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SBA and Treasury Provide PPP Loan Forgiveness Applications

July 16, 2020
Hinshaw Alert

Last month, the U.S. Treasury and the Small Business Administration (SBA) released two Paycheck Protection Program (PPP) loan forgiveness applications. The first was a new EZ PPP loan forgiveness application with instructions (short-form application). The second was an updated version of the previously released PPP loan forgiveness application with revised instructions (long-form application).

The short-form application, SBA Form 3508EZ, may be used if a borrower meets at least one of the three criteria below.

(1) The borrower is a self-employed individual, independent contractor, or sole proprietor who had no employees at the time of the PPP loan application and did not include any employee salaries in the computation of average monthly payroll in the loan application.

OR

(2) The borrower did not reduce annual salary or hourly wages of any employee by more than 25% during the Covered Period or the Alternative Payroll Covered Period compared to the period between January 1, 2020 and March 31, 2020. AND the borrower did not reduce the number of employees or the average paid hours of employees between January 1, 2020 and the end of the Covered Period OR the borrower (a) was unable to rehire employees or hire similarly qualified employees, or (b) reduced hours of employees and the borrower offered to restore and the employee refused.

OR

(3) The borrower did not reduce annual salary or hourly wages of any employee by more than 25% during the Covered Period compared to the period between January 1, 2020 and March 31, 2020. AND the borrower was unable to operate during the Covered Period at the same level of business activity as before February 15, 2020, due to compliance with COVID-19 guidance or safety standards issued between March 1, 2020 and December 31, 2020.

The short-form application is streamlined, relying to a large extent on certifications of the borrower and lightened documentation submission requirements. A borrower will submit documentation verifying payroll and benefit costs as well as non-payroll costs, but a borrower is not required to submit documentation substantiating the number of full-time employees (FTEs). Documentation substantiating the various certifications—including certifications regarding the number of FTEs—must be retained by the borrower (See, Documentation).

Costs Eligible for Forgiveness

As we explain below, both applications provide that borrowers are eligible for loan forgiveness for payroll and nonpayroll costs.

Eligible Payroll Costs

Borrowers are generally eligible for forgiveness for the payroll costs paid and payroll costs incurred during the 24-week or 8-week Covered Period (or Alternative Payroll Covered Period).

Eligible Nonpayroll Costs

Nonpayroll costs eligible for forgiveness consist of:

An eligible nonpayroll cost must be paid during the Covered Period—or 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.

Eligible nonpayroll costs cannot exceed 40% of the total forgiveness amount. Nonpayroll costs that were both paid and incurred should only be counted once.

FTE Tests

The long-form application provides three tests designed to eliminate the need to reduce a portion of the loan to be forgiven due to reductions in FTEs.

FTE Reduction Exceptions

The following are not counted as FTE reductions:

In these cases, FTE reductions do not reduce the borrower's loan forgiveness.

Operational Issues: The borrower is exempt from the reduction in loan forgiveness based on a reduction in FTE employees if the borrower, in good faith, is able to document that it was unable to operate between February 15, 2020, and the end of the Covered Period at the same level of business activity as before February 15, 2020, due to compliance with requirements established or guidance issued between March 1, 2020 and December 31, 2020, by the Secretary of Health and Human Services, the Director of the Centers for Disease Control and Prevention, or the Occupational Safety and Health Administration, related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID-19.

Restoration of FTEs: The borrower is exempt from the reduction in loan forgiveness based on a reduction in FTE employees described above if both of the following conditions are met: (a) the borrower reduced its FTE employee levels in the period beginning February 15, 2020, and ending April 26, 2020; and (b) the borrower then restored its FTE employee levels by not later than December 31, 2020 to its FTE employee levels in the borrower's pay period that included February 15, 2020.

Forgiveness Amount

The short-term application (3508EZ) provides that a borrower may receive forgiveness for the lesser of the following:

The long-term application (3508) provides that a borrower may receive forgiveness for the lesser of the following:

The Modified Total is calculated by (a) adding the sum of the permitted payroll and non-payroll costs, (b) subtracting the amount of the reduction required by the wage forgiveness reduction test, (c) multiplying the difference by the average number of FTEs during the Alternative Payroll Covered Period as determined in the employee forgiveness reduction test, and (d) dividing the product by average number of FTEs during the chosen Reference Period.

Certifications

The applications contain eight certifications a borrower must make. These should be reviewed carefully.

One of the certifications requires the borrower to acknowledge that if the PPP proceeds were used for unauthorized purposes, the federal government may pursue recovery of the amounts and/or civil or criminal fraud charges. A second states that "knowingly making a false statement to obtain forgiveness" is punishable by various criminal statutes. In another, the borrower agrees to provide any documents requested by the SBA related to its loan or forgiveness application.

Documentation

Each application form contains a list of the documents that must be submitted by the borrower along with the application. In addition, each application provides a list of records that need to be maintained by the borrower.

Borrowers must retain all records relating to a PPP loan—including documentation submitted with its PPP loan application, documentation supporting the borrower's certifications as to the necessity of the loan request and its eligibility for a PPP loan, documentation necessary to support the borrower's loan forgiveness application, and documentation demonstrating the borrower's material compliance with PPP requirements—for six years after the date the loan is forgiven or repaid in full. Additionally, borrowers must permit authorized representatives of the SBA, including representatives of its Office of Inspector General, to access such files upon request.

Submission of Forgiveness Application to a Lender

When a borrower submits the long-form application (SBA Form 3508 or lender's equivalent form), the lender must confirm:

When the borrower submits the short-form application (SBA Form 3508EZ or lender's equivalent form), the lender must confirm:

Regardless of which application is submitted, a borrower is responsible for providing an accurate calculation of the loan forgiveness amount. The borrower must attest to the accuracy of its reported information and calculations on the loan forgiveness application.