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Written by Marty Bodnar
To help businesses deal with the Covid-19 shutdown, Congress enacted the Payroll Protection Program (“PPP”) dedicating over $1 trillion for potentially forgivable loans to businesses, with 500 or fewer employees.
Upon receiving a PPP loan, a business has 8 weeks to spend the loan proceeds on certain expenses to be eligible to forgive the entire amount of the loan. On May 15th, the Small Business Administration (“SBA”) announced its long-waited forgiveness rules through the release of the PPP Loan Forgiveness Application.
The Application confirms the public rules on PPP forgiveness. Loan forgiveness depends on how the loan proceeds are spent over an 8-week period. To qualify for forgiveness of the entire PPP loan, at least 75% of it must be spent on payroll, while up to the remaining 25% of it must be spent on mortgage interest, rent, and utility payments incurred before February 15, 2020.
The Application confirms the PPP rules on payroll. Payroll includes cash compensation, employer contributions for group health insurance and retirement plans, and state and local taxes assessed on employee compensation. Under PPP rules and the Application, payroll doesn’t include compensation in excess of $100,000, qualified sick leave under the Families First Coronavirus Response Act or federal income taxes and FICA withheld from an employee.
The Application confirms the two reductions under PPP rules. Loan forgiveness amounts will be reduced 1) if a business decreases the number of its full-time employees or 2) decreases its cash compensation by more than 25% for any employee making less than $100,000 annually.
The Application clarifies the PPP rules in two important areas. The PPP statute provided that the eligible costs had to be incurred during an 8-week period. The Application broadens these rules to provide that such costs can be either incurred or paid during the 8-week period. The PPP rules provide that the 8-week period starts on the date the PPP loan proceeds are received. The Application broadened these rules to include another start date: the first day of the first pay period following the receipt of these funds.
On May 13, 2020, the SBA released an updated FAQ sheet on the PPP. Businesses with a PPP loan under $2 million are eligible for forgiveness without proof of financial hardship. The SBA says that this safe harbor is appropriate because borrowers are less likely to have had access to adequate sources of liquidity than borrowers, who obtain PPP loans over $2 million.
With the release of the 11-page Application and its instructions, all businesses, who received a PPP loan, should start to read the Application to become familiar with it, start to gather the needed documents and information and start to complete it with the help of its accountant, bookkeeper and legal counsel. Getting a PPP loan forgiven will be an important step in the recovery of most businesses.
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