What Business Can Expect When It Comes to PPP Loan Forgiveness

The Coronavirus Aid, Relief, and Economic Relief (“CARES”) Act was passed on March 25, 2020 in order to provide, amongst other things, much needed and immediate assistance to businesses impacted by the COVID-19 pandemic. Under the CARES Act, the Small Business Administration (“SBA”) is authorized to temporarily guarantee loans under a new SBA (7(a) loan program, otherwise known as the Paycheck Protection Program (“PPP”).

If used correctly and in accordance with the CARES Act guidelines, these PPP loans are potentially eligible for complete and tax-free forgiveness. PPP loan amounts are forgivable to the extent that such funds are used to pay forgivable expenses as delineated in the CARES Act (“Qualified Expenses”) within eight weeks after the PPP loan is disbursed (“Expenditure Period”). Any of the PPP loan funds that are not used on Qualified Expenses during the Expenditure Period must be paid back within two years.

Please note that the CARES Act provides that PPP funds will be forgiven on a covered loan in an amount equal to the sum of the payroll costs incurred and payments made during the Expenditure Period. At this time it is not known whether the costs and payments eligible for forgiveness include funds paid during the Expenditure Period or funds that were both paid and incurred during the Expenditure Period. Accordingly, until the SBA provides more definitive guidance on this, borrowers should only use PPP funds for the payment of expenses incurred and paid during the Expenditure Period.

 Now that the $349 billion in funds from the initial round of the PPP have been exhausted, and businesses await the second round of PPP funding (approximately $310 billion), what can PPP borrowers expect to be forgiven as Qualified Expenses?

Here are some of the most common questions, and our answers, regarding the PPP loans:

1) Rent Payments

a. Any rent payments under a lease that is in effect before February 15, 2020 will qualify as a Qualified Expense.

b.  There is currently no guidance whether rent prepayments, past-due rent payments or late fees under a lease are Qualified Expenses.

2)   Utilities

a.   Utility payments are Qualified Expenses and include electricity, gas, and water.

b.  Internet, telephone and transportation utilities are also most likely covered as Qualified Expenses, however, further SBA guidance is needed on these items in order to know for sure.

3)   Mortgage Payments

a.   Principal payments or prepayments are not Qualified Expenses.

b.  Any mortgage interest incurred on or before February 15, 2020 is a Qualified Expense.

4)   How Much of the PPP Funds Need to be Spent on Payroll?

a.   At least 75% of the PPP funds need to be spent on payroll costs.

b.  Payroll costs include the following: (a) salaries, commission, wages or other similar compensation up to an annualized amount of $100,000 per employee; (b) tips; (c) paid vacation, sick, medical and family leave; (d) severance pay; (e) group health insurance expenses; (f) state or local payroll tax; or (g) retirement benefits.

c.   Payroll costs do not include the following: (a) payments for emergency paid sick leave or expanded family and medical leaves; or (b) federal pay roll tax expenses.

5)   Are Employee Bonuses and Raises Included as Qualified Expenses?

a.   It is not entirely clear whether raises or bonuses paid to employees will be considered Qualified Expenses. Any borrower using PPP funds to pay employees bonuses or raises should only do so as the borrower would otherwise do in the ordinary course of its business. Additionally, it is important to keep in mind the $100,000 compensation threshold when giving bonuses and raises.

6)   Are Compensation Payments to Shareholders, Members or Other Owners of Borrowers Covered as Qualified Expenses?

a.   Distributions to shareholders, members or other owners of borrowers that are not payments for work performed by such         shareholders, members or other owners would not be considered a Qualified Expense.

b.  Payments to shareholders, members or other owners who perform work for the borrower may be included in payroll costs as a Qualified Expense.

7)   What Will Reduce PPP Loan Forgiveness Amount?

a.   The PPP loan forgiveness amount will be reduced by (a) the reduction in the borrower’s average number of full-time equivalent employees (“Employees”), and (b) reduction in Employees’ salaries.

b.  The PPP will compare the borrower’s average number of Employees during the Expenditure Period against the number of Employees during borrower’s choice of either the period from (i) February 15, 2019 until June 30, 2019; or (ii) January 1, 2020 until February 29, 2020. If there is a decrease in the number of borrower’s Employee’s during the Expenditure Period compared to the applicable base period, the PPP loan forgiveness amount will be reduced in proportion to such decrease.

c.   The PPP loan forgiveness amount will be reduced dollar for dollar for a reduction of more than 25% in the total compensation of any employee during the Expenditure Period as compared to the most recent quarter that the employee was employed prior to the Expenditure Period. Please note that this will not apply to employees who made more than $100,000 in 2019.

8)   Can Rehiring Employees Eliminate Loan Forgiveness Reduction Amounts?

a.   Yes. If a borrower’s reduction in Employees occurred between February 15, 2020 and April 26, 2020 and the borrower eliminates that reduction in Employees by June 30, 2020 (either by rehiring Employees or hiring new Employees), then the Employee reduction will not be used in determining the loan forgiveness amount.

9)   Can I Restore an Employee’s Salary to Eliminate Loan Forgiveness Reduction Amounts?

a.   Yes. If an employee’s total compensation is reduced more than 25% but such employee’s salary reduction is eliminated by June 30, 2020, then the salary reduction will not be used in determining the loan forgiveness amount.

While we await further guidance from the SBA on what will and will not be forgiven under the PPP loans, it is important to be aware of what you are using your PPP loan funds for and why. As the PPP loan forgiveness rules can be complex and vague, it is important to consult with informed attorneys, financial advisors, bankers and accountants on how best to proceed. Our team is keeping up to date on these on-going developments and will be sure to advise you accordingly. Should you have any questions, don’t hesitate to call or email us.