On Friday, May 22, 2020, the Treasury Department released two Interim Rules that detail the Forgiveness Criteria for recipients of a Paycheck Protection Program (“PPP”) loan: the Interim Final Rule on Loan Forgiveness, and the Interim Final Rule on SBA Loan Review Procedures and Related Borrower and Lender Responsibilities.
The Interim Forgiveness & Audit Rules inform the instructions contained in the Forgiveness Application. As such, it is critical that PPP loan recipients that intend to request forgiveness fully understand the standards set forth in the Interim Forgiveness & Audit Rules:
- Interim Final Rule on Loan Forgiveness(the “First Interim Rule”); and
- Interim Final Rule on SBA Loan Review Procedures and Related Borrower and Lender Responsibilities(the “Second Interim Rule”).
The First Interim Rule covers the following:
THE PPP LOAN FORGIVENESS PROCESS: The First Interim Rule establishes the process by which PPP loan forgiveness is determined.
DEFINITION OF FORGIVABLE EXPENSES: The First Interim Rule instructs that a PPP Forgiveness Applicant may apply for forgiveness for loan amounts that are used for “payroll costs” that are paid or incurred during the eight-week period beginning on either:
- The date of disbursement of the loan proceeds from the lender or if the Forgiveness Applicant pays employee wages on a bi-weekly, or more frequent, payroll cycle, the first day of the first payroll cycle after the date of disbursement of the loan proceeds from the lender.
- The First Interim Rule also instructs that a PPP Forgiveness Applicant may apply for forgiveness for loan amounts that are used for “non-payroll costs” – certain rent, utility payments, and mortgage interest costs – that are paid or incurred during the Covered Period.
- The First Interim Rule appears to indicate that if a Forgiveness Applicant decides to use loan proceeds to pre-pay future but not-yet-incurred rent or utility payment obligations (or to pay past due rent or utility payments), those pre-payments (or catch-up payments) may be forgiven so long as such pre-payments (or catch-up payments) are “paid during” the loan forgiveness period.
The First Interim Rule does clarify, however, that “advance payments of interest on a covered mortgage obligation are not eligible for loan forgiveness” as a result of specific language in the CARES Act that expressly excludes mortgage interest “prepayments” from forgiveness.
THE FORGIVENESS DEDUCTION CALCULATION: The First Interim Rule confirms that the forgiveness rate for a specific PPP loan will be decreased if: (a) a Forgiveness Applicant reduces its number of full-time equivalent (“FTE”) employees during the Period (the “FTE Deduction”); or (b) with certain exceptions, the Forgiveness Applicant reduces employee wages during the Period (the “Wage Decline Deduction”).
The specific “Forgiveness Deduction” rules provided in the First Interim Rule are complex and numerous, and include broad concepts such as the FTE Deduction, reduction in employee headcount, wage decline and more.
REQUIRED DOCUMENTATION TO SUPPORT A FORGIVENESS APPLICATION: The First Interim Rule confirms that all documentation requirements for obtaining PPP loan forgiveness are identified in the Loan Forgiveness Application.
SMALL BUSINESS ADMINISTRATION AUDIT RULES: The Second Interim Rule confirms that the Small Business Administration (the “SBA”) has discretion to audit PPP Forgiveness Applicants, and clarifies that for “a loan of any size, SBA may undertake a review at any time in SBA’s discretion” of the following:
- Borrower Eligibility: Whether the Forgiveness Applicant meets the various PPP eligibility requirements, including affiliation requirements.
- Loan Amounts and Use of Proceeds: Whether the loan amount requested was consistent with PPP loan amount calculation standards.
- Loan Forgiveness Amounts: Whether forgiveness amounts claimed are consistent with applicable forgiveness standards.
- The Second Interim Rule clarifies that the SBA is reserving the right to audit any Forgiveness Applicant, irrespective of loan size.
- The Second Interim Rule further establishes the PPP audit procedures.
- Last, the Second Interim Rule establishes various audit outcomes.
WHAT’S NEXT? MORE CHANGES ON THE HORIZON.
On May 11, 2020, U.S. House of Representatives introduced legislation that proposes significant modifications to the PPP that are designed, in part, to relax and simplify PPP forgiveness.
The bill, titled the Paycheck Protection Flexibility Act, includes language that would:
- Extend the covered loan forgiveness period from eight-weeks to twenty-four weeks.
- Permit a greater percentage of non-payroll costs to be forgivable.
- Extend the repayment term for PPP loans from two years to a longer term.
- Ensure that PPP Forgiveness Applicants have full access to payroll tax deferments.
- Extend the Rehire and Wage Restoration Safe Harbors past June 30, 2020.