Two weeks ago the submission of applications under the SBA’s Payroll Protection Plan (PPP) began.  While the process did not go smoothly in all cases, funds are being distributed – sometimes as quickly as within three days of applying and being approved.  

The focus has shifted and borrowers are now realizing that they need to understand exactly what to do once they have received the funds and exactly how to take advantage of the forgiveness component. This of course, is not an easy task since there has been no specific guidance issued and as we have learned, what we read and understood to be law, may not be.

So here are some thoughts…subject to modification or change. 

There are several factors that borrowers must be aware of if they are going to apply for forgiveness at the conclusion of the eight week period.  

  • The borrower has agreed to spend the money in accordance with the program requirements and the signed note. This means the money must be applied to payroll and occupancy costs (including rent, utilities, and other expenses).  These are known as “costs incurred and payments made” within the eight week period.  We are not certain how “costs incurred and payments made” will be defined yet.  When we know, we will let you know.     
  • Under the guidelines outlined in the forgiveness part of program, if the employee and compensation levels are maintained, and the borrower uses all of the loan proceeds for forgivable purposes as described under the law, then the borrower will not be held responsible for any loan re-payment. Employee headcount is a critical aspect of the loan and must be maintained.

There are a few different interpretations of exactly how the employee levels mentioned above will be calculated. As we mentioned already, there is no final guidance yet as to how the loan forgiveness program will actually work. Currently, borrowers and their advisors are relying on the Interim Final Rule which the SBA published the week of March 30, 2020.  

  • Forgivable costs are defined those costs that are incurred over the eight week period following the date of the loan.  The clock starts ticking when the loan is received. If the loan proceeds are received on April 15, 2020 then the eight week period starts on April 15, 2020 and ends after eight weeks.  (Remember, the payment period is not two months. It is eight weeks.)
  • 75% of the loan forgiveness amount must be attributed to payroll costs while only 25% can be applied to non-payroll expenses.  For example, borrowers must recognize that if they received a loan of $100, it is required that at least $75 be spent on payroll costs. (Payroll costs are generally defined the same way they were for purposes of the PPP application).  If a borrower does not meet this test, funds will need to be returned.
  • If the borrower takes advantage of the PPP loan forgiveness program they cannot take advantage of other credits that may be available, such as the employee retention credit.
  • Employers who have received PPP loans may elect to defer employer federal   payroll taxes (social security) up to the time the PPP loan is forgiven.

On behalf of all the current and future borrowers, and those who are trying to provide advice to the business community, it is hoped, and anticipated, that the SBA will issue additional guidance on loan forgiveness and help to clarify the responsibilities and factors for all.  Hopefully we get that guidance before Independence Day.