Treasury, SBA Update PPP Loan Forgiveness Guidance

The U.S. Treasury Department and Small Business Administration released new guidance May 22 for Paycheck Protection Program borrowers and lenders.

The Interim Final Rule on Loan Forgiveness provides some clarification and guidance to “help borrowers prepare and submit loan forgiveness applications [and] help PPP lenders who will be making loan forgiveness decisions.”

The agencies said the rule provides more certainty on loan forgiveness and other requirements and more clarity on which payroll and nonpayroll costs are eligible for forgiveness so that “borrowers will be able to take immediate steps to maximize their loan forgiveness amounts.”

The rule generally restated that borrowers are eligible for loan forgiveness if loans are used for the following: 

1. Payroll costs (generally consisting of cash and non-cash compensation to employees); 
2. Interest payments on any business mortgage obligation on real or personal property that was incurred before February 15, 2020 (but not any prepayment or payment of principal); 
3. Payments on business rent obligations on real or personal property under a lease agreement in force before February 15, 2020;
4. Business utility payments for the distribution of electricity, gas, water, transportation, telephone, or internet access for which service began before February 15, 2020. 

Forgiveness Application

The rule also solidifies guidance provided in the PPP loan forgiveness application that was released in mid-May.

Importantly, it provides more clarity on important issues regarding the eligibility of payroll costs on loan forgiveness including:

• When payroll costs must be incurred and/or paid to be eligible for forgiveness. 
• Options for borrowers to calculate payroll costs using an “alternative payroll covered period” that aligns with an employer’s regular payroll cycles. 

Eligible Payroll Costs

Notably, the rule states explicitly that salary, wages, and commission payments to furloughed employees as well as bonuses and hazard pay during the covered period are eligible for loan forgiveness as long as they do not exceed an annual salary of $100,000, as prorated for the covered period.

The rule states this is “consistent with the text of the [CARES Act] and advances the paycheck protection purposes by enabling borrowers to continue to pay their employees even if those employees are not able to perform their day-to-day duties, whether due to lack of economic demand or public health considerations.”

Similarly, the rule states that “the employee’s hazard pay and bonuses are eligible for loan forgiveness.”

The rule also covered caps on the amount of loan forgiveness available for owner-employees and self-employed individuals payroll compensation. 

Nonpayroll Expenses

It provides some flexibility with regard to nonpayroll expenses if paid or incurred during the covered period and paid on or before the next regular billing date, even the billing date is after the covered period. 

SBA and Treasury also restated the regulatory exemption to reduction to forgiveness rules to borrowers who have offered to rehire employees or restore employee hours in cases where employees have not accepted.

Further, the rule provides additional explanation into how the reductions to loan forgiveness formulas based on reductions in full-time equivalent employees and employee salary and wages work and provides for a de minimis exemption for a reduction in employees due to termination for cause or voluntary resignation. 

Additionally, it states that documentation requirements for loan forgiveness are limited to what is listed in the PPP loan forgiveness application. 

Forgiveness Process

To receive loan forgiveness, borrowers must complete and submit the forgiveness application to their lenders.

The lender then has 60 days to issue a decision to SBA on whether the borrower is entitled to forgiveness for some or all of the loan.

SBA then has 90 days to remit the forgiveness amount to the lender. If applicable, SBA will deduct Economic Injury Disaster Loan advances from the forgiveness amount as required.

In the case of partial forgiveness, or if forgiveness is entirely denied, any remaining balance on the loan must be repaid by the borrower at 1% interest on or before the two-year maturity of the loan. 

The SBA continues to accept PPP loan applications through approved lenders.

As of May 23, 73,950 loans totaling $10.75 billion have been made to Connecticut small businesses.

 For more information, contact CBIA’s Brian Corvo (860.244.1169).