Now That You Have Your PPP Loan, Here’s What You Need to Know
By Jack Gannon Jr.
Attorney at McGuire, Craddock & Strother
May 4, 2020
We previously provided a brief summary of the loan initiative created by the Paycheck Protection Program (“PPP”) as part of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). Businesses across the country are now receiving their PPP loan funds, and with the recent increase in aggregate appropriation levels from $350 billion to $670 billion, an influx of additional PPP loans is imminent. If you’re one of the businesses receiving a PPP loan, this article is for you. Review and remember the information set forth below as you utilize and navigate your PPP loan.
Use Loan Funds Only for Permitted Purposes
Make sure your PPP loan is used only for permitted purposes. Funds used for unauthorized purposes must be repaid. Misuse of funds may result in additional liability, such as charges for fraud, and the Small Business Association (“SBA”) will have recourse against business owners that misuse funds. It is thus imperative that loan funds be used appropriately.
PPP loan funds may be used to pay the following amounts from February 15, 2020 to June 30, 2020: (i) payroll costs; (ii) costs related to the continuation of group health care benefits during periods of paid sick, medical, or family leave, and insurance premiums; (iii) employee salaries, commissions, or similar compensations; (iv) mortgage interest payments; (v) rent payments; (vi) utility payments; and (vii) interest on any other debt obligations that were incurred before February 15, 2020.
Be aware that at least 75% of your PPP loan must be used for payroll costs. For an overview of what does and does not constitute “payroll costs” for purposes of the PPP, see Section III.2.f-g of the SBA’s Interim Final Rule effective April 15, 2020 and Section 1102(a)(2) of the CARES Act. Since the definition of “payroll costs” is a central, recurring issue for PPP loans (including permitted uses and loan forgiveness), we recommend reviewing that definition carefully. Notably, payroll costs do not include compensation to an individual employee in excess of an annual salary of $100,000, prorated for the applicable period. Nor do payroll costs include compensation to any employee whose principal place of residence is outside the United States.
Assess How Much of Your Loan is Eligible for Forgiveness
The indebtedness on your PPP loan may be eligible for forgiveness. Forgiven PPP loan amounts are excluded from gross income for federal income tax purposes. Exactly how much of your loan is forgiven will depend on the amount and timing of certain of your costs and expenses. Try to assess how much of your PPP loan will be forgiven ahead of time.
The amount forgiven will equal the sum of the following approved costs, in all cases to the extent incurred and paid during the 8-week period that commences on the date PPP loan funds are first disbursed by the lender (the “8-Week Forgiveness Period”): (i) payroll costs; (ii) mortgage interest payments with respect to any indebtedness or debt instrument incurred before February 15, 2020; (iii) rent payments with respect to lease agreements in force before February 15, 2020; and (iv) utility payments for which service began before February 15, 2020. Notwithstanding the foregoing sum, the amount forgiven cannot exceed the principal amount of the PPP loan.
Note that, although PPP loan funds are generally permitted to be used through June 30, 2020, loan forgiveness only applies to approved costs expended during the 8-Week Forgiveness Period, and interest on other debt, despite being a permitted use generally, is not eligible for forgiveness. Furthermore, at least 75% of the forgiveness amount must be attributable to payroll costs, meaning no more than 25% may be attributable to other approved costs. Finally, payments to independent contractors do not count toward loan forgiveness and are otherwise excluded from payroll costs calculated under the PPP.
Avoid Employee and Wage Reductions
Try not to reduce your number of full-time employees or the compensation paid to employees. Otherwise, your PPP loan forgiveness may be diminished or eliminated. The PPP sets forth specific formulas and thresholds to determine how much of your PPP loan forgiveness will be diminished (if any) as a result of employee and wage reductions.
For reductions in employee numbers, the amount of loan forgiveness will be diminished by multiplying (i) the PPP loan amount otherwise eligible for forgiveness, by (ii) the quotient obtained by dividing (a) the average number of full-time equivalent employees during the 8-Week Forgiveness Period, by (b) the average number of full-time equivalent employees during either, at the election of the borrower, the period from February 15, 2019 to June 30, 2019 or the period from January 1, 2020 to February 29, 2020.
As an example, if the amount of PPP loan forgiveness is $100,000, the average number of full-time equivalent employees during the 8-Week Forgiveness Period is 15, the average number of full-time equivalent employees from February 15, 2019 to June 30, 2019 was 20, and the average number of full-time equivalent employees from January 1, 2020 to February 29, 2020 was 18, then the forgiveness amount would be diminished from $100,000 to an amount equal to (i) $100,000 multiplied by (ii) the fraction obtained by dividing (a) 15 by (b) 18. The adjusted PPP loan forgiveness amount would be $83,333.33, subject to further adjustment for any salary and wage reductions as set forth below.
For salary and wage reductions, the amount of loan forgiveness will be further diminished by the amount of any reduction in total salary or wages of any employee during the 8-Week Forgiveness Period that is in excess of 25% of the total salary or wages of such employee during the most recent full quarter during which the employee was employed before the 8-Week Forgiveness Period. Note, however, that this applies only to employees who did not receive, during any single pay period during 2019, wages or salary at an annualized rate of pay in an amount more than $100,000.
Importantly, if the loan forgiveness amount would be diminished due to reductions in employee numbers or compensation levels occurring between February 15, 2020 and April 26, 2020, borrowers will have the opportunity to cure by eliminating the reductions on or before June 30, 2020. If the employee and compensation reductions are eliminated by June 30, 2020, then the loan forgiveness amount to which the borrower would otherwise be entitled will not be diminished. We hope the SBA will provide further guidance and clarification on this subject.
Leave a Paper Trail and Apply for Loan Forgiveness
You’ll be required to submit to your PPP lender an application with accompanying documentation to obtain loan forgiveness after the 8-Week Forgiveness Period. You should therefore keep track of financial, employment, and other relevant records. Your PPP lender will issue a decision regarding loan forgiveness within 60 days of receipt of your application.
The documentation required to accompany an application includes the following: (i) documentation verifying the number of full-time equivalent employees on payroll and pay rates for the applicable periods, including federal payroll tax filings and state income, payroll, and unemployment insurance filings; (ii) documentation, including cancelled checks, payment receipts, transcripts of accounts, or other documents verifying payments on covered mortgage obligations, payments on covered lease obligations, and covered utility payments; (iii) a certification from an authorized representative that the documentation is true and correct and the amount for which forgiveness is requested was used for approved forgiveness purposes; and (iv) any other documentation the SBA determines necessary.
Know If and When You’ll Need to Repay Your PPP Loan
If for any reason your PPP loan is not forgiven, either in whole or in part, then you’ll need to know your repayment terms. The unforgiven portion of the loan has a 2-year maturity date. Regularly scheduled loan payments are deferred for 6 months, so the first payment is not required to be made until 6 months after the date of the loan (but interest will accrue during such time). The interest rate is fixed at 1% per annum, and the loan can be prepaid in whole or in part at any time prior to the 2-year maturity date without fee or penalty.
This article is intended to serve as a general overview of PPP loan use and navigation. If you have a PPP loan, we recommend also reviewing more detailed and comprehensive sources, such as the SBA’s PPP webpage, the U.S. Treasury’s PPP webpage, the links and sources listed therein, and the sources used to write this article described below. Should you have any questions or need assistance regarding your PPP loan, please contact Jack Gannon Jr. at 214-954-6808 or firstname.lastname@example.org, or reach out to any other attorney of our firm.
The information set forth in this article was primarily obtained from the following sources: (i) the text of the PPP set forth in Sections 1101 – 1114 of the CARES Act; (ii) the SBA’s Interim Final Rule on the PPP dated effective April 15, 2020; (iii) Frequently Asked Questions concerning the PPP provided by the SBA as of April 28, 2020; and (iv) the PPP Information Sheet provided by the U.S. Treasury.
This article should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult a lawyer concerning your own situation and legal questions. The information contained herein is current as of the date of this article.