Using a Paycheck Protection Program Loan and Loan Forgiveness (Coronavirus and the Law)


Some small businesses have received a Paycheck Protection Program (PPP) loan or may receive such a loan in the near future. This article focuses on the restrictions on how the PPP loan money can be used, and how to obtain loan forgiveness.

[clear]Using an SBA Paycheck Protection Program Loan

A PPP participant may use the PPP loan for any of the following:

  1. Payroll costs (defined below);
  2. Costs related to the continuation of group health care benefits during periods of paid sick, medical, or family leave, and insurance premiums;
  3. Employee salaries, commission, or similar compensations;
  4. Payments on interest on any mortgage obligation (interest only, not principal);
  5. Rent;
  6. Utilities; and
  7. Interest-only any other debt obligations that were incurred before the covered period;
  8. Refinance of an SBA EIDL loan made between January 31, 2020 and April 3, 2020.

How are “payroll costs” defined in the Paycheck Protection Program?

“Payroll costs” equal the sum of payments of any compensation to employees that includes any of the following:

  1. Salary, wage, commission, or similar compensation (including draws and distributions to partners and LLC members treated as net earnings from self-employment that is subject to self-employment taxes);
  2. Payment of cash tip or equivalent as based on employer records of past tips, or in the absence of such records, a reasonable, good-faith employer estimate of such tips;
  3. Payment for vacation, parental, family, medical, or sick leave;
  4. Allowance for dismissal or separation;
  5. Payment required for the provision of group health care benefits, including the employer-paid portion of insurance premiums;
  6. Any employer-paid retirement benefits; or
  7. Payment of state of local tax assessed on the compensation of employees.

For sole proprietors or independent contractors, “payroll costs” include payments that are wages, commissions, incomes, or net earnings from self-employment, or similar compensation that does not exceed $100,000 in one year, as prorated for the covered period of February 15, 2020 through June 30, 2020.

“Payroll costs” expressly do not include:

  1. Compensation of an individual employee in excess of an annual salary of $100,000, as prorated for the covered period of February 15, 2020 through June 30, 2020 (but not including employer provided health benefits and retirement benefits);
  2. The employer’s share of federal employment taxes imposed between February 15, 2020 and June 30, 2020, including the employer’s share of FICA (Social Security and Medicare), the Railroad Retirement Act, and other payroll taxes;
  3. Any compensation to an employee whose principal place of residence is outside of the United States;
  4. Qualified sick leave or family leave wages for which a credit is already allowed under the Families First Coronavirus Response Act; and
  5. Payments to independent contractors.

What are the consequences for misusing the PPP loan funds?

PPP loans are nonrecourse loans, meaning the SBA has no recourse against any individual shareholder, member, or partner of an EB for nonpayment the PPP loan, except if the PPP loan is knowingly used for an unauthorized purpose. If the loan funds are knowingly used for an unauthorized purpose, then the government may charge an EB and/or its officers, directors, managers, shareholders, members, or partners with fraud for knowingly making a false statement to obtain a guaranteed loan from the SBA.

Loan Forgiveness Under the Paycheck Protection Program

How much of the loan will be forgiven?

There is 100% forgiveness in an amount equal to the sum of the following costs incurred and paid during the 8-week period beginning with the loan origination date (the “Covered Period”):

  1. Cash compensation of up to $100,000 of annualized pay per employee (for eight weeks, a maximum of $15,385 per individual employee);
  2. Non-cash employee benefits incurred and paid by the employer during the covered period (without regard to the $100,000 limitation above), including
    1. employer contributions to defined benefit or defined-contribution retirement plans;
    2. employer payments for the provision of employee benefits consisting of group health care coverage, including insurance premiums; and
    3. employer payment of state and local taxes assessed on employee compensation.
  3. Any interest payment on any mortgage on real or personal property that was incurred in the ordinary course of business before February 15, 2020;
  4. Any payment on any rent obligation under a lease agreement of which was in force before February 15, 2020; and
  5. Any utility payment for electricity, gas, water, transportation, telephone, or internet access for which service began before February 15, 2020.

The Covered Period begins on the date the lender makes the first disbursement of the PPP loan to the eligible business (EB).

Are there any loan forgiveness limitations?

Yes, there are few limitations that an EB must consider.

  1. The forgiveness amount cannot exceed the total principal amount of the PPP loan.
  2. An EB is only eligible to be forgiven for what it incurs and spends during the eight-week Covered Period, up to 100% of the total principal amount of the PPP loan.
  3. Of the portion of the PPP loan that is incurred and spent during the Covered Period, to be eligible for forgiveness, at least 75% of the amount spent must by for payroll costs only. The remaining 25% of the amount may also be spent on qualifying non-payroll costs, i.e. rent, mortgage/debt interest, and utilities.
    If you spend less than the full PPP loan amount during the Covered Period, then the unspent portion will not be forgiven and will continue as a loan (to be repaid overtwo years).
    The remaining two-year loan amount must also continue to be spent in the same 75/25 proportion. Thus, an EB must look at three tests to determine what is forgiven and not forgiven:

    1. The EB must first determine the portion of the PPP loan that is incurred and paid in the Covered Period and is eligible to be forgiven, with the remaining unspent portion, if any, not being eligible for forgiveness (and continuing as a loan).
    2. The portion paid and incurred in the Covered Period must also meet the 75/25 split requirement to be forgiven.
    3. The unspent portion (and any portion that is incurred and paid for less than 75% of payroll costs or is incurred and paid on a non-qualifying cost) is not forgiven and treated as a loan, but must still meet the 75/25 requirement.
  4. An EB must use the PPP loan consistent with the certifications made in the original PPP loan application and the subsequent forgiveness request.
  5. Employee Retention Test: The forgiveness amount will be reduced, but not increased, by multiplying the eligible forgiveness amount by the average number of full-time equivalent (FTE) employees per month during the Covered Period and either
    1. the average number of FTE employees per month during February 15, 2019 to June 30, 2019, or
    2. the average number of FTE employees per month during January 1, 2020 to February 29, 2020.
      The borrower may choose either to use (a) or (b) above in this calculation. However, if you are a seasonal employer, the FTE employees per month shall use the average number of employees during February 15, 2019 to June 30, 2019.
  6. Rehire and Repaid Test: If the number of FTE employees on February 15, 2020 or the salary or wages of any employee on February 15,  020 was reduced or decreased during the period between February 15, 2020 and April 26, 2020, then the EB has until June 30, 2020 to eliminate any such decrease or reduction. If the EB eliminates any decrease of reduction, then the amount of forgiveness shall be determined without regard to the decrease in FTE employees or any employee salary or wage reductions made during February 15, 2020 and April 26, 2020.
    This means an EB should review the period of February 15, 2020 to April 26, 2020. If the EB laid off any staff during this time, then, by June 30, 2020, it must bring the number of FTE employees back to the number of FTEs that the EB had on February 15, 2020. Also, the EB should review if it reduced salary or wages of any employee during the period from February 15, 2020 to April 26, 2020. If it did, then the EB has until June 30 to use the PPP loan funds to make up the difference in pay resulting from such reduction.
  7. Salary/Wage Test: The forgiveness amount will be further reduced if, during the Covered Period, there is a more than 25% reduction (compared to the most recent quarter ending prior to the loan origination date) in the salary and wages of employees who do not receive more than $100,000 in annualized salary or wages. Further guidance is needed to determine how this calculation will be made.

What is in the loan forgiveness application?

For any part of the PPP loan to be forgiven, the recipient must submit an application to the lender servicing the loan. The lender will supply the loan forgiveness application and the loan recipient applying for loan forgiveness must, at minimum, include the following documentation:

  1. Documentation verifying the number of FTE employees on payroll and pay rates, including payroll tax filings reported to the IRS and state income, payroll, and unemployment insurance filings. These documents include IRS Form 941 and state quarterly wage unemployment insurance tax reporting forms or equivalent payroll processor records, including evidence of any retirement and health insurance contributions;
  2. Documentation, including canceled checks, payment receipts, transcripts of accounts, or other documents, verifying payments on covered mortgage obligations, payments on covered rent obligations, and covered utility payments;
  3. A certification that (a) the documentation presented is true and correct; and (b) the amount for which forgiveness is requested was used to retain employees, make interest payments on covered mortgage obligations, payments on covered rent obligations, and covered utility payments;
  4. Any other documentation the SBA determines necessary.

Many small businesses use a Professional Employer Organization (PEO) to process payroll and report payroll taxes. The payroll documentation provided by the payroll provider indicating the amount of wages and payroll taxes reported to the IRS for the borrower’s employees will be considered acceptable PPP loan payroll documentation.

Additionally, relevant information from a Schedule R to Form 941, Allocation Schedule for Aggregate Form 941 Filers, attached to the PEO’s or other payroll provider’s Form 941, Employer’s Quarterly Federal Tax Return, should be used. If such documentation is unavailable, then the EB should obtain a statement from the payroll provider documenting the amount of wages and payroll taxes. EB employees are not considered employees of the EB’s payroll provider or PEO.

What is the timeframe for notification of forgiveness?

The lender will issue a decision on loan forgiveness within 60 days after receiving the loan forgiveness application. Any amount forgiven will be considered canceled indebtedness by a lender.

Are Paycheck Protection Program Loans still available?

Small business owners who have yet to apply for a PPP loan have another opportunity to do so under the Paycheck Protection Program and Health Care Enhancement Act (PPP-HCEA). Loan applications should be submitted through a third-party lender, i.e. federally insured banks, credit unions, and farm credit institutions.

Learn more about PPP loans and eligibility requirements.

Learn more about Economic Injury Disaster Loans (EIDL).

Additional and supplemental guidance continues to be issued on various aspects of the PPP. Woods Rogers will continue to provide additional updates and alerts as such guidance is released.

Read more legal updates on COVID-19 from Woods Rogers attorneys.


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