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A Few Unanswered Questions About PPP Loan Forgiveness

As we reported in a previous article, on May 15, the SBA posted the form of application, with instructions, that borrowers must complete and submit to request forgiveness of all or a portion of their PPP loans based on their use of loan proceeds for eligible purposes.  Following that posting, on May 22, the SBA posted an Interim Final Rule providing some guidance with respect to the forgiveness application process.

The application instructions and rule answered many of the questions about forgiveness that have been raised based on the wording of the CARES Act and prior guidance.  Unfortunately, some questions remain unanswered. 

This article discusses some of those unanswered questions.

What must a borrower do to "eliminate" a reduction in FTEs or salary or wages by June 30? 

Under the CARES Act and the SBA's guidance, the amount of a PPP loan that may be forgiven will be reduced if, during the Covered Period or Alternative Payroll Covered Period, the borrower reduces FTEs, or reduces salary or wage rates by more than 25%, as compared to a specified earlier period.  However, the Act provides a "safe harbor" under which a borrower may avoid the forgiveness "haircut" if the borrower reduced its FTEs or salary/wage rates between February 15, 2020, and April 26, 2020, but then "eliminates" the reduction not later than June 30, 2020.  So, what is required in order to eliminate a reduction in FTEs or salary/wage rates?

Clearly, on or before June 30, FTEs and/or compensation rates have to be restored to the levels that existed on February 15.  However, is that all that is required?  Do the restored FTEs or salary/wage rates have to be maintained for any particular period of time before or after June 30?  Or, could a borrower restore them for one pay period during the Covered Period or Alternative Payroll Covered Period and then reduce them in the very next pay period? 

That's unclear from the guidance.  However, the sections of the forgiveness application that address the safe harbor call for a borrower to compare its FTEs and the salary/wage rate of each employee as of February 15 to their levels as of June 30.  As a result, though the current guidance does not say so, if FTEs or salary/wage rates are restored to their February 15 levels sometime during the Covered Period or Alternative Payroll Covered Period, it appears that they must be maintained at those levels at least through the payroll period that includes June 30.  We hope that further guidance will answer that question.

On the same subject, the section of the forgiveness application pertaining to the safe harbor for reductions in FTEs calls for a borrower to list its FTEs "in the Borrower's pay period inclusive of February 15, 2020," (in other words, for a pay period which could consist of a week, or two weeks or a month).  However, the application then calls for the borrower to enter its FTEs "as of June 30."  Since for other purposes, FTEs are computed for a pay period, or as an average over a period of time, does the application actually mean to enter a number of FTEs for a single day?  Or, similar to the February 15 number, are borrowers to enter their FTEs for the pay period that includes June 30?  The current guidance does not answer this question.

Can payroll costs incurred prior to loan disbursement be included in the forgiveness calculation?

Before approval of their PPP loans, some borrowers had planned or announced to employees a reduction in salary or wage rates for a pay period during which the PPP loan proceeds were disbursed.  Then, when the borrowers received their PPP funds before the payroll dates for that pay period, they paid employees in full at their regular salary/wage rates for that pay period.  It seems clear that borrowers may receive forgiveness for only eight weeks of payroll costs but, in the situation described above, may borrowers include payroll costs incurred before loan disbursement that were paid during their Covered Period following disbursement of loan proceeds?

The forgiveness application instructions provide that borrowers generally are eligible for forgiveness for "payroll costs paid and payroll costs incurred during the eight-week (56-day) Covered Period or Alternative Payroll Covered Period."  In addition, the May 22 Interim Final Rule states that "In general, payroll costs paid or incurred during the eight consecutive week (56 days) covered period are eligible for forgiveness."  That guidance implies that, in the situation above, the payment on the first payroll date following loan disbursement (covering, at least in part, days of employee services rendered prior to loan disbursement), could be included since the payment would be made during the Covered Period.  However, that's not clear from the SBA's guidance.  What does appear to be clear is that a borrower may only include eight consecutive weeks of payroll costs, whenever they begin.  We hope that further guidance will answer that question.

Borrowers should understand that, if they do include in their payroll costs payments made for days of employee services before their loan disbursement dates, they will be using an eight consecutive week period to measure payroll costs that will be different from their eight-week Covered Period or Alternative Payroll Covered Period that they must use to measure whether there is a reduction in FTEs or salary/wage rates that will reduce their loan forgiveness amounts.  If a borrower's PPP funds are spent as described above, and later, after the funds are exhausted, the borrower must lay off employees or reduce salary/wage rates by more than 25% before the end of their Covered Period or Alternative Covered Period, then under current SBA guidance it appears that the borrower will incur a reduction (a "haircut") in the amount of the loan that may be forgiven.  That situation is not addressed in the SBA's guidance.

What are transportation costs? 

"Covered Utility Payments" are eligible for forgiveness and, as defined in the CARES Act, include payments for electricity, gas, water, transportation, telephone, or internet access for which service began before February 15, 2020.  Most of the utilities in the list are self-explanatory, but "transportation" costs are referred to only in the definition.  So, what exactly may be included in transportation costs?  Does the term include payments for fuel and maintenance for vehicles or an airplane used in the borrower's business, or for delivery charges for materials shipped by suppliers to the borrower or for products shipped by the borrower to customers?  Maybe.  But, without additional SBA guidance, we think borrowers should be cautious about including payments for costs of that type in their forgiveness applications.  And, if borrowers do include things such as operating costs for a vehicle, the current guidance does not address the effect of personal use of the vehicles.

The definition of "Covered Utility Payments" raises other questions.  The distribution of natural gas to businesses by a single provider through a network of pipelines ordinarily is considered to be a "utility." But, does the same hold true for purchases of liquid propane delivered by a truck that can be purchased from any of several vendors?  That's not clear. 

And, what about city sewer service?  It's ordinarily considered to be a utility service, and it's typically included in water bills, but it's not listed in the definition.

Will "bi-weekly" pay periods be treated the same as "semi-monthly" pay periods?

The SBA's forgiveness application instructions, and its May 22 Interim Final Rule, permit borrowers that have a "biweekly (or more frequent)" payroll schedule to elect to calculate their eligible Payroll Costs using an "Alternative Payroll Covered Period" that begins on the first day of their first pay period following their PPP loan disbursement, rather than the normal Covered Period that begins on their loan disbursement dates.  A true biweekly payroll schedule contemplates that employees are paid every other week (for example, every other Friday).  On the other hand, a semi-monthly payroll schedule contemplates that employees are paid twice per month (for example, on the 15th and the 30th of each month). 

There's only a slight difference as pay dates under a semi-monthly pay schedule are approximately two weeks apart.  However, the SBA's May 22 Interim Final Rule describes a biweekly schedule as "every other week," so unless the SBA provides guidance saying that semi-monthly is "close enough," we do not think borrowers that have semi-monthly pay periods may elect to use an Alternative Payroll Covered Period.

Is there a deadline for a borrower to file its forgiveness application?  

Borrowers will want to submit their applications as soon as possible after the end of their Covered Periods in order to obtain timely forgiveness of their loans.  However, it's unclear whether there is an application deadline or at least the Cares Act and SBA guidance do not say there is a deadline.  Unless there is further guidance imposing a deadline, borrowers can (and should) take sufficient time in preparing their forgiveness applications to be as sure as possible that they are complete and correct when submitted to their lenders.  Lenders likely will be inundated with applications, and if a borrower's application is incorrect, or the supporting documentation is incomplete, there is no assurance that the lender will, or will have time to, permit a borrower to make corrections or provide additional documentation.  Therefore, borrowers should take the time to get it right the first time.

Payments on PPP loans to lenders begin after six months following the disbursement date.  The SBA's forgiveness rule provides that lenders must make a decision on a forgiveness application within 60 days following receipt of a complete application, and then (subject to a potential review by the SBA of the borrower's loan or forgiveness application), the SBA will remit the forgiven amount (including interest), minus the amount of any EIDL advance received by the borrower, not later than 90 days after the lender issues its decision.  Since it will be a minimum of two months into the six-month loan payment forbearance period before forgiveness applications are submitted, it could be seven months or more before a lender receives remittance of the forgiven amount of a loan from SBA.  And, that means that remittances on some borrowers' loans likely will not be received by lenders until after monthly payments have begun.  If that happens, and if the forgiven amount of a loan that SBA remits to the bank exceeds the unpaid balance of the loan at the time of the remittance, the lender must pay the excess amount to the borrower.

As borrowers begin to work through the forgiveness application form and apply the instructions to calculate the data they need to provide, we expect more questions to arise.  We hope the SBA will continue to publish guidance to answer questions and add more clarity to the forgiveness process.

© 2020 Ward and Smith, P.A.. All Rights Reserved.National Law Review, Volume X, Number 150

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About this Author

William Lathan Financial Institutions Attorney Ward and Smith Law Firm
Financial Institutions Attorney

Bill's practice experience encompasses the formation, regulation, and operation of banks and bank holding companies; securities offerings and reporting; mergers and acquisitions; and corporate governance matters pertaining to publicly-held companies.  He has been rated by his peers as being "preeminent" in his fields of law.  Prior to joining the firm, Bill served as vice president and general counsel/corporate secretary for one of North Carolina's multi-bank holding companies.

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