On Friday May 22, the Small Business Administration released two interim final rules related to forgiveness of loans issued under the Paycheck Protection Program of the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”).
The first set of new Interim Final Rules, SBA-2020-0032, builds upon the information provided in the Loan Forgiveness Application and Instructions released on May 15, and clarifies certain lingering questions that small businesses may have regarding the requirements for loan forgiveness. The second set of Interim Final Rules, SBA-2020-0033, outlines the SBA’s loan forgiveness procedures and certain related duties of borrowers and lenders.
Below are a few of the key takeaways from this new guidance:
SBA-2020-0032 – Requirements – Loan Forgiveness
The 26 pages of loan forgiveness guidance in SBA-2020-0032, together with the Loan Forgiveness Application and Instructions, provide clarity regarding the following loan forgiveness issues and calculations:
Establishment of “Alternative Payroll Covered Period”
It is well-established that, in general, a borrower must spend PPP funds during the eight-week covered period (56 days) following the date of the borrower’s loan disbursement in order to be eligible for loan forgiveness. But the Loan Forgiveness Application and Instructions and SBA-2020-0032 clarify that, when it comes to forgiveness of payroll costs, borrowers with bi-weekly (or more frequent) payroll cycles actually have two options for determining when that eight-week covered period may begin:
Election of the “Alternative Payroll Covered Period” allows borrowers with bi-weekly (or more frequent) payroll cycles to align their covered payroll costs with their payroll cycles to improve the efficiency of the loan forgiveness application process. The U.S. Department of Treasury provides the following example:
Notably, a borrower with a less frequent payroll cycle must elect the Covered Period, rather than the Alternative Payroll Covered Period, when filling out its Loan Forgiveness Application. It should also be noted that borrowers must continue to use the Covered Period for all nonpayroll costs.
Payroll Costs Eligible for Loan Forgiveness
Citing the breadth of the definition of “payroll costs” under the CARES Act, the Interim Final Rules clarify that the following costs are likewise eligible for forgiveness so long as they do not exceed an annualized amount of $100,000 per employee:
The rules likewise provide a cap on the amount of loan forgiveness available to owner-employees and self-employed individuals for their own payroll compensation. According to the Interim Final Rules, the amount of forgiveness requested can be no more than the lesser of 8/52 of 2019 compensation (i.e., approximately 15.83 percent of 2019 compensation) or $15,385 per individual in total across all businesses. No additional forgiveness is provided for retirement or health insurance contributions for self-employed individuals, including Schedule C filers and general partners.
Loan Forgiveness Calculations pertaining to maintenance of Employees, Salaries and Wages
The new guidance clarifies several issues regarding borrowers’ loan forgiveness calculations as it pertains to reductions of employees, salaries and wages:
Nonpayroll Costs Eligible for Loan Forgiveness
According to the Interim Final Rules, non-payroll costs consist of the following:
A nonpayroll cost is eligible for forgiveness if it was (i) paid during the Covered Period, or (ii) incurred during the Covered Period and paid on or before the next regular billing date, even if the billing date is after the Covered Period. The Loan Forgiveness Application Instructions further state that eligible nonpayroll costs cannot exceed 25% of the total forgiveness amount.
The Interim Final Rules specifically clarify, however, that advance payments of interest on mortgage obligation are not eligible for loan forgiveness under the CARES Act’s loan forgiveness provisions. Likewise, principal on mortgage obligations is not eligible for forgiveness under any circumstances.
SBA-2020-0033 – SBA Loan Review Procedures and Related Borrower and Lender Responsibilities
The second set of Interim Final Rules released on May 22, SBA-2020-0033, shed light on the process by which lenders and SBA will review loan forgiveness applications and the responsibilities of lenders and borrowers throughout this process. The most notable provisions are as follows:
General Process for Obtaining Loan Forgiveness
To obtain loan forgiveness under the PPP, a borrower must complete and submit the Loan Forgiveness Application (SBA Form 3508 or lender equivalent) to its lender. Once the borrower has submitted the required documentation, it is the lender’s job to review the application and make a decision regarding loan forgiveness. The lender must issue its decision to SBA within 60 days of the date it received the complete application.
If the lender determines that the borrower is entitled to forgiveness of some or all of the amount applied for, the lender must request payment from the SBA at the time the lender issues its decision to the SBA. The SBA will remit to the lender the appropriate forgiveness amount not later than 90 days after the lender issues its decision to the SBA. The lender is responsible for notifying the borrower of any forgiveness amount.
If the lender determines that only a portion of the loan may be forgiven, or if the forgiveness request is denied, any remaining balance due on the loan must be repaid by the borrower on or before the two-year maturity of the loan. If the lender determines that the borrower is not entitled to forgiveness in any amount, the lender must notify the borrower in writing and provide the SBA with the reason for its denial. Within 30 days of notice from the lender, a borrower may request that SBA review the lender’s decision to deny forgiveness of the loan. SBA reserves the right to review the lender’s decision in its sole discretion.
Calculation of the Loan Forgiveness Amount
It is the responsibility of the borrower to provide an accurate calculation of the loan forgiveness amount, and the borrower must attest to the accuracy of its calculation. Lenders are expected to perform a good-faith review of the borrower’s calculations and supporting documentation.
SBA’s review of Individual PPP Loans
The SBA may review any PPP loan that the Administrator deems appropriate. Specifically, the SBA is authorized to review (1) whether a borrower is eligible for the PPP loan based on the provisions of the CARES Act, the rules and guidance in place at the time of the borrower’s PPP loan application, and the terms of the borrower’s loan application; (2) whether a borrower calculated its loan amount correctly and used loan proceeds for the allowable uses; and (3) whether a borrower is entitled to loan forgiveness in the amount claimed on the borrower’s Loan Forgiveness Application. While the SBA may undertake such a review at any time in the SBA’s discretion, the SBA is not required to do this and may rely upon the borrower’s calculations and lender’s review.
If the SBA undertakes a review, the SBA will notify the lender in writing and the lender must notify the borrower in writing within five business days of receipt of the SBA’s notification. If the SBA notifies a lender that SBA has commenced a loan review, the lender may not approve any application for loan forgiveness for such loan until SBA notifies the lender in writing that the SBA has completed its review.
If the loan documentation submitted to SBA by the lender or any other information indicates that the borrower may be ineligible for the PPP loan, the loan amount, or loan forgiveness, the SBA will require the lender to contact the borrower in writing to request additional information. Thereafter, any information obtained by the lender will be provided to SBA. If the SBA ultimately determines in the course of its review that a borrower is ineligible for the PPP loan, the SBA will direct the lender to deny the loan forgiveness application. Similarly, if the SBA determines that the borrower miscalculated the loan amount or is not entitled to the amount of forgiveness claimed on the borrower’s Loan Forgiveness Application, the SBA will direct the lender to deny the loan forgiveness application in whole or in part.
Appeal of SBA Decisions regarding Loan Eligibility, Amount, or Forgiveness
A borrower may appeal the SBA’s determination regarding loan eligibility, loan amount, or the loan forgiveness amount claimed by the borrower. The SBA intends to issue a separate interim final rule addressing this process.
Borrower’s Retention of PPP Documentation
A borrower must retain its PPP documentation in its files for six years after the date the loan is forgiven or repaid in full and must permit authorized representatives of the SBA to access such files upon request.
Importantly, Interim Final Rules SBA-2020-0032 and SBA-2020-0033 come as Congress considers multiple bills that would allow for greater flexibility in the timing and use of funds loaned under the PPP. A bill currently in the Senate, for example, would double the loan forgiveness period to 16 weeks. The House is similarly expected to vote this week on legislation that would extend the loan forgiveness period as long as 24 weeks and eliminate the rules requiring borrowers to spend at least 75% of PPP funds on payroll costs in order to qualify for full forgiveness.
Taylor Porter attorneys continue to closely monitor the developments of the SBA loan programs and the CARES Act. Visit the Taylor Porter Coronavirus - Legal News and Business Resources website for updated legislation, news, and legal developments pertaining to COVID-19.
About Bob Barton: Taylor Porter Managing Partner Bob Barton, practicing law since 1994, represents local and national businesses in matters involving commercial litigation and transactions, regulatory and compliance matters, and general litigation. He is the co-chair of the firm's Business and Commercial Litigation practice. Bob has been selected for inclusion in both Louisiana Super Lawyers and Best Lawyers in Business Litigation.
About Ashley Carver Meredith: Taylor Porter Associate Ashley Carver Meredith practices in a wide array of areas including business law, commercial transactions, banking, commercial litigation, and health care compliance. Ashley earned her J.D. in 2014 from the Paul M. Hebert Law Center. Ashley graduated in 2011 from Louisiana State University, where she received her bachelor of arts in Mass Communication and minored in Political Science. She was also a member of LSU Honors College.
About Ryan Gonzales: Taylor Porter Associate Ryan Gonzales is a certified public accountant and a former tax associate of a national tax practice. Ryan assists clients with the tax implications of transactions, such as mergers, acquisitions, disposals, and restructurings, and he advises clients on tax planning and compliance at the federal, state and local levels with respect to various taxes including business and individual income tax, franchise tax, excise tax, ad valorem tax, sales and use tax, payroll tax, and transfer tax. Ryan previously served as a law clerk for the U.S. Senate Committee on Finance in Washington, DC.
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