8562 / What do small business clients need to know about obtaining loan forgiveness under the paycheck protection program?

PPP loan forgiveness was determined based on how the small business client spent the loan proceeds. Importantly, at least 60 percent of the loan must be used for payroll costs (reduced from 75 percent under the CARES Act by the Paycheck Protection Program Flexibility Act (PPPFA), passed in early June 2020).

Early on, the small business administration (SBA) released a form version of the loan forgiveness application. Every PPP lender could use its own version of the SBA form application. Generally, after the business owner completed the application for loan forgiveness, the lender had 60 days to decide whether the borrower qualified. The SBA then had an additional 90 days to provide funding for the lender.

The loan application also required employers to certify whether they received loans in excess of $2 million (also considering loans by affiliates). (Generally, if the loan amount was $2 million or less, the government presumed that it was made in good faith—i.e., that the borrower did not have a viable alternate liquidity source). The provisions in the Consolidated Appropriations Act of 2021 imposed a firm $2 million cap on the amount of any PPP loan.

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Planning Point: In a surprise move, the SBA began asking PPP lenders to issue loan necessity questionnaires to recipients of loans of at least $2 million. The questionnaires were detailed and request significant information. They were also issued without warning. It is expected that these information requests may be used in enforcement of PPP loan requirements or in determining eligibility for forgiveness. According to the SBA, the forms will be used to evaluate whether a recipient’s loan was made necessary by economic uncertainty. Information provided in the forms must be certified under threat of criminal action for false statements. The questions essentially asked borrowers to certify actual detrimental economic impact. Borrowers also had to provide information about local COVID-19 shutdown orders, other CARES Act aid, financial information and compensation to highly compensated owners and employees. Upon receipt, the borrower had only 10 days to complete the questionnaire and submit supporting documents.

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Employers were required to certify that loan amounts were used to cover eligible expenses and that the borrower has accurately confirmed payments made for both payroll costs and non-payroll costs.

The application itself contained a worksheet to help small business clients calculate their loan forgiveness amount, as well as any reductions necessary because the employer reduced its workforce or employee salaries. The document provided a cure provision for employers who impermissibly reduced workforce (and may have brought employees back to work) or salary levels. The employer provided documentation to show the payroll costs it paid out during the relevant period—whether in the form of bank records or reports from a third-party payroll service. IRS payroll tax filing forms (i.e., Form 941) and state quarterly wage reporting forms, as well as payment receipts, cancelled checks or other account statements showing contributions to employee retirement accounts or healthcare were also necessary.

Importantly, employers were required to document the number of full-time employees employed between February 15, 2019 and June 30, 2019, when compared to the same period in 2020. Two methods were available for counting FTEs: employers can elect to (1) assign “1” for every employee working at least 40 hours per week and “0.5” for all other employees, or (2) divide the average number of hours worked weekly by each employee by 40, rounding up to the nearest 10th (up to a maximum of “1” per employee).

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Planning Point: Determining eligibility for loan forgiveness was much more complex than expected. In response, the SBA released a streamlined application (Form 3508S) for business owners who borrowed $150,000 or less (previously, the threshold was set at $50,000). Borrowers of small loans were no longer required to reduce their loan forgiveness value if they reduced the salary or wages of an employee earning less than $100,000 during the covered period. Similarly, these borrowers were not required to reduce the amount forgiven if they reduced their number of full-time equivalent employees during the covered period.

Small loan recipients were still required to calculate the amount of their forgiveness and retain applicable documentation—remembering that the SBA may ask to see supporting documents even if they are not required to be submitted with the application.

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For employers that used funds to pay costs such as rent or mortgage interest, copies of lender amortization schedules, account statements and/or lease agreements must be submitted with the application. Borrowers that qualified to use Form 3508S were required to complete a one-page certification that contains basic information about the loan and use of the proceeds, including:

the number of employees retained because of the loan,

the amount of the loan,

an estimate of how much of the loan was used for payroll costs,

documentation to prove the business experienced the required revenue loss, if not already provided to the lender.

Borrowers who were not eligible for the short form application were required to carefully document how the funds were spent. This documentation could include tax forms, bank statements, receipts, purchase orders, cancelled checks and other written documentation.

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Planning Point: All documentation to support the small business owner’s loan forgiveness eligibility should be maintained for at least six years after the date the loan was forgiven (or repaid).

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