Paycheck Protection Plan and CARES Act guidance

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. The ARPA expanded eligibility to Section 501(c)(3) nonprofits with not more than 500 employees per physical location.

In addition, the CAA 2021 and the ARPA expanded eligibility to Section 501(c)(6) nonprofits that have less than 300 employees per physical location, spend less than $1 million per year on lobbying, do not receive more than 15% of their receipts from lobbying activities, and engage in lobbying for no more than 15% of their total activities. Similarly, the ARPA expanded eligibility to all other Section 501(c) nonprofits (other than under sections (3), (4), (6), or (19)) that also have not more than 300 employees per physical location, spend less than $1 million per year on lobbying, do not receive more than 15% of their receipts from lobbying activities, and engage in lobbying for no more than 15% of their total activities,

Last updated on: March 26, 2021

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

Last updated on: April 6, 2020

The loan amount is an amount up to 2.5 times employer’s average monthly payroll costs (or, under the ARPA, up to 3.5 times for businesses in NAICS code 72), 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: March 26, 2021

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.

The CAA 2021 defined a seasonal employer as a business that either (1) does not operate more than 7 months in a calendar year or (2) had gross receipts for any six months of the prior year that were not more than 33.3% of the gross receipts for the other six months of that year.

Last updated on: January 5, 2021

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 (or, under the ARPA, up to 3.5 times for businesses in NAICS code 72) incurred from January 1, 2020 through February 29, 2020.

Last updated on: March 26, 2021

No. Under the CAA 2021, most employers may only choose to use the average payroll costs for the last 12 months prior to the date of the loan or the average payroll costs in 2019 or 2020 to calculate the loan amount unless (1) the employer is a seasonal employer or (2) the employer was not in business from February 15, 2019 through June 30, 2019.

Last updated on: March 26, 2021

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 for medical, dental, and vision, (6) group life and disability (which were added by the CAA 2021), (7) retirement benefits, and (8) state or local taxes assessed on employee compensation.

Under the ARPA, individuals who file a Form 1040, Schedule C may calculate their own payroll costs as the amount equal to either (a) net profit or (b) gross income minus (if the business has other employees) employee benefit costs, pension and profit-sharing costs, and wages. The exclusions from the gross income calculation are intended to avoid double-counting those amounts in calculating the loan amount. Businesses that use the gross income method and have PPLs in excess of $150,000 may be subject to review by the SBA of the certification by the business of the necessity of the loan. Further, use of gross income method requires the applicant to use Form 2483-C (or, for a Second Draw PPL, Form 2483-SD-C) when applying for a PPL.

Last updated on: March 26, 2021

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

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.” The CAA 2021 also allows PPLs to be used for covered operation costs, covered property damage costs, covered supplier costs, and covered worker protection expenditures, which are discussed in more detail in FAQ E.1. below. Importantly, the permitted uses are broader than the categories of uses that will entitle a borrower to forgiveness of the PPL.

Last updated on: January 5, 2021

The CAA 2021 provided additional funds for PPLs, allows eligible borrowers to apply for Second Draw PPLs, and modified various provisions relating to the calculation of PPLs and forgiveness. Below is a summary of some of the key changes to the Paycheck Protection Program as a result of the CCA 2021.

• Extends the PPP to March 31, 2021. Previously, the last day on which a Paycheck Protection Program loan application could have been approved was August 8, 2020. Additional guidance is expected that would clarify whether loan applications must be approved or submitted by March 31, 2021.
• Allows eligible businesses to incur a Second Draw PPL. Among other requirements to be eligible, a business must have 300 or less employees and demonstrate at least a 25% reduction in quarterly revenues as compared to the comparable prior year quarter.
• Revises the “covered period” during which eligible expenditures must be made for loan forgiveness to a date selected by the borrower that is between 8 weeks and 24 weeks from loan disbursement. Note that the covered period remains 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.
• Removes the CARES Act provision restricting employers who receive a PPL forgiveness from also qualifying for the employer tax credit.
• Provides that forgiveness of a PPL does not constitute income to the borrower and that the borrower does not lose any deductions as a result of the PPL.

Added on: January 5, 2021

The ARPA made modest changes to the Paycheck Protection Program, such as modifying eligibility requirements for some non-profit organizations and expanding eligibility to internet publishing organizations, and created a new fund to assisted eligible restaurants.

Added on: March 26, 2021

The following types of expenditures count towards the eligible forgiveness amount:

1. payroll costs, which are calculated the same as for the PPL application (but excludes qualified wages taken into account when determining the Employer Retention Credit),
2. interest payments on business mortgage obligations (on real or personal property) incurred before February 15, 2020 (excluding any prepayments),
3. rent or lease payments on business leases (for real or personal property) in force before February 15, 2020,
4. utility payments for electricity, gas, water, transportation, telephone, or internet access for which service began before February 15, 2020.
5. covered operational costs, which are payments for any business software or cloud computing service that facilitates any of the following: business operations; product or service delivery; the processing, payment, or tracking of payroll expenses; human resources; sales and billing functions; or accounting or tracking of supplies, inventory, records and expenses;
6. covered property damage costs, which are costs related to property damage and vandalism or looting due to public disturbances that occurred during 2020 that were not covered by insurance or other compensation;
7. covered supplier costs, which are expenditures made by an entity to a supplier of goods for the supply of goods that both are essential to the operations of the borrower at the time at which the expenditure is made; and that were made pursuant to a contract, order, or purchase order either in effect at any time before the covered period or, with respect to perishable goods, in effect before or at any time during the covered period; and
8. covered worker protection expenditures, which include operating or capital expenses to facilitate or adapt the business to comply with certain requirements or guidance related to sanitation, social distancing, or any other worker or customer safety requirement related to COVID–19.

Borrowers will need to provide purchase orders and invoices to substantiate these new eligible costs as a part of the forgiveness process. In addition, the nonpayroll costs described it items 5 through 8 above are eligible for forgiveness only if the borrower had not submitted a forgiveness application as of the date of effectives of the CAA 2021 (December 27, 2021).

Note that 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 CAA 2021 did not alter this requirement. 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: March 26, 2021

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: January 05, 2021

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 FAQ E.3.A below.

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. Consistent with the FAQs from the Department of Treasury released on August 4, 2020, the Interim Final Rule on Loan Forgiveness and Loan Review Procedures as amended by the Economic Aid Act (effective February 3, 2021) states 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 or 2020 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 or 2020 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 or 2020 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 or 2020 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 noncash compensation payments do not count toward the maximum per individual cap of $20,833 (24-week covered period) or the minimum per individual cap of $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 or 2020 net profit (or gross wages less certain costs) as reported on IRS Form 1040 Schedule C (or 2.5/12 of 2019 or 2020 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 or 2020 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 or 2002 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 or 2020 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 2020, 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: March 26, 2021

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

The PPL proceeds must be used on qualifying expenditures during the “covered period” in order to be eligible for forgiveness. Under the CAA 2021, the covered period begins on the date on which the borrower receives the PPL and ends on a date elected by the borrower that is between the 8th and 24th week after the borrower receives the PPL.

The payroll costs must be paid during the covered period except that payroll costs incurred but not paid during the 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 a 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: January 05, 2021

Any loan proceeds that have not been used during the 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 may count towards forgiveness if they are paid on or before the next regular payroll date or billing date, as applicable. Please see FAQ E.4. 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 FAQ E14 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 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 February 15, 2019 and February 15, 2020.

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 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 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 with respect to PPLs outstanding as of the effectiveness of the CAA 2021 and the end of the covered period with respect to PPLs made after the date of effectiveness of the CAA 2021. 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 FAQ E.13.
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 with respect to PPLs outstanding as of the effectiveness of the CAA 2021 and the end of the covered period with respect to PPLs made after the date of effectiveness of the CAA 2021, the borrower restores its FTEE levels to those in the pay period that included February 15, 2020

Last updated on: March 26, 2021

An eligible borrower that uses Form 3508S (see FAQ E.14 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

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 the borrower has restored the salary or wages of that employee by the earlier of (1) the date the loan forgiveness application is submitted to borrower’s lender and (2) December 31, 2020 with respect to PPLs outstanding as of the effectiveness of the CAA 2021 and the end of the covered period with respect to PPLs made after the date of effectiveness of the CAA 2021.

Last updated on: March 26, 2021

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 FAQ E.12. 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 FAQ E.14. 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, the CAA 2021 requires the Department of Treasury to issue a new, one-page forgiveness application for borrowers with a PPL of $150,000 or less. We have made reports available to our clients to assist them with the forgiveness process. We intend to update the report as guidance continues to evolve.

In addition, the CAA 2021 requires the Department of Treasury to issue a new, one-page forgiveness application for borrowers with a PPL of $150,000 or less. We have made reports available to our clients to assist them with the forgiveness process. We intend to update the report as guidance continues to evolve.

Last updated on: January 05, 2021

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, 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 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. 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).

Principal, interest and fees are subject to forbearance until a forgiveness determination has been made or following the tenth month after the end of a 24-week 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. If the entire amount is not forgiven and the the borrower appeals the decision, then the forbearance would continue during the pendency of the appeal.

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 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, 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) 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 17, 2021

Borrowers must use PPL Loan Forgiveness Application Form 3508 unless they are eligible to use one of the simplified forms. Borrowers with PPLs of $150,000 or less may use PPP Loan Forgiveness Application Form 3508S.

Previously, the Department of Treasury also created the EZ Loan Forgiveness Application Form (Form 3508EZ), which a borrower may use 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: August 17, 2021

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 between March 1, 2020 and December 31, 2020 (or, for loans after the effectiveness of the CAA 2021 (December 27, 2020), the end of the covered period) 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: March 26, 2021

The CAA 2021 instructs the Department of Treasury to issue a one-page, simplified forgiveness application for borrowers with PPLs of $150,000 or less. It is unclear whether this application will replace PPP Loan Forgiveness Application Form 3508S that is available to borrowers with PPLs of $50,000 or less. 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. Absent further guidance, 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 FAQ E.10. above), 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: January 05, 2021

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 FAQ E.11 above, 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

The CAA 2021 requires the Department of Treasury to issue regulations by January 13, 2020 that would allow borrowers who returned all or part of their PPL to reapply for the maximum amount for which they are eligible as long as their PPL has not been forgiven. The CAA 2021 also allows borrowers whose loan calculations increased due to the regulations issued by the Department of Treasury to work with their lender to increase the amount of their loans.

Added on: January 05, 2021

The CAA 2021 created “Second Draw PPLs” that allow eligible borrowers who already have a PPL to obtain a second PPL. In order to be eligible for a Second Draw PPL, a borrower:

• Must have been in existence on February 15, 2020,
• Must have no more than 300 employees,
• Have used, or will use, all of the borrower’s original PPL, and
• Demonstrate at least a 25% reduction in revenues (or, in the case of a non-profit borrower, in receipts) for any calendar quarter in 2020 as compared to the comparable calendar quarter in 2019. If the borrower was not in existence for all of 2019, then alternate comparison periods apply.

In addition, borrowers of a Second Draw PPLs of $150,000 or less may use the “COVID Revenue Reduction Score” developed by SBA’s contractor as an optional method to document the borrower’s revenue reduction rather than calculating the actual reduction. The score is based on a variety of inputs including industry, geography, and business size, and uses current data on economic recovery and return of businesses to operational status. If the borrower’s score meets or exceeds the value required for validation of the borrower’s revenue reduction, use of the score will satisfy the requirement for the borrower to document revenue reduction.

Last updated on: August 17, 2021

Generally, the amount of a Second Draw PPL is calculated in the same manner as initial PPLs, e.g. equal to 2.5 times the borrower’s average monthly payroll costs during either (at the borrower’s option) the 12 months prior to the date of the loan or 2019; however, the maximum amount cannot exceed $2 million.

If the borrower’s business operates in an industry beginning with NAICS code 72 (Accommodations and Food Services), then the Second Draw PPL may be up to 3.5 times the borrower’s average monthly payroll costs.

If the borrower is a seasonal employer, then the borrower may calculate payroll costs based on any 12-week period between February 15, 2019 and February 15, 2020. See FAQ B.2. above for the definition of “seasonal employers.”

Added on: January 05, 2021

Yes. The same forgiveness requirements that apply to initial PPLs also apply to Second Draw PPLs. A borrower must submit its forgiveness application for a Second Draw PPL in excess of $150,000 simultaneously with or after the forgiveness application for the First Draw PPL, even if the forgiveness amount for the First Draw PPL is zero.

Last updated on: June 15, 2021

The CAA 2021 created a $15 billion grant program for live venue operators or promoters, theatrical producers, live performing arts organizations, museum operators, motion picture theatre operators, or talent representatives who demonstrate a 25% reduction in revenues, did not receive a PPL (including a Second Draw PPL) after December 27, 2021, and meet other eligibility criteria. The SBA will be administering this program. Priority during the first 14 days of the program will be given to eligible entities with a 90% revenue reduction and during the second 14 days to eligible entities with a 70% revenue reduction. Under the ARPA, borrowers of a PPL after the effectiveness of the CAA 2021 (December 27, 2020) are no longer ineligible for a Shuttered Venue Grant under certain circumstances; however, in such a case, the amount of any grant would be reduced by the amount of any PPLs. Please consult with your advisors and the SBA for more information.

Last updated on: March 26, 2021

The ARPA created a $28.6 billion fund to assist restaurants, food trucks, caterers, bars, or other similar places of business where the public or patrons assemble for the primary purpose of being served food or drink. However, the following businesses are excluded:

• State or local government-operated businesses,
• Businesses with more than 20 locations,
• Businesses that received or have a pending application for a Shuttered Venue Grant, and
• Publicly-traded companies.

In general, grants are equal to the “pandemic-related revenue loss,” which generally compares gross receipts in 2019 to gross receipts in 2020, and are reduced by the amount of any PPL. Grants are capped at $10 million and limited to $5 million per physical location. Grant funds may only be used for specified purposes, which are generally similar to permitted uses of a PPL plus operating expenses.

Added on: March 26, 2021

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.

The CAA 2021 and the ARPA both provided additional funds for the EIDL. Businesses are urged to consult with the SBA or their advisors about the availability of an EIDL.

Last updated on: March 26, 2021