May 21, 2020

Maximizing PPP Loan Forgiveness

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Polsinelli COVID-19 Resources

Contact

For COVID-19 legal advice across a spectrum of

issues impacting an array of industries and legal

areas, our team is available and connected

nationally and in the communities in which you

operate.

Contact us with questions at:

COVID19CrossDeptResponseTeam@Polsinelli.com

Polsinelli’s cross-disciplinary COVID-19 blog

provides companies tools and information needed

to effectively and lawfully protect their employees

and business.

Visit our blog:

https://www.covid19.polsinelli.com/

Blog + Resources

2

• When and how to properly use PPP funds

• Reductions in forgivable amounts

• The loan forgiveness process

• How to stay in compliance

• What to do with leftover funds

Topics We’ll Cover

When and how to properly use PPP funds

Using PPP Funds – Payroll Costs

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• PPP funds can be used for payroll costs, rent, utilities and payments on mortgage interest. Please note

that use of the loan to pay for any other expenses, even after the 8 week period, constitutes misuse of

funds.

• Payroll costs include:

• Employer contributions to retirement plans;

• Employer contributions to employee health insurance, including employer contributions to a self-insured,

employer-sponsored group health plan, but excluding any pre-tax or after tax contributions by employees;

• Payment of employer state and local taxes assessed on compensation; and

• Cash compensation including wages, compensation, tips, commission, allowances for separation and dismissals,

and paid leave. Cash compensation is capped at $100,000 annualized during the 8 week period.

• For owner-employees, self-employed individuals, or general partners, compensation the 8 week

equivalent of their compensation in 2019 or the 8 week equivalent of $100,000, whichever is lower

• Utilities include:• Gas• Water• Electricity• Telephone• Internet access• Transportation (this was not defined)

• Mortgage interest and rent includes both real and personal property.• Contracts for the non-payroll costs must have been in place by February

15, 2020.

Using PPP Funds – Nonpayroll Costs

• Borrowers with a biweekly or more frequent payroll schedule may elect to calculate eligible payroll costs using the 8 week period that begins on the first day of their first pay period following their loan disbursement.

• If you choose the Alternative Payroll Covered Period, this will be your 8 week period for all expenses.

• Example: You receive the funds on Tuesday, April 28, but your next payroll period begins on Monday, May 4. You can use May 4 as the first day of your 8 week period.

Alternative Payroll Covered Period

Prepayments• The SBA has explicitly said that prepayments on mortgage obligations were

not allowed. • We do not suggest prepaying any expensesPay Increases and Bonuses• Any pay increase or bonus using PPP funds must not result in the employee

having a salary of over $100,000 annualized during the 8 week period.• Any pay increase or bonus should be justified, e.g. this is ordinarily when

pay increases or bonuses occur or you are in healthcare and the pay increase is hazard pay

If it is out of ordinary for you, an auditor will also likely view it as out of the ordinary

Prepayments, Pay Increases and Bonuses

• An eligible nonpayroll cost must be paid during the 8 week period or incurred during the 8 week period and paid on or before the next regular billing date, even if the billing date is after the 8 week period.

• These costs can only be paid and incurred once, meaning if you count them when they’re incurred don’t count them when they’re paid

Paying Nonpayroll Costs

• Your maximum forgivable amount is the sum of payroll costs, rent, utility payments, and mortgage interest payments during the 8 week period.

• This is capped at 100% of the loan.

• Eligible nonpayroll costs can’t exceed 25% of the total forgivable amount.

• For example, if you spend $100,000 during the 8 week period and:• Spend $75,000 on payroll and $25,000 on nonpayroll then it is 100% forgivable

(assuming no reductions)

• Spend $60,000 on payroll and $40,000 on nonpayroll, the $60,000 on payroll will be fully forgivable, but only $20,000 of the nonpayroll will be fully forgivable

Maximum Forgivable Amount

Reductions in Forgivable Amounts

(((payroll costs + utilities + rent + mortgage interest during the 8 week period) – salary reductions) * headcount reductions) – EIDL advance

For example:

Original loan amount: $100,000

Payroll costs: $75,000

Rent: $10,000

Utilities: $1,000

Mortgage interest: $4,000

Salary reductions: $2,500

Headcount reductions: 5/10

EIDL advance: $10,000

((($75,000 + $10,000 + $1,000 + $4,000) - $2,500) * 5/10) - $10,000 = $38,750 (forgivable amount)

Forgiveness Formula

• The maximum amount eligible for loan forgiveness may be reduced by reductions in salary that exceed 25% of an employee’s salary. This is a by employee test.

• This is calculated by determining an employee’s average annual wages during the most recent full quarter and comparing them to their average annual wages during the 8 week period. If the wages during the 8 week period are 74% or less than their wages in the most recent full quarter, you will reduce the maximum forgivable amount.

• However, if the salary reductions occur from 2/15/20 – 4/26/20 and you eliminate that reduction by 6/30/20, there will be no reduction in the amount eligible for loan forgiveness. The elimination of the reduction is determined on June 30.

• If your 8 weeks goes over June 30th, there has been no additional guidance so assume that you have to make your rehires by June 30.

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Reductions Due to Reduced Salaries

• The maximum amount eligible for loan forgiveness may be reduced by any layoffs.

• This is calculated by determining your average monthly full-time equivalent employees (40 hours/week) during the 8 week period and dividing that by either (a) your average monthly full-time equivalent employees from 1/1/20-2/29/20 or (b) your average monthly full-time equivalent employees from 2/15/19-6/30/19.

• If this number is less than 1 then you multiply the fraction by the maximum loan amount.

• However, if the layoffs occur from 2/15/20 – 4/26/20 and you rehire employees by 6/30/20, there will be no reduction in the amount eligible for loan forgiveness. The elimination of the reduction is determined on June 30.

• Exceptions: Borrower made a good-faith, written offer to rehire that was rejected, or the employee voluntarily resigned or requested and received a reduction of their hours.

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Reductions Due to Layoffs

Loan Forgiveness Process

• Borrowers will provide the Loan Forgiveness Application to their lenders. The lender will review within 60 days and send to the SBA, who has 90 days to review and reimburse the lender.

• The magic word is documentation.

• It is not clear whether the audit will occur during the forgiveness examination or after the fact.

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Process

• 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) for the periods that overlap with the 8 week period

• Payroll tax filings 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 included in the forgiveness amount

Documentation Required for the Loan Forgiveness Application - Payroll

• Documentation showing (at the election of the Borrower):• the average number of FTE employees on payroll per month employed by the

Borrower between February 15, 2019 and June 30, 2019;• the average number of FTE employees on payroll per month employed by the

Borrower between January 1, 2020 and February 29, 2020; or• in the case of a seasonal employer, the average number of FTE employees on payroll

per month employed by the Borrower between February 15, 2019 and June 30, 2019; between January 1, 2020 and February 29, 2020; or any consecutive twelve-week period between May 1, 2019 and September 15, 2019.

• Documents may include payroll tax filings 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. Documents submitted may cover periods longer than the specific time period.

Documentation Required for the Loan Forgiveness Application - FTE

• Business mortgage interest payments: Copy of lender amortization schedule and receipts or cancelled checks verifying eligible payments from the Covered Period; or lender account statements from February 2020 and the months of the Covered Period through one month after the end of the Covered Period verifying interest amounts and eligible payments.

• Business rent or lease payments: Copy of current lease agreement and receipts or cancelled checks verifying eligible payments from the Covered Period; or lessor account statements from February 2020 and from the Covered Period through one month after the end of the Covered Period verifying eligible payments.

• Business utility payments: Copy of invoices from February 2020 and those paid during the Covered Period and receipts, cancelled checks, or account statements verifying those eligible payments.

Documentation Required for the Loan Forgiveness Application - Nonpayroll

Compliance

The following documents must be retained for 6 years after the date on which the loan is forgiven or repaid in full:• All documentation submitted with the loan forgiveness application;• Loan application and any documentation submitted with it;• Documentation supporting economic need and eligibility for the loan;• Documentation demonstrating compliance with PPP requirements; • Documentation supporting the listing of employees on the loan forgiveness

application;• Documentation regarding any employee job offers and refusal, firings for cause,

voluntary resignations, and written requests by an employee for reduction in work schedule; and

• Documentation related to the FTE safe harbor.

Documentation Retention Requirements

• 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.

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Certifications – Compliance with Forgiveness Terms

• I understand that if the funds were knowingly used for unauthorized purposes, the federal government may pursue recovery of loan amounts and/or civil or criminal fraud charges.

• Remember you can only use the funds for payroll costs, rent, utilities and mortgage interest payments.

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Certifications – Misuse of Funds

• The Borrower has accurately verified the payments for the eligible payroll and nonpayroll costs for which the Borrower is requesting forgiveness.

• The information provided in this application and the information provided in all supporting documents and forms is true and correct in all material respects. I understand that knowingly making a false statement to obtain forgiveness of an SBA-guaranteed loan is punishable under the law, including 18 USC 1001 and 3571 by imprisonment of not more than five years and/or a fine of up to $250,000; under 15 USC 645 by imprisonment of not more than two years and/or a fine of not more than $5,000; and, if submitted to a Federally insured institution, under 18 USC 1014 by imprisonment of not more than thirty years and/or a fine of not more than $1,000,000.

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Certifications – Accuracy

• I have submitted to the Lender the 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.

• The tax documents I have submitted to the Lender are consistent with those the Borrower has submitted/will submit to the IRS and/or state tax or workforce agency. I also understand, acknowledge, and agree that the Lender can 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.

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Certifications – Documentation

• The SBA has said that it will audit all borrowers with loans of over $2 million

• A recent FAQ and the loan forgiveness application seem to imply that they will also audit borrowers who, together with their affiliates, have loans of over $2 million.

Audits

Use of Leftover Funds

• If you have loan proceeds that were not forgiven, you can:• Return the funds; or • Keep the funds as a loan

• Loan terms:• 1% interest with 6 months deferred payment • 2 year term beginning on origination

•The funds are still subject to the use restrictions

How to use leftover funds

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Polsinelli COVID-19 Resources

Contact

For COVID-19 legal advice across a spectrum of

issues impacting an array of industries and legal

areas, our team is available and connected

nationally and in the communities in which you

operate.

Contact us with questions at:

COVID19CrossDeptResponseTeam@Polsinelli.com

Polsinelli’s cross-disciplinary COVID-19 blog

provides companies tools and information needed

to effectively and lawfully protect their employees

and business.

Visit our blog:

https://www.covid19.polsinelli.com/

Blog + Resources

29

Questions