CARES Act

Overview and FAQs

On March 27, 2020, President Trump signed into law the CARES Act, which is designed to address the economic and health impacts of the COVID-19 pandemic, including providing relief for small and medium-sized business that are facing unprecedented challenges at this time.

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Please find below a Q&A with respect to certain key provisions of the CARES Act with a particular focus on the Paycheck Protection Program, the centerpiece of the legislation for small and medium-sized businesses. We continue to monitor and review the additional guidance and updates that are being provided by federal agencies to assist in the understanding, implementation and administration of the various programs under the CARES Act and intend to supplement and provide updates to this Q&A as appropriate to support our clients during these challenging times.

I. Paycheck Protection Program (the “PPP”)

A. Eligibility

All eligible businesses (for profit, section 501(c)(3) nonprofits, section 501(c)(19) veterans organizations and tribal small business concerns) with less than 500 employees that were in operation on February 15, 2020 can apply for a loan. Also, businesses operating in an NAICS Code beginning with 72 (Accommodation and Food Services sector) with less than 500 employees per physical location are eligible, as well as franchises (regardless of sector or size) that have received a franchise identifier code from the SBA.

In addition, if a business has more than 500 employees but meets the applicable SBA industry-based “size standard” requirements for the NAICS code applicable to that business, then the business also meets the size eligibility standards. The SBA’s current size standards can be found here: http://www.sba.gov/document/support–table-size-standards.

Last updated on: April 6, 2020

A tax-exempt nonprofit organization described in section 501(c)(3) of the Internal Revenue Code and a tax-exempt veterans organization described in section 501(c)(19) of the Internal Revenue Code are eligible for a loan under the Paycheck Protection Program.

Last updated on: April 6, 2020

Yes, as long as the entity meets the program’s other eligibility requirements.

Last updated on: April 6, 2020

B. Loan Calculation

The loan amount is an amount up to 2.5 times employer’s average monthly payroll costs, up to a maximum loan amount of $10 million. Payroll costs are calculated based on the average monthly payroll costs incurred from the last 12 months for employees whose principal place of residence is the United States.

Last updated on: April 6, 2020

If employer is a seasonal employer (as determined by the SBA), then payroll costs are calculated based on the average monthly payments for payroll costs for the 12-week period beginning on February 15, 2019 (or, if elected by the employer, March 1, 2019) and ending on June 30, 2019.

Last updated on: April 6, 2020

Yes, so long as the business was in operation on February 15, 2020 and had employees for whom salaries and payroll taxes were paid. If employer was in business on February 15, 2020, but not in business from February 15, 2019 through June 30, 2019, then the loan amount calculation is 2.5 times the average monthly payroll costs incurred from January 1, 2020 through February 29, 2020.

Last updated on: April 6, 2020

No. An employer must use the average monthly payroll costs incurred for the last 12 months prior to the date of the loan to calculate the loan amount unless (1) the employer is a seasonal employer (as determined by the SBA) or (2) the employer was not in business from February 15, 2019 through June 30, 2019. We note that the PPL application also notes that “most Applicants will use the average monthly payroll for 2019” despite the provision of the CARES Act referring to the 12 months prior to the date of the loan.

Last updated on: April 6, 2020

Payroll costs include payments for: (1) salary, wages and commissions, (2) payment of cash tips or equivalent, (3) vacation, parental, family, medical or sick leave, (4) separation allowances, (5) group health care benefits, including insurance premiums, (6) retirement benefits, and (7) state or local taxes assessed on employee compensation.

Last updated on: April 6, 2020

Payroll costs exclude payments for: (1) compensation of an employee in excess of an annual salary of $100,000, (2) federal employment taxes imposed or withheld between February 15, 2020 and June 30, 2020, including employee’s and employer’s share of FICA and Railroad Retirement Act taxes, and income taxes required to be withheld from employees, (3) any compensation to an employee whose principal place of residence is outside the United States, and (4) qualified sick leave wages and family leave wages for which a credit is allowed under the Families First Coronavirus Response Act.

Last updated on: April 6, 2020

Only the amount that is in excess of an employee’s annualized salary of $100,000 is excluded for purposes of calculating average monthly payroll costs. We do note that the CARES Act, SBA guidance and the application form are inconsistent when describing how to calculate the $100,000 employee payroll cap. The CARES Act states that compensation of an individual employee in excess of an annual salary of $100,000 is capped, which could be read to mean that an employee whose salary is less than $100,000 has no cap with respect the employee’s non-salary benefits. On the other hand, the Treasury guidance instructs borrowers to cap salary, wages, commissions and tips at $100,000 but includes no such cap on non-cash benefits. Lastly, the application form instructs borrowers to cap all compensation at $100,000. Despite the inconsistency, lenders are likely to be careful when calculating payroll costs and we believe may instruct borrowers to cap all amounts at $100,000. We encourage employers to specifically ask their lender how it prefers to calculate this cap in order to maximize available funds.

Last updated on: April 6, 2020

C. Use of Loan Proceeds

The SBA’s proposed regulations clarify that the proceeds of a PPL may only be used for those items that would be considered “payroll costs,” costs related to continuation of group healthcare benefits during periods of covered leave, mortgage interest, rent, utility payments, interest payments on debt incurred before February 15, 2020, and refinancing an Economic Injury Disaster Loan (“EIDL”). The CARES Act also states that PPLs may be used for “other allowable purposes.” Importantly, the permitted uses are broader than the categories of uses that will entitle a borrower to forgiveness of the PPL.

Last updated on: April 6, 2020

D. Loan Forgiveness

*On June 5, 2020, the Paycheck Protection Program Flexibility Act (PPP Flexibility Act) became law, which changed various aspects of the Paycheck Protection Program, particularly with respect to the loan forgiveness provisions. Since the enactment of the PPP Flexibility Act, the Department of Treasury has released three different loan forgiveness applications, each of which remain available for borrowers to use (subject to satisfaction of eligibility requirements) and are listed below:

We will continue to review additional guidance as it becomes available and intend to update this information accordingly.

We have developed reports to assist clients with calculating Paycheck Protection Loan (PPL) forgiveness amounts based on the PPL forgiveness application. We also continue to monitor and review legislative and regulatory developments concerning the Paycheck Protection Program, particularly with respect to the forgiveness provisions, in order to promptly make available relevant information to support our clients during these challenging times. Borrowers are encouraged to discuss matters that could impact their forgiveness amounts with their advisers and PPL lender.

The PPP Flexibility Act is designed to, among other things, provide additional time and greater flexibility to make use of funds received under the Paycheck Protection Program. Below is a summary of some of the key changes to the Paycheck Protection Program as a result of the PPP Flexibility Act. Note that the Department of Treasury and SBA have not stated how existing guidance should be applied to the Paycheck Protection Program, as amended by the PPP Flexibility Act.

  • Notwithstanding the PPP Flexibility Act, the Department of Treasury and SBA confirmed in a joint statement on June 8, 2020 that the last day on which a Paycheck Protection Program loan application can be approved remained June 30, 2020. Note, however, that on July 4, 2020, the deadline for approving a Paycheck Protection Program loan application was extended to August 8, 2020.
  • Extends the deadline for allowable uses of PPL proceeds from June 30, 2020 to December 31, 2020. Note that, to be eligible for forgiveness, the PPL proceeds still must be utilized during the covered period (the covered period was revised under the PPP Flexibility Act, as discussed below).
  • Reduces the minimum amount of PPL proceeds that must be used for payroll costs to 60% for forgiveness purposes. The SBA released a draft interim final rule on June 11, 2020 noting that even though the PPP Flexibility Act requires a borrower to use at least 60% of the PPL proceeds for payroll costs to receive loan forgiveness, the SBA will interpret this requirement as a proportional limit on nonpayroll costs as a share of borrower’s forgiveness amount, as opposed to a threshold for receiving any loan forgiveness. Please see Question No.2 below on Loan Forgiveness for an example of this proportional limitation. Note that prior to the PPP Flexibility Act, the CARES Act merely limited non-payroll costs to 25% of the eligible forgiveness amount.
  • Extends the “covered period” during which eligible expenditures must be made for loan forgiveness from 8 weeks to the earlier of (1) 24 weeks from loan disbursement and (2) December 31, 2020 (although borrowers who received a PPL prior to June5, 2020 may elect an 8-week covered period). Note that the covered period is also applicable to the period during which borrowers must maintain salary and wage levels and full-time equivalent employee levels to avoid potential reductions in the forgiveness amounts.
  • Extends the safe harbor deadline from June 30, 2020 to December 31, 2020 by which some reductions in full-time equivalent employees or some reductions in salary or wages may be eliminated to avoid a reduction in loan forgiveness. Note that the safe harbor only applies to reductions that occurred between February 15, 2020 and April 26, 2020.
  • Adds an exemption based on employee availability. Loan forgiveness is not impacted by a documented inability to (1) rehire individuals who were employees on February 15, 2020 or (2) hire similarly qualified employees for unfilled positions on or before December 31, 2020.
  • Adds an exemption based on level of business activity. Loan forgiveness is not impacted if borrower, in good faith, is able to document an inability to return to the same level of business activity as such business was operating before February 15, 2020 due to compliance with requirements established by the Secretary of Health and Human Services, the CDC or OSHA, related to maintenance of standards for sanitation, social distancing, or any other safety requirement related to COVID-19.
  • Removes the CARES Act provision restricting employers who receive PPL forgiveness from deferring payment of borrower’s portion of social security tax. Note that the deferral of payroll taxes is not a waiver, but rather a deferral and fifty percent (50%) of such deferred amount is due and payable by December 31, 2021 and the remaining fifty percent (50%) is due and payable by December 31, 2022. Borrowers are encouraged to discuss with their advisers any deferral election and any potential consequences of utilizing such cash savings for current operations without planning and setting aside such deferred amounts for future payment.

Last updated on: July 06, 2020

There are only four types of expenditures that count towards the eligible forgiveness amount:

  • payroll costs, which are calculated the same as for the PPL application,
  • interest payments on business mortgage obligations (on real or personal property) incurred before February 15, 2020 (excluding any prepayments),
  • rent or lease payments on business leases (for real or personal property) in force before February 15, 2020, and
  • utility payments for electricity, gas, water, transportation, telephone, or internet access for which service began before February 15, 2020.

Note that, due to the changes under the PPP Flexibility Act, borrowers must use at least 60% of the PPL proceeds on payroll costs in order to avoid a proportional reduction in the amount eligible for forgiveness. The SBA provided the following example in the June 11, 2020 interim final rule:

If a borrower receives a $100,000 PPP loan, and during the covered period the borrower spends $54,000 (or 54%) of its loan on payroll costs, then because the borrower used less than 60% of its loan on payroll costs, the maximum amount of loan forgiveness the borrower may receive is $90,000 (with $54,000 in payroll costs constituting 60% of the forgiveness amount and $36,000 in nonpayroll costs constituting 40% of the forgiveness amount).

Amounts Attributable to Business Operations of a Tenant or Sub-Tenant of Borrower

On August 24, 2020, the Department of Treasury released guidance stating that “the amount of loan forgiveness requested for nonpayroll costs may not include any amount attributable to the business operation of a tenant or sub-tenant” of borrower. To illustrate this rule, the guidance provided the following examples:

Example 1: A borrower rents an office building for $10,000 per month and sub-leases out a portion of the space to other businesses for $2,500 per month. Only $7,500 per month is eligible for loan forgiveness.

Example 2: A borrower has a mortgage on an office building it operates out of, and it leases out a portion of the space to other businesses. The portion of mortgage interest that is eligible for loan forgiveness is limited to the percent share of the fair market value of the space that is not leased out to other businesses. As an illustration, if the leased space represents 25% of the fair market value of the office building, then the borrower may only claim forgiveness on 75% of the mortgage interest.

Example 3: A borrower shares a rented space with another business. When determining the amount that is eligible for loan forgiveness, the borrower must prorate rent and utility payments in the same manner as on the borrower’s 2019 tax filings, or if a new business, the borrower’s expected 2020 tax filings.

Renewed Leases & Refinanced Mortgages

If a lease that was in effect prior to February 15, 2020 expires on or after February 15, 2020 and is renewed, the lease payments made during the covered period under the renewed lease are eligible for forgiveness. In addition, if a business mortgage loan on real or personal property that existed prior to February 15, 2020 is refinanced on or after February 15, 2020, the interest payments made during the covered period on the refinanced business mortgage loan are eligible for forgiveness.

Interest on Unsecured Loans

Interest on unsecured credit incurred before February 15, 2020 is a permissible use of PPP loan proceeds but is not eligible for forgiveness because the loan is not secured by real or personal property. Note that payments of interest on business mortgages on real or personal property are eligible for forgiveness.

Rent and Lease Payments to a Related Party

In the August 24, 2020 interim final rule, the Department of Treasury stated that rent and lease payments to a related party are eligible for forgiveness if (1) the forgiveness amount requested for rent or lease payments to the related party do not exceed the amount of mortgage interest owed on the property during the covered period that is attributable to the space being rented by borrower and (2) the lease and the mortgage were entered into prior to February 15, 2020.

The Department of Treasury provided that for purposes of identifying a related party rent or lease payment, any ownership in common between the borrower and the property owner constitutes a related party payment. To substantiate rent and lease payments made to a related party, the borrower must provide its lender with mortgage interest documentation. Distinguishing from rent and lease payments, the Department of Treasury noted that mortgage interest payments to a related party are not eligible for forgiveness.

Utility Payments

Covered utility payments, which are eligible for forgiveness, include a “payment for a service for the distribution of . . . transportation”. The FAQs from the Department of Treasury released on August 4, 2020 clarified that “a service for the distribution of transportation” refers to transportation utility fees assessed by state and local governments and that payment of these fees is eligible for loan forgiveness.

Last updated on: August 31, 2020

The SBA stated in the May 22, 2020 interim final rule that bonuses and hazard pay constitute a supplement to salary or wages and, as such, are part of the salaries and wages that can count towards forgiveness. The SBA further cautioned that these amounts must be included when determining whether an employee’s total compensation during the covered period (or alternative payroll covered period) exceeds $100,000 on an annualized basis. Notwithstanding this guidance, borrowers are encouraged to discuss with their advisers and lender any potential impact on forgiveness amounts resulting from the payment of bonuses or hazard pay, particularly if the bonus would not be considered in the ordinary course of the borrower’s business.

Last updated on: June 01, 2020

As a general rule, employer contributions for non-owner employee retirement benefits that are paid or incurred by the borrower during the covered period or alternative payroll covered period qualify as “payroll costs” eligible for loan forgiveness. Employer contributions for retirement benefits included in the loan forgiveness amount as payroll costs cannot include any retirement contributions deducted from employees’ pay or otherwise paid by employees.

The FAQs from the Department of Treasury released on August 4, 2020 provided that forgiveness is not provided for employer contributions for retirement benefits accelerated from periods outside the covered period or alternative payroll covered period. However, the Department of Treasury has not stated how a borrower would determine whether a contribution for retirement benefits has been accelerated or not accelerated from periods outside the covered period or alternative payroll covered period.

Please note that the treatment of retirement benefits for owners is different from the approach outlined above and is addressed in Question No. 4.A.

Last updated on: August 06, 2020

The amount of compensation of owners who work at their business that is eligible for forgiveness depends on the business type and whether the borrower is using an 8-week or 24-week covered period. In addition to the specific caps described below, the amount of loan forgiveness requested for owner-employees and self-employed individuals’ payroll compensation is capped at $20,833 per individual in total across all businesses in which the owner has an ownership stake. For borrowers that received a PPP loan before June 5, 2020 and elect to use an 8-week covered period, this cap is $15,385. If the owner’s total compensation across businesses that receive a PPP loan exceeds the cap, the owner can choose how to allocate the capped amount across different businesses. The FAQs from the Department of Treasury released on August 4, 2020 state the following:

C Corporations: Employee cash compensation of a C-corporation owner-employee is eligible for loan forgiveness up to the amount of 2.5/12 of their 2019 employee cash compensation, with cash compensation defined as it is for all other employees. Borrowers are also eligible for loan forgiveness for payments for employer state and local taxes paid by the borrowers and assessed on their compensation, for the amount paid by the borrower for employer contributions for their employee health insurance, and for employer retirement contributions to their employee retirement plans capped at the amount of 2.5/12 of the 2019 employer retirement contribution. Payments other than for cash compensation do not count toward the per individual cap of $20,833 (24-week covered period) or $15,385 (8-week covered period).

S Corporations: Employee cash compensation of an S-corporation owner-employee is eligible for loan forgiveness up to the amount of 2.5/12 of their 2019 employee cash compensation, with cash compensation defined as it is for all other employees. Borrowers are also eligible for loan forgiveness for payments for employer state and local taxes paid by the borrowers and assessed on their compensation, and for employer retirement contributions to their employee retirement plans capped at the amount of 2.5/12 of their 2019 employer retirement contribution. Employer contributions for health insurance are not eligible for additional forgiveness for S-corporation employees with at least a 2% stake in the business, including for employees who are family members of an at least 2% owner, because those contributions are included in cash compensation. The eligible non-cash compensation payments do not count toward the per individual cap of $20,833 (24-week covered period) or $15,385 (8-week covered period).

Self-employed Schedule C (or Schedule F) filers: The compensation of self-employed Schedule C (or Schedule F) individuals, including sole proprietors, self-employed individuals, and independent contractors, that is eligible for loan forgiveness is limited to 2.5/12 of 2019 net profit as reported on IRS Form 1040 Schedule C (or 2.5/12 of 2019 net farm profit, as reported on IRS Form 1040 Schedule F). Separate payments for health insurance, retirement, or state or local taxes are not eligible for additional loan forgiveness; health insurance and retirement expenses are paid out of their net self-employment income. If the borrower did not submit its 2019 IRS Form 1040 Schedule C (or F) to its lender when the borrower initially applied for the loan, it must be included with the borrower’s forgiveness application.

General Partners: The compensation of general partners that is eligible for loan forgiveness is limited to 2.5/12 of their 2019 net earnings from self-employment that is subject to self-employment tax, which is computed from 2019 IRS Form 1065 Schedule K-1 box 14a (reduced by claimed section 179 expense deduction, unreimbursed partnership expenses, and depletion from oil and gas properties) multiplied by 0.9235. Compensation is only eligible for loan forgiveness if the payments to partners are made during the covered period or alternative payroll covered period, as applicable. Separate payments for health insurance, retirement, or state or local taxes are not eligible for additional loan forgiveness. If the partnership did not submit its 2019 IRS Form 1065 K-1s when initially applying for the loan, it must be included with the partnership’s forgiveness application.

LLC owners: LLC owners must follow the instructions that apply to how their business was organized for tax filing purposes for tax year 2019, or if a new business, the expected tax filing situation for 2020.

All self-employed owners are encouraged to discuss this matter with their advisers and lender to ensure that the desired outcome is achieved.

Last updated on: August 06, 2020

The PPL application refers to a broad category of “owners,” distinct from standard employees who receive W-2 wages whose cash compensation is reported on Lines 1 and 4 of Schedule A on the Loan Forgiveness Application. This category of “owners” consists of three sub-groups: (1) self-employed individuals, (2) general partners and (3) owner-employees. Self-employed individuals seem to be sole proprietors and independent contractors who report their compensation as self-employment income on Schedule C or Schedule F. General partners likely only include general partners in a partnership who either receive a guaranteed payment or a share of the partnership’s income and report this as self-employment income.

Prior to August 24, 2020, no guidance had been provided to define who is an “owner-employee”, one of the three sub-group of “owners”, in the Paycheck Protection Program context (other than Department of Treasury guidance on August 4, 2020 defining an “owner-employee” as “an owner who is also an employee”).

On August 24, 2020, the Department of Treasury released guidance exempting owner-employees with less than a 5% ownership interest in a C-corporation or S-corporation from application of the limits on the amount of loan forgiveness available for owner-employees. (Please see Question No. 4A for additional information concerning a discussion of these limits.) Noting that there was no prior exception in the rule based on the owner-employee’s percentage of ownership, the Department of Treasury noted that the exemption is intended to cover owner-employees who have “no meaningful ability to influence decisions over how loan proceeds are allocated.” Notably, the designation of an entity as a “C-corporation” or “S-corporation” is a function of federal tax law and not a designation under state law governing the formation of entities.

The August 24, 2020 guidance did not, however, provide additional information concerning general partners in a partnership or owner-employees of an LLC. Notably, the instructions to the PPL forgiveness application expressly mention “general partners,” suggesting that all general partners should be treated the same.

Regarding LLCs, the recent guidance could suggest that the tax-treatment election of the LLC for tax year 2019 (or if a new business, the expected tax filing situation for 2020) determines whether equity holders in the LLC with less than a 5% ownership interest are exempt from the application of the limits on the amount of loan forgiveness available for LLC members who are employees. If the LLC is taxed as a partnership, then it is possible that the Department of Treasury would take the position that all LLC members who are employees should be treated as general partners and are subject to the application of the limits on the amount of loan forgiveness available, whereas if the LLC is taxed as a C-corporation, then it is possible that the Department of Treasury would take the position that LLC members who are employees with less than a 5% ownership interest in the LLC are exempt from application of the limits on the amount of loan forgiveness available.

Last updated on: August 31, 2020

Under the CARES Act, the PPL proceeds must be used on qualifying expenditures during the “covered period” in order to be eligible for forgiveness. The PPP Flexibility Act extended the “covered period” to be the 24-week (168-day) period following the date on which the borrower receives the PPL proceeds (or, if shorter, the period ending December 31, 2020). However, borrowers that received their PPL before June 5, 2020 may instead elect to use the 8-week (56-day) period following the date on which the borrower received the PPL proceeds, as provided in the original CARES Act.

The following explanations are based on the May 22, 2020 interim final rule, which has not yet been updated by the Department of Treasury to address the changes implemented by the PPP Flexibility Act, including the continued applicability of the “alternative payroll covered period.” Borrowers should discuss this matter with their advisers and lender before making decisions that may impact forgiveness.

Payroll Costs

Under the PPL forgiveness application, the borrower has two options for calculating the period during which payroll costs may be calculated for forgiveness purposes:

  • Covered period: Either (1) the 24-week (168-day) period or (2) the 8-week (56-day) period, in each case commencing with the first day on which the PPL proceeds were received or
  • Alternative payroll covered period: If the borrower has a biweekly (or more frequent) payroll schedule, then the borrower can choose to start either (1) the 24-week (168 day) period or (2) the 8-week (56 day) period, in each case commencing on the first day of their first full payroll period following the date on which the PPL proceeds were received. (Note that if the borrower selects the alternative payroll covered period, then the borrower must use that period for all calculations that reference the alternative payroll covered period as an option.)

The payroll costs must be paid during the covered period (or alternative payroll covered period) except that payroll costs incurred but not paid during the covered period (or alternative payroll covered period) may count towards forgiveness if they are paid on or before the next regular payroll date after the end of such period.

Payroll costs are considered “paid” on the day when the “paychecks are distributed” or when the borrower “originates an ACH transaction.” A payroll cost is considered “incurred” on the day that the employee earns the related pay. The SBA provided the following example in the May 22, 2020 interim final rule with respect to a borrower that elected to use an 8-week period:

A borrower has a bi-weekly payroll schedule (every other week). The borrower’s eight-week covered period begins on June 1 and ends on July 26. The first day of the borrower’s first payroll cycle that starts in the covered period is June 7. The borrower may elect an alternative payroll covered period for payroll cost purposes that starts on June 7 and ends 55 days later (for a total of 56 days) on August 1. Payroll costs paid during this alternative payroll covered period are eligible for forgiveness. In addition, payroll costs incurred during this alternative payroll covered period are eligible for forgiveness as long as they are paid on or before the first regular payroll date occurring after August 1. Payroll costs that were both paid and incurred during the covered period (or alternative payroll covered period) may only be counted once.

The May 22, 2020 interim final rule further states that “[f]or employees who are not performing work but are still on the borrower’s payroll, payroll costs are incurred based on the schedule established by the borrower (typically, each day that the employee would have performed work).”

Non-Payroll Costs

Non-payroll costs must be either (a) paid during the covered period or (b) incurred during the covered period and paid on or before the next regular billing date, even if that is after the covered period. The SBA provided the following example in the May 22, 2020 interim final rule with respect to a borrower that elected to use an 8-week period:

A borrower’s covered period begins on June 1 and ends on July 26. The borrower pays its May and June electricity bill during the covered period and pays its July electricity bill on August 10, which is the next regular billing date. The borrower may seek loan forgiveness for its May and June electricity bills, because they were paid during the covered period. In addition, the borrower may seek loan forgiveness for the portion of its July electricity bill through July 26 (the end of the covered period), because it was incurred during the covered period and paid on the next regular billing date.

The June 22, 2020 interim file rule provided an example, with the same result, that used the 24-week covered period. Note that, even if the borrower elects the alternative payroll covered period for purposes of payroll costs, the non-payroll costs still must be calculated based on the covered period.

Last updated on: June 25, 2020

Any loan proceeds that have not been used during the covered period (or alternative payroll covered period) for payroll costs or during the covered period for qualifying non-payroll costs are not eligible to be forgiven, even if they are ultimately used for a qualifying-type of expenditure. It is important to note, however, that payroll costs and qualifying non-payroll costs incurred but not paid during the covered period (or alternative payroll covered period for payroll costs) may count towards forgiveness if they are paid on or before the next regular payroll date or billing date, as applicable. Please see Question No. 5 above on Loan Forgiveness for additional information concerning this topic.

Last updated on: June 18, 2020

The SBA stated in the May 22, 2020 interim final rule that prepayments or advance payments of interest on a covered mortgage obligation are not eligible for loan forgiveness. However, the SBA did not address in this guidance whether prepayments or advance payments of other non-payroll costs or payroll costs would be eligible for forgiveness, particularly with respect to payroll that would accrue after the covered period (or alternative payroll covered period) had ended.

In the FAQs released on August 4, 2020, the Department of Treasury stated that employer contributions for retirement benefits accelerated from periods outside the covered period or alternative payroll covered period are not eligible for forgiveness. However, the Department of Treasury has not stated how a borrower would determine whether a contribution for retirement benefits has been accelerated or not accelerated from periods outside the covered period or alternative payroll covered period.

Borrowers are encouraged to discuss any planned prepayments or advanced payments with their advisers and lender to confirm the potential impact on forgiveness. Further, as the borrower discusses the potential forgiveness implications of prepaying a payroll with its advisers, the borrower should also discuss the other payroll-related implications, including potential requirements that employees be notified of a change in pay dates; the need to forecast regular and/or overtime hours that will be worked and then issue additional paychecks for any shortfall; and potential limitations on the borrower’s ability to reclaim overpayments to any particular employee, such as if the employee works less than expected or terminates employment altogether.

Last updated on: August 06, 2020

An eligible borrower that uses Form 3508S (see Question 15 below) is exempt from any reductions in the borrower’s loan forgiveness amount that would otherwise apply based on reductions in full-time equivalent employees.

In all other cases, a reduction in the borrower’s full-time equivalent employees (FTEEs) can result in a reduction in the forgiveness amount as further described below.

Reduction in Average FTEEs

Unless the safe harbor discussed below applies, the loan forgiveness amount will be reduced by the percentage by which the borrower reduced its average number of FTEEs during the covered period (or alternative payroll covered period) as compared to the average number of FTEEs during one of following periods selected by the borrower: (1) February 15, 2019 through June 30, 2019, (2) January 1, 2020 through February 29, 2020, or (3) in the case of a seasonal employer only, a consecutive twelve-week period between May 1, 2019 and September 15, 2019.

Calculation of Average FTEEs

The borrower must calculate the full-time equivalency for each employee using one of two methods for all of the borrower’s employees:

  • An exact method that divides the average number of hours paid per week (up to 40) during the covered period (or alternative payroll covered period) by 40. Because the hours worked cannot exceed 40 for purposes of this calculation, this number cannot exceed “1.0”.
  • A simple method that allocates a “1.0” for each employee who works 40 or more hours per week and a “0.5” for all other employees.

The sum of the average full-time equivalencies for each employee results in the total average FTEEs for the borrower. The PPL forgiveness application does not state how the average should be calculated for employees who were not employed by the borrower during the entire covered period (or alternative payroll covered period) or during the comparison period.

Borrowers that had a reduction in their FTEEs should consider calculating the reduction using both the exact and simple method in order to determine which method is the most beneficial.

Note that average FTEEs is based on “paid hours week” and that the average FTEE calculation does not exclude employees who earned in excess of $100,000 during any pay period in 2019. Accordingly, a reduction in hours of these employees may impact the FTEE calculation even though those employees would be excluded for purposes of calculating a reduction in total salary or wages.

Treatment of Terminated Employees

The PPL forgiveness application clearly states the following reductions in FTEEs will not reduce the borrower’s loan forgiveness:

  • Any positions for which the borrower made a good-faith, written offer to rehire an employee who was an employee on February 15, 2020 and borrower was unable to hire similarly qualified employees for unfilled positions on or before December 31, 2020. In the May 22, 2020 interim final rule, the SBA introduced an additional procedural requirement related to rejected rehire offers. Within 30 days of employee’s rejection of an offer to rehire, the applicable state unemployment insurance office must be informed of the employee’s rejected offer of reemployment. The SBA noted that further information regarding how borrowers will report information concerning rejected rehire offers to state unemployment insurance offices will be provided on the SBA’s website.
  • Any positions for which the borrower made a good-faith, written offer to restore any reduction in hours, at the same salary or wages, during the covered period (or alternative payroll covered period) and the employee rejected the offer. The borrower should maintain documentation evidencing the offer and the rejection of the offer.
  • Any employees who during the covered period (or alternative payroll covered period) (a) were fired for cause, (b) voluntarily resigned, or (c) voluntarily requested and received a reduction of their hours.

Note that the exceptions listed above apply to all employees, not just employees who would be listed in Table 1 of the Loan Forgiveness Application. In other words, if applicable, a borrower should include employees who earned in excess of $100,000 during any pay period in 2019 in the FTE Reduction Exception line in Table 1 of the PPP Schedule A Worksheet.

As provided in the instructions to the PPL loan forgiveness application, the borrower should maintain documentation supporting its use of any of the above exclusions. For example, the Department of Treasury has stated that the documents a borrower should maintain to show compliance with the attempted rehire exemption (first bullet above) include the written offer to rehire an individual, a written record of the offer’s rejection, and a written record of efforts to hire a similarly qualified individual. Please see Question No. 11 for additional information concerning the documentation requirements associated with the loan forgiveness application process.

The PPP Flexibility Act further provides that loan forgiveness is not impacted by (1) a documented inability to hire similarly qualified employees for unfilled position on or before December 31, 2020 or (2) a documented inability to return to the same level of business activity as such business was operating before February 15, 2020 due to compliance with requirements established by the Secretary of Health and Human Services, the CDC or OSHA, related to maintenance of standards for sanitation, social distancing, or any other safety requirement related to COVID-19.

The PPL forgiveness application, however, is unclear as to exactly how the calculation is supposed to work in these scenarios, including when a replacement was hired. In addition, as noted above, the PPL forgiveness application is also unclear as to how the averages should be calculated for employees who were not present during the entire period.

Safe Harbor

As a result of the PPP Flexibility Act, there are two separate safe harbors that may exempt certain borrowers from any loan forgiveness reduction based on a reduction in FTEE levels.

  1. The amount of the loan forgiveness shall be determined without regard to any reduction in average FTEEs if borrower, in good faith, can 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 by the Secretary of Health and Human Services, the CDC or OSHA, related to maintenance of standards for sanitation, social distancing, or any other safety requirement related to COVID-19. For further discussion concerning an inability to return to the same level of business activity, please see Question No. 14.
  2. The amount of the loan forgiveness shall be determined without regard to any reduction in average FTEEs that occurred between February 15, 2020 and April 26, 2020 if by not later than December 31, 2020, the borrower restores its FTEE levels to those in the pay period that included February 15, 2020.

Last updated on: October 12, 2020

An eligible borrower that uses Form 3508S (see Question 15 below) is exempt from any reductions in the borrower’s loan forgiveness amount that would otherwise apply based on reductions in employee salary or wages.

In all other cases, a reduction in salary or wages of an employee can result in a reduction in the forgiveness amount as further described below.

Reduction in Salary or Wages

Unless the safe harbor discussed below applies, the loan forgiveness amount will be reduced by the amount in excess of 25% by which the borrower reduces an employee’s average salary or wages during the covered period (or alternative payroll covered period) as compared to the employee’s average salary or wages during the first quarter of 2020.

Calculation of Salary and Wages

If an employee received wages or salary during any single pay period in 2019 at an annualized rate of pay in an amount more than $100,000, then that employee is excluded for purposes of this calculation. As discussed in question 8, however, these employees are included for purposes of calculating average FTEEs based on the number of hours for which they were paid.

Note that this test only considers the cash compensation paid to an employee; accordingly, it differs from the payroll costs related to that employee. Specifically, the borrower may only consider gross salary, gross wages, gross tips, gross commissions, paid leave (vacation, family, medical or sick leave, not including leave covered by the Families First Coronavirus Response Act), and allowances for dismissal or separation paid to an employee.

Safe Harbor

Under the PPP Flexibility Act, the amount of the loan forgiveness shall be determined without regard to any reduction in the average salary or wages that occurred between February 15, 2020 and April 26, 2020 if by the earlier of December 31, 2020 and the date the loan forgiveness application is submitted to borrower’s lender, the borrower has restored the salary or wages of that employee.

Notably, the PPL forgiveness application states that the borrower must compare the average annual salary or wages of the employee as of the earlier of December 31, 2020 and the date the loan forgiveness application is submitted to borrower’s lender to the average salary or wages between February 15, 2020 and April 26, 2020. It is unclear how to calculate the average annual salary or wages as of one specific date (e.g., December 31, 2020). It is further unclear exactly what steps the borrower must take to have “restored” the salary or wages by that date, e.g. must the employee have been paid at the restored rate at least once? Further, if an average as of a specific date must be used, then it may be necessary for the borrower to also provide back pay; however, additional guidance from the Department of Treasury as to the period over which the average must be calculated would be needed.

Last updated on: October 12, 2020

To ensure that borrowers are not doubly penalized, any reduction in salary or wages of an employee will apply only to the portion of the decline in the employee’s salary or wages that is not attributable to a reduction in the full-time equivalency of that employee.

Last updated on: June 01, 2020

The instructions to the PPL loan forgiveness applications specify a list of documents that the borrower must provide to substantiate the forgiveness amounts. The list can be found on page 6 of the Loan Forgiveness Application Instructions for Borrowers and is titled “Documents that Each Borrower Must Submit with its PPP Loan Forgiveness Application”. For borrowers eligible to use the EZ version of the PPL forgiveness application (see Question No. 13 below), the list can be found on page 4 of the instructions to the PPP Loan Forgiveness Application Form 3508EZ Instructions and is titled “Documents that Each Borrower Must Submit with its PPP Loan Forgiveness Application Form 3508EZ”. For borrowers eligible to use Form 3508S (see Question No. 15 below), the list can be found on page 3 of the instructions to the PPP Loan Forgiveness Application Form 3508S Instructions and is titled “Documents that Each Borrower Must Submit with its PPP Loan Forgiveness Application Form 3508S”. In addition, on the same pages of the instructions as provided above, the instructions also identify other documents that a borrower must maintain but is not required to submit under the title “Documents that Each Borrower Must Maintain but is Not Required to Submit”.

We have made available to our clients with the forgiveness process. We intend to update the report as guidance continues to evolve.

Last updated on: October 12, 2020

A borrower may submit a loan forgiveness application any time on or before the maturity date of the loan, including before the end of the covered period (or alternative payroll covered period), if the borrower has used all of the loan proceeds for which the borrower is requesting forgiveness.

However, if the borrower applies for forgiveness before the end of the covered period (or alternative payroll covered period) and has reduced any employee’s salaries or wages in excess of 25%, the borrower must account for the excess salary reduction for the entirety of the covered period (or alternative payroll covered period). The SBA provided the following example in the June 22, 2020 interim final rule:

A borrower is using a 24-week covered period. The borrower reduced a full-time employee’s weekly salary from $1,000 per week during the reference period to $700 per week during the covered period. The employee continued to work on a full-time basis during the covered period, with an FTE of 1.0. In this case, the first $250 (25% of $1,000) is exempted from the loan forgiveness reduction. The borrower seeking forgiveness would list $1,200 as the salary/hourly wage reduction for that employee (the extra $50 weekly reduction multiplied by 24 weeks). If borrower applies for forgiveness before the end of the covered period, it must account for the salary reduction for the full 24-week covered period (totaling $1,200).

Under the PPP Flexibility Act, principal, interest and fees are subject to forbearance until a forgiveness determination has been made or following the tenth month after the end of the covered period if the borrower has not filed an application for forgiveness by such date. If the borrower does not apply for loan forgiveness within ten months after the end of the covered period, the loan is no longer deferred and the borrower must begin paying principal and interest. If this occurs, the lender will notify the borrower of the date the first payment is due.

In addition, interest accrues during the time between the disbursement of the loan and the SBA’s remittance of the forgiveness amount and, importantly, the borrower is responsible for paying the accrued interest on any amount of the loan that is not forgiven. If this occurs, the lender is required to notify the borrower of the date the first payment is due.

Borrowers are encouraged to evaluate and discuss with their advisers the most favorable time to apply for loan forgiveness. In some instances, borrowers may benefit by waiting to seek forgiveness. For example, if borrower expects to restore its FTE levels by not later than December 31, 2020 to the levels in the pay period that included February 15, 2020, then waiting to file for loan forgiveness may allow borrower to take advantage of an FTE reduction safe harbor thereby exempting borrower from any loan forgiveness reduction that would have otherwise occurred based on a reduction in FTE levels.

In other instances, borrowers should discuss with their advisers whether they may benefit by seeking forgiveness as soon as all the loan proceeds have been utilized. For example, if a borrower does not reduce salaries or wages in excess of 25% during the period in which the loan proceeds are utilized, but expects that it may do so prior to the end of the covered period (or alternative payroll covered period), then the borrower may benefit from applying for forgiveness as soon as the loan proceeds are utilized (even though this is still during the covered period (or alternative payroll covered period)) to avoid any potential reduction in the loan forgiveness amount based on a reduction in salaries or wages in excess of 25%. Note, however, that in this scenario, if borrower reduces salaries or wages in excess of 25% after applying for but prior to receiving forgiveness, it is not clear if borrower has an obligation to inform its lender of such reductions and the SBA has not provided any guidance on this point.

Last updated on: August 06, 2020

A borrower is eligible to apply for forgiveness of its PPP loan using the EZ Loan Forgiveness Application Form (Form 3508EZ) if any one of the following three conditions is satisfied:

  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 PPP loan application.
  2. The borrower did not reduce annual salary or hourly wages of any employee by more than 25% during the covered period (or alternative payroll covered period) compared to the period between January 1, 2020 and March 31, 2020 and 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.
  3. The borrower did not reduce annual salary or hourly wages of any employee by more than 25% during the covered period (or alternative payroll covered period) compared to the period between January 1, 2020 and March 31, 2020 and was unable to operate during 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 of sanitation, social distancing, or any other work or customer safety requirement related to COVID-19.

For purposes of clauses (2) and (3), “employees” means only those employees that did not receive, during any single period during 2019, wages or salary at an annualized rate of pay in an amount more than $100,000. In addition, for clause (2) ignore reductions that arose from an inability to rehire individuals who were employees on February 15, 2020 if Borrower was unable to hire similarly qualified employees for unfilled positions on or before December 31, 2020, and also ignore reductions in an employee’s hours that Borrower offered to restore and employee refused.

Last updated on: June 18, 2020

The amount of the loan forgiveness shall be determined without regard to any reduction in average FTEEs if borrower, in good faith, can 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 by the Secretary of Health and Human Services, the CDC or OSHA, related to maintenance of standards for sanitation, social distancing, or any other safety requirement related to COVID-19.

The SBA stated in the June 22, 2020 interim final rule that it is interpreting this requirement to “include both direct and indirect compliance” with COVID Requirements or Guidance because “a significant amount of the reduction in business activity stemming from COVID Requirements or Guidance is the result of state and local government shutdown orders that are based in part on guidance from” the Secretary of Health and Human Services, CDC and OSHA.

The SBA provided the following example in the June 22, 2020 interim final rule:

Borrower is in the business of selling beauty products both online and at its physical store. During the covered period, the local government where the borrower’s store is located orders all non-essential businesses, including the borrower’s business, to shut down their stores, based in part on COVID-19 guidance issued by the CDC in March 2020. Because the borrower’s business activity during the covered period was reduced compared to its activity before February 15, 2020 due to compliance with COVID Requirements or Guidance, the borrower satisfies the PPP Flexibility Act’s exemption and will not have its forgiveness amount reduced because of a reduction in FTEs during the covered period, if the borrower in good faith maintains records regarding the reduction in business activity and the local government’s shutdown orders that reference a COVID Requirement or Guidance as described above.

The instructions to the modified Paycheck Protection Program Loan Forgiveness application, as well as to the EZ form, both provide that borrower must maintain documentation supporting borrower’s certification that it was not able to operate at the same level of business activity, which must include copies of the applicable requirements for each borrower location and relevant borrower financial records.

Last updated on: June 25, 2020

A borrower of a PPL of $50,000 or less, other than any borrower that together with its affiliates received loans totaling $2 million or greater (applying the SBA’s affiliation rules), is eligible to use Form 3508S to apply for loan forgiveness. If a borrower is not eligible to use Form 3508S, a borrower must apply for forgiveness using Form 3508 or Form 3508EZ.

Borrowers that use Form 3508S are exempt from reductions in loan forgiveness amounts based on reductions in full-time equivalents or in salaries or wages. Although Form 3508S still requires borrowers to provide documentation verifying payroll and nonpayroll costs (See Question 11), Form 3508S does not require borrowers to show their calculations in determining their loan forgiveness amount.

The instructions to Form 3508 provide that the SBA may request information and documents to review calculations as part of its loan review process.

Last updated on: October 12, 2020

Borrowers that have PPLs that are undergoing a change in their ownership as a result of an acquisition or issuance of additional securities, as well as the acquirers of those borrowers, should carefully review with their advisors the SBA Procedural Notice effective October 2, 2020 regarding “Paycheck Protection Program Loans and Changes of Ownership”. Notably, this guidance provides that a “change in ownership” occurs when “(1) at least 20 percent of the common stock or other ownership interest of a PPP borrower (including a publicly traded entity) is sold or otherwise transferred, whether in one or more transactions, including to an affiliate or an existing owner of the entity, (2) the PPP borrower sells or otherwise transfers at least 50 percent of its assets (measured by fair market value), whether in one or more transactions, or (3) a PPP borrower is merged with or into another entity.”

Last updated on: October 12, 2020

No. A borrower may submit a loan forgiveness application any time on or before the maturity date of the loan. Please see Question No. 12 above on Loan Forgiveness, which discusses various factors a borrower should consider when determining when to apply for forgiveness.

The FAQs from the Department of Treasury released on October 13, 2020 explain that the expiration date in the upper-right corner of each loan forgiveness application form is “displayed for purposes of SBA’s compliance with the Paperwork Reduction Act, and reflects the temporary expiration date for approved use of the forms.” In the same FAQ, the Department of Treasury further notes that the expiration date “will be extended, and when approved, the same forms with the new expiration date will be posted.”

Last updated on: October 20, 2020

II. Economic Injury Disaster Loans (EIDL) and Emergency Economic Injury Grants

Yes. The SBA will provide EIDLs in an amount up to $2 million to eligible businesses that have suffered substantial economic damage as a result of COVID-19 and waive certain requirements on loans of less than $200,000. Up to $10,000 of an EIDL may be advanced as an emergency grant within three days to maintain payroll, meet increased costs to obtain materials not available from the original source, provide paid sick leave, make rent or mortgage payments and repay other obligations that cannot be met due revenue losses. Applicants are not required to repay any amounts of the advance; however, the advance amount will reduce the amount by which any PPL may be forgiven.

Last updated on: April 06, 2020

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