveness, but if a borrower does not use a “recognized third-party payroll processor” to provide those calculations, the rule simply states that a “more extensive review of calculations and data would be appropriate.” While lenders are not required to “independently verify” the reported information, keep in mind that the SBA has 90 days to review the application before making a final determination and may require additional evidence of reported information.
Lenders must also confirm the borrower’s calculations on the Application by reviewing documentation submitted with the Loan Forgiveness Application. Finally, lenders must confirm Line 10 of the Loan Forgiveness Calculation Form correctly, by dividing the borrower’s Eligible Payroll Costs claimed on Line 1 by .75.
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What happens if the SBA selects a loan for review?¶
If the SBA is reviewing a loan, the lender must transmit electronic copies of all supporting documentation provided by the borrower to the SBA within 5 business days of receipt from the borrower. The lender will not be able to approve any application for forgiveness until the SBA notifies the lender in writing that the SBA has completed its review.
SBA reminds the borrower that they must retain PPP documentation in its files for six years after the date the loan is forgiven or repaid as noted on the Loan Forgiveness Application Form, including the Appendix A Worksheet or its equivalent and the following:
- Documentation supporting the listing of each individual employee in PPP Schedule A Worksheet Table 1, including the “Salary/Hourly Wage Reduction” calculation, if necessary.
- Documentation supporting the listing of each individual employee in PPP Schedule A Worksheet Table 2; specifically, that each listed employee received during any single pay period in 2019 compensation at an annualized rate of more than $100,000.
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- Documentation regarding any employee job offers and refusals, firings for cause, voluntary resignations, and written requests by any employee for reductions in work schedule.
- Documentation supporting the PPP Schedule A Worksheet “FTE Reduction Safe Harbor.”
The Loan Forgiveness rule also adds a new requirement, where the borrower may only exclude a reduction in the full-time equivalent headcount that is attributable to an individual employee who rejected an offer of rehire if they inform the applicable state unemployment insurance office of such employee’s rejected offer of reemployment within 30 days of the employee’s rejection of the offer. The SBA also notes that further information regarding how borrowers will report this information will be provided on the SBA’s website.
Additional Questions Remain¶
In addition to uncertainties that remain with regard to payroll documentation records necessary to verify payroll expenses, several other open questions were introduced by the PPP Loan Forgiveness Application that were not addressed by the latest interim final rules. For example, the instructions to the PPP Loan Forgiveness Application make note of mortgage interest on real OR PERSONAL property costs incurred:
“Line 2: Enter the amount of business mortgage interest payments during the Covered Period for any business mortgage obligation on real or personal property incurred before February 15, 2020. Do not include prepayments.“
The same instructions are provided for Line 3, which indicate that the amount of business rent or lease payments for real OR PERSONAL property should be entered. It is unclear what the intent of these instructions were, as it appears as though rental payments for business expenses other than real property can be included.
The application also clarifies utility payments as “business utility payments for the distribution of electricity, gas, water, transportation, telephone or internet access for which service began before February 15, 2020,” adding expenses for “transportation” without further defining what such transportation costs are.
Regardless of the questions that remain, the rules are clear about one thing: you may NOT receive a loan, or be forgiven for any amount, at more than 125% of your payroll costs incurred during the “covered period” or “alternative covered period”. As before, we encourage you to seek professional advice in interpreting any of the rules referenced above.
We will continue to update you as we receive new information from the SBA. Stay well!
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