Loan Forgiveness for Paycheck Protection Program Loans
by Mandy Hicks
(April 7, 2020) – Small businesses receiving funding under the Paycheck Protection Program created by the CARES Act will be eligible to apply for loan forgiveness for up to the full amount of the loan received if borrowers use the funds for authorized purposes during the 8-week period following the loan date. Because loan forgiveness is dependent on borrowers’ use of the funds, borrowers should carefully document all expenditures of loan proceeds.
SBA has stated it will issue additional guidance on loan forgiveness. A summary of the key components of loan forgiveness under current guidance follows:
1. How much of the loan will be forgiven?
- The maximum amount of loan forgiveness can be the full principal amount of the loan and any accrued interest. If the borrower uses all loan proceeds for forgivable purposes, as explained herein, and maintains employee and compensation levels, the borrower will not be responsible for any loan payment. Full and partial loan forgiveness will be determined based on borrower’s use of the funds.
2. What can loan proceeds be used on to maintain eligibility for loan forgiveness?
- Over the 8-week period following the loan date, the borrower may use loan proceeds for:
- A. Payroll costs, which SBA defines as follows:
- i. Compensation to employees (whose principal place of residence is the United States) in the form of salary, wages, commissions, or similar compensation;
- ii. Cash tips or the equivalent (based on employer records of past tips or, in the absence of such records, a reasonable, good-faith employer estimate of such tips);
- iii. Payment for vacation, parental, family, medical, or sick leave;
- iv. Allowance for separation or dismissal;
- v. Payment for the provision of employee benefits consisting of group health care coverage, including insurance premiums, and retirement;
- vi. Payment of state and local taxes assessed on compensation of employees; and
- vii. For an independent contractor or sole proprietor, wage, commissions, income, or net earnings from self-employment or similar compensation.
- B. Rent payments on leases dated before February 15, 2020;
- C. Utility payments under service agreements dated before February 15, 2020;
- D. Interest payments on any other debt obligations that were incurred before February 15, 2020; and/or
- E. Refinancing an SBA Economic Injury Disaster-Assistance loan (“EIDL loan”) made between January 31, 2020, and April 3, 2020.
- i. Note: If borrower received an EIDL loan from January 31, 2020, through April 3, 2020, borrower can apply for a PPP loan. If the EIDL loan was not used for payroll costs, it does not affect borrower’s eligibility for a PPP loan. If borrower’s EIDL loan was used for payroll costs, the PPP loan must be used to refinance the EIDL loan. Proceeds from any advance up to $10,000 on the EIDL loan will be deducted from the loan forgiveness amount on the PPP loan.
- A. Payroll costs, which SBA defines as follows:
- While all of these costs are authorized uses of PPP loan funds, SBA has ruled that not more than 25 percent of the loan forgiveness amount may be attributable to non-payroll costs.
3. What is expressly excluded from SBA’s definition of payroll costs?
- A. Any compensation of an employee whose principal place of residence is outside of the United States;
- B. The compensation of an individual employee in excess of an annual salary of $100,000, prorated as necessary;
- C. Federal employment taxes imposed or withheld between February 15, 2020 and June 30, 2020, including the employee’s and employer’s share of FICA (Federal Insurance Contributions Act) and Railroad Retirement Act taxes, and income taxes required to be withheld from employees;
- D. Qualified sick and family leave wages for which a credit is allowed under sections 7001 and 7003 of the Families First Coronavirus Response Act (Public Law 116–127); and
- E. Payment to independent contractors by a business.
4. What employment levels do borrowers need to maintain for loan forgiveness?
- The loan forgiveness will be reduced if borrower decreases its full-time employee headcount, and does not reach pre-employment levels by June 30, 2020.
- If borrower reduces full time equivalent employees between February 15, 2020 and April 26, 2020, the forgiveness will be reduced by the numeric average of monthly full time equivalent employees for the eight (8) weeks following the making of the loan divided by the average number of full-time employees during either the period of: (i) February 15, 2019–June 30, 2019, or (ii) January 1, 2020–February 29, 2020, as selected by the borrower, with seasonal employers being required to use the first-listed period.
- Borrowers have until June 30, 2020, to restore full-time employment levels for any changes made between February 15, 2020 and April 26, 2020.
- For maximum loan forgiveness, borrowers must expend 75 percent of loan proceeds on payroll costs during the 8-week period following disbursement. For borrowers who have suffered employee layoffs, they should review payroll schedules prior to the anticipated loan disbursement date and plan to rehire employees early in the period to ensure the anticipated payroll costs fall within the 8-week forgiveness period.
5. What salary or wage levels do borrowers need to maintain for loan forgiveness?
- If borrowers reduce salary or wage levels for any employee that did not make in excess of $100,000 by more than 25 percent from the most recent quarter they were employed before the loan was originated, loan forgiveness will be reduced. This may result in a dollar-for-dollar forgiveness reduction.
- For cuts in employee salaries, the amount of loan forgiveness is reduced by the amount of decrease in total salary or wages of any employee during the eight-week loan forgiveness period, to the extent in excess of 25 percent of the total salary or wages of the employee during the most recent quarter before the 8-week period.
- Borrowers have until June 30, 2020, to restore salary and wage levels for any changes made between February 15, 2020 and April 26, 2020.
6. How will loan forgiveness be determined?
- The borrower will have to document its use of the proceeds in order to determine the amount of forgiveness, and provide documentation to the lender who serviced the loan that verifies the number of full-time equivalent employees and pay rates, as well as the payments on eligible mortgage, lease, debt and utility obligations. The lender will have 60 days to verify and process the borrower’s application for loan forgiveness. Loan forgiveness applications have not yet been released.
7. What if borrowers do not use all loan proceeds within the 8-week period following the loan?
- Remaining proceeds may still be used only for authorized uses; however, the remaining funds will not be eligible for loan forgiveness and will be repaid pursuant to the initial loan terms. The loans have an interest rate of 1 percent and a maturity date of 2 years from the loan origination date.
- Borrowers will not have to make any payments for six months following the date of disbursement of the loan; however, interest will continue to accrue during this six-month deferment. There are no pre-payment penalties for the loan.
ELPO Law will continue to monitor the issues affecting businesses and individuals related to the COVID-19 pandemic. For questions, contact English, Lucas, Priest & Owsley, LLP at 270-781-6500.