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First came enactment, then applications, disbursement, and now the Paycheck Protection Program (PPP) will soon enter its next phase: forgiveness. Forgiveness was a policy cornerstone of the PPP program, but it has been made difficult by the rapidly evolving guidance issued by the Small Business Administration (SBA) and Department of Treasury.  For this reason, it is critical that borrowers make good faith efforts to comply with the changing regulatory environment as they navigate the sustained economic downturn caused by COVID-19.

Being Earnest

For businesses that obtained PPP loans, a good faith belief in the need for the loans is a necessary condition to avail themselves of PPP loan forgiveness. If a business owner is having second thoughts about their actual need, they should assess their position, consider the economic outlook and potential future losses, and if need be, communicate with their lender to the extent that they believe their “need” might have been unfounded. Although the safe harbor deadline to return funds without penalty has expired, that deadline may be extended, and the mere existence of this policy shows an understanding that the initial rollout of the program was unclear enough for participants to make good faith mistakes.  

What’s Important

Let’s assume a business owner has a good faith belief in their need for the loan, the next question is how to deploy the funds to obtain the maximum return on the forgivable portion. Regardless of the amount that was borrowed, at least 75% of the total must be used for qualifying payroll costs; [1] the rest (up to 25%) can be used for qualifying non-payroll costs, which include mortgage interest, rents, and utilities. [2]  This usage requirement applies to qualifying costs over the life of the loan.

Loan forgiveness is based on the use of funds during the 8-week period following the date of disbursement (Covered Period). [3] The amount spent on qualifying costs during the Covered Period is eligible for forgiveness, up to the entire principal amount of the PPP Loan (and possibly accrued interest –  the PPP Interim Final Rules and PPP Forgiveness application (Form 3508) seem to contradict each other regarding accrued interest). However, the important clarification is that PPP program allows for partial forgiveness: if a business owner’s payroll costs during the Covered Period do not meet 75% of the total PPP loan amount, whatever amount that was spent on qualifying payroll costs during the Covered Period are forgivable, as are qualifying non-payroll costs that do not exceed 25% of the amount forgiven.

Let’s take an example. ABC Corp borrows $100,000 in PPP loans. During the Covered Period, ABC spends $50,000 on qualifying payroll costs, $25,000 on qualifying non-payroll costs, and has $25,000 left over. The entire $50,000 spent on qualifying payroll costs is forgivable, but only $16,666.67 of the $25,000 spent on qualifying non-payroll costs is forgivable, because those costs cannot exceed 25% of the total forgivable amount. A simple way to calculate this for ABC Corp is to take all qualifying payroll costs during the Covered Period and divide it by 0.75. That amount equals the total that is forgivable, and then ABC Corp can simply apportion this first to their qualifying payroll costs, and the rest to their qualifying nonpayroll costs. In the above, $50,000 / 0.75 = $66,666.67 = total forgivable amount. Since $50,000 of the $66,666.67 are qualifying payroll costs, that leaves $16,666.67 ($66,666.67 – $50,000) eligible for qualifying nonpayroll costs. Whatever amounts that are not forgiven (here that quals $100,000 – $66,666.67 = $33,333.33) is subject to the standard terms and conditions of the debt. Each business must take into account their revenue projections, liquidity needs, and other relevant factors to decide whether to prepay that amount or keep the money until maturity.

On May 22, 2020, the SBA released Interim Final Rule on Loan Forgiveness, which provided much needed clarifications on the eligible costs and procedures for loan forgiveness.  For example, the SBA clarified that qualifying payroll costs may include payments to furloughed employees or non-furloughed employees that are nonetheless unable to perform their day-to-day duties. Loan forgiveness will also not be reduced if a borrower offered to rehire a previously terminated employee, but the employee declined the offer. There is plenty of additional guidance that may or may not apply to your business – the key is to work in good faith with your lender (and lawyer) and document your approach and methodologies. That’s the importance of being earnest.

*Legislative Note – as this article is published, the House of Representatives is considering changes to the PPP Program, including an extension of the 8-week coverage period for loan forgiveness, an extension of the total term of the loan itself, and reductions to the required percentage of PPP funds that must be used for qualifying payroll costs. These actions are likely to be supported by the Senate and President, who have signaled their willingness to extend deadlines for PPP money.

COVID-19 TASK FORCE

DLHA has formed a COVID-19 task force to help clients and local business communities navigate the broad scope of legal issues brought on by this public health challenge. DLHA’s COVID-19 task force has presented to several chambers of commerce in the San Francisco Bay Area, and monitors developments as they unfold. If you would like to stay informed, please reach out to our offices for updates, webinar information, or guidance on specific legal issues.

CONTACT:

If you have any questions or would like more information on the issues discussed above, please contact Kellen Stevens with D/L/H/A Law Group, a division of De La Housaye & Associates, A Law Corporation:

Kellen Stevens: Kellen@dlhalaw.com