Paycheck Protection Program: SBA Issues Interim Final Rules on Loan Forgiveness

Late Friday night, the Treasury and the Small Business Administration (SBA) issued 26 pages of new guidance on the Paycheck Protection Program (PPP) forgiveness rules that were issued on May 22. These new Interim Final Rules build upon what we learned from the Loan Forgiveness Application and Instructions, which resulted in several questions, and now helps to clarify.

Below, we’ve highlighted the key clarifications.

Loan Forgiveness Process

Once the borrower provides the SBA application to the lender, the lender will have 60 days to review the application and make a determination on forgiveness. The lender provides a request for payment from the SBA, and the SBA must remit the forgiven amounts (including interest accrued) to the lender within 90 days of the lender issuing decision to the SBA. This means if someone applies in early July, then they must have their answer before year-end.

This does create an unusual situation, as there will be many that may apply after July since the rules don’t specify a need to apply earlier, which means those applicants may not receive a decision before year-end.

We anticipate the FASB will address the issue of subsequent forgiveness and we’ll be watching for it. To avoid this issue, it may be advisable to get forgiveness applications submitted as soon as possible after BOTH the 8-week period and the next invoicing period for forgivable costs (see below.)

The SBA can review any loan forgiveness application and if it determines that any borrower was ineligible for the PPP loan, the loan will not be eligible for forgiveness. The lender is responsible for notifying the borrower of the forgiveness amount.

Payroll

The Interim Final Rules reiterate that borrowers will be eligible for forgiveness in an amount equal to “costs incurred and payments made during the covered period.” These “costs and payments” include payroll costs, interest on mortgage obligations, rent and utilities.

Payroll costs include “salary, wages, commissions, or similar compensation, cash tips or the equivalent (based on employer records of past tips, or, in the absence of such records, a reasonable, good-faith employee estimate of such tips), payment for vacation, parental, family, medical, or sick leave, allowances for separation or dismissal, payments for group health care coverage, including insurance premiums, and retirement, as well as payment of state and local taxes assessed on the compensation of employees.”

Both payroll and nonpayroll costs can be calculated using what is paid during an 8-week period, plus what is incurred during the period but paid on or before the next regular billing date – even if the billing date is after the covered period. This provides a potentially significant opportunity for companies to increase their forgiveness amounts.

The provisions for inclusion of accrued payroll and non-payroll costs that are incurred during the covered period but paid in the next billing period opens a door for additional costs beyond what is paid during the 8-week period. And since there is no current provision excluding costs incurred during the period prior to the 8 weeks but paid within the 8 weeks, that basically provides for cost inclusion of more than 8 weeks.

We recommend that clients should immediately schedule out the payrolls they expect to be in the covered period, or alternative covered period, and review to ensure alignment with the actual amounts that can be paid to maximize forgiveness. Your BMF Advisor can assist with that review.

Interest, Rent and Utility Payments

The Interim Final Rules indicate that the total costs for interest, rent and utility payments “cannot exceed 25% of the loan forgiveness amount.” This is another way of saying that 75% of the total forgiveness must be based upon expenses paid for payroll, including health insurance and retirement contributions.

The rule, like the PPP loan application process, defines interest as “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).” Based on our interpretation, the interest expense for equipment and other personal property type loans that are specifically secured by the personal property is allowable. This potentially opens an opportunity for inclusion of interest beyond mortgage interest (subject to the 25% of total forgiveness calculation). Note: we are awaiting further guidance on whether lines of credit with a blanket lien, but right now the interpretations we are seeing would not anticipate these would be included.

Employees

There is a lot of detail in the interim final regulations that better define and provide examples of full-time employee (FTE) calculations and the impact of reductions in FTEs, or in reductions of salary amounts beyond the 25% allowed in the CARES Act. The information is consistent with the information we issued last week on the loan forgiveness application and instructions.

The total amounts that would otherwise be forgiven for the above payroll costs and costs for rent, interest and utilities will be further reduced if there are reductions in the number of employees considered to be employed during the eight-week period, and by certain reductions of compensation as to one or more particular employees.

The Interim Final Rules go into significant detail with respect to the timing of payroll costs and how the new Alternative Payroll Covered Period (introduced in the Loan Forgiveness Application and Instructions) will work. These new rules allow borrowers to use their normal payroll period of one week or two weeks to calculate costs.

Tips

Employers who have employees that receive tips will have the loan forgiven for tips provided during the “covered period,” even though these come from customers, and not the employer.

SBA Loan Review

The SBA has also published their loan review procedures, which are designed to reduce compliance burdens and simplify the process for borrowers. Below are key aspects of that interim final rule:

• The 19-page document sets forth procedures the SBA will use in reviewing PPP loans.
• They may review any PPP loan, not just those in excess of $2M; however, prior Q&As issued by SBA make it clear that the larger loans will be their main focus, at least initially.
• SBA may review loans anytime at their discretion. Borrowers are required to maintain documentation for six years after the loan is forgiven or repaid in full. This is important because SBA can go back and review loans years after – not just within the 90-days after submissions under the program – and can require repayment if it is later determined that the borrower was not eligible.
• If SBA determines a borrower was ineligible for the PPP loan, forgiveness will not be granted but the borrower will have the ability to appeal this determination by the SBA. SBA will issue regulations addressing the appeal process.
• Lenders are required to perform a “good faith review” of the application for forgiveness and all associated documentation. This places a significant burden on the lenders both for review of the documentation as well as having to approve, deny or partially deny forgiveness.
• Lenders will not receive a fee from SBA for their loans if it is determined that the borrower was not eligible for participation in the PPP loan program. SBA can claw back fees if they review and determine ineligibility within one year after the loan was disbursed.

Looking Forward

While this new guidance has provided some clarification, it didn’t address the two parts of PPP that have generated the most concern with those that have received funding: the eight-week period during which PPP funds must be spent to qualify for forgiveness, and the rule requiring PPP borrowers to spend at least 75% of the funds on payroll costs to qualify for full loan forgiveness. Those two issues are the focus of multiple bills being considered in Congress.

The Senate could vote as early as this week on a bill that would double the loan forgiveness period to 16 weeks. The House is expected to vote this week on standalone legislation that would extend the loan forgiveness period to as long as 24 weeks and also eliminate the rule requiring PPP borrowers to spend at least 75% of the funds on payroll costs to qualify for full loan forgiveness. A separate Senate bill would also expand the loan forgiveness period to 24 weeks and eliminate the 75% rule.

We are actively monitoring this progress and will keep you informed on its continued movement. Our BMF Advisors stand ready to help with questions on PPP loans or other answers you need to keep your business moving forward. Contact us if you or your business need:

• Guidance on documenting the necessity of the PPP loan and the ultimate forgiveness.
• Assistance with the calculation of the amount of PPP loan forgiveness.
• Assistance with projecting the usage of funds in accordance with the PPP program over the eight-week measurement period.
• Guidance on the completion of the PPP loan forgiveness application.

Visit our COVID-19 Resource Center for additional information and resources for you and your business.