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May 19, 2020

Checklist for Businesses Receiving a PPP Loan — Maximize Your Forgiveness

If you are a small business that received a Paycheck Protection Program loan (a “PPP loan”), you should begin preparations to maximize your PPP loan forgiveness.

As a refresher, the CARES Act’s Paycheck Protection Program established a new loan program for small businesses (500 or fewer employees) to pay for certain payroll, mortgage interest, rent, and utility payments during the COVID-19 crisis. The PPP loan proceeds that are used by a small business to pay for approved expenses (no more than 25% of which can be spent on non-payroll costs) during the eight-week period following the origination date of the PPP loan (the “Forgiveness Period”) are eligible for forgiveness. See our prior Alert.

1. Review Your Lender’s Loan Forgiveness Application

On May 15, 2020, the Small Business Administration (the “SBA”) released its form PPP loan forgiveness application (the “Application”). The SBA’s form Application provides useful guidance and instructions that give additional insight into the SBA’s forgiveness requirements. However, this Application is just a form. The financial institution that provided your PPP loan may use its own version of the Application, including via online application. You should reach out your PPP lender and obtain a copy of the specific application you will be asked to complete.

2. Make Sure You and Your Affiliates Do Not Have More Than One PPP Loan

The PPP loan guidance limits you and your affiliates to only one (1) PPP loan. In determining an “affiliate” for PPP loan purposes, you must use the SBA definition, with certain PPP-specific modifications. The SBA definition can be much broader than the traditional controlled group or affiliated service group determinations that are used in the benefit plan world, with the possibility that “affiliate” status can be created merely by certain powers being included in a contract between two entities. On the other hand, for purposes of PPP loans, the standard SBA definition has been modified so that “affiliate” status is ignored if your company’s NAISC code begins with 72 (including hotels and restaurants) and you employ 500 or fewer employees at each location, or if your company is an eligible franchisee. Check with your legal counsel to make sure you have properly identified your affiliates.

3. Do Not Claim Employee Retention Credits

The CARES Act provides a fully refundable employee retention payroll tax credit (“ERC”) based on certain qualified wages (including qualified health expenses) that eligible employers pay to their employees between March 13, 2020, and December 31, 2020. The ERC is not available to you if you receive a PPP loan, except where you repay the PPP loan by May 14, 2020.

In addition, note that if you or any of your affiliates receives a PPP loan (and do not repay it), neither you nor your affiliates are eligible for the ERC. See above for discussion of affiliates.

4. Do Not Delay Payment of Social Security Taxes

Employers and self-employed individuals may temporarily delay payment of the employer share (6.2%) of the Social Security taxes (not the Medicare tax portion) that they otherwise are responsible for paying in 2020, effective for payments due after March 27, 2020. The employer or self-employed individual may delay payment of 50% of the deferred payroll taxes until December 31, 2021, and the remaining 50% until December 31, 2022. The delay in payment of Social Security taxes is not available if you or your affiliates claim any forgiveness of your PPP loan. See above for discussion of affiliates.

5. Track Your Eligible Expenses

Under the CARES Act, your PPP loan forgiveness is measured over the eight-week period after the PPP loan is disbursed (subject to a special administrative convenience rule described below that may allow you to align your payroll costs with complete payroll periods).

The forgiveness amount may be up to the full principal amount, including accrued interest, provided that you use the full amount of the loan during the Forgiveness Period for approved payroll costs and non-payroll costs. Note that, on May 18, 2020, the SBA released guidance stating that under no circumstances may PPP loan proceeds (not just amounts forgiven) be used to support non-U.S. workers or operations.

Payroll Costs. Payroll costs include up to $100,000 in annual cash compensation for each employee ($15,385 per employee over the eight-week period), including:

  • salary,
  • wages,
  • commissions,
  • cash tips,
  • vacation/PTO, and
  • parental, family, medical, and sick leave (excluding qualified sick and family leave wages if a credit is claimed under the Families First Coronaviruses Response Act).

Payroll costs also include employer retirement plan contributions, employer group health plan premiums, and employer state and local taxes assessed on compensation; provided, however, these “non-cash” amounts are not limited by the $100,000 cap. To date, limited guidance has been issued regarding how retirement plan contributions should be calculated. You might be able to include 401(k) match, profit sharing, or ESOP contributions in payroll costs incurred during the Forgiveness Period even if you don’t normally make those contributions until the end of the plan year. However, this is a decision you need to make with the assistance of your legal counsel. At a minimum, it appears that what you claim as payroll costs needs to be consistent with the annual contributions you made in 2019 and should be pro-rated for the Forgiveness Period (8/52 or 15% of 2019 contributions).

Independent contractor and self-employed individuals’ costs do not count as payroll costs, but partner expenses do count as payroll costs that may be claimed by their partnership. In addition, it is likely that unemployment insurance premiums will not qualify as payroll costs.

To ease your administrative burden of tracking payroll costs, the Application permits you to use an “Alternative Payroll Covered Period.” Rather than measuring payroll costs from the date your PPP loan is disbursed, if your payroll is biweekly or more frequent, you may measure payroll costs for the eight-week period beginning on the first day of the first pay period following your PPP loan disbursement. For example, if your PPP loan was disbursed on April 20, 2020, and the first day of the first pay period following April 20, 2020 is April 26, 2020, under the Alternative Payroll Covered Period the first day of the eight-week period is April 26, 2020. For your Forgiveness Period with respect to payroll costs, you may choose whether to use the eight-week period commencing on the date of your PPP loan disbursement, or the Alternative Payroll Covered Period.

Non-Payroll Costs. Non-payroll costs include mortgage interest, rent and utilities. Non-payroll costs cannot exceed 25% of the total loan forgiveness.

Mortgage interest must be incurred prior to February 15, 2020 on any business mortgage obligation on real or personal property, and does not include mortgage prepayments or mortgage principal. Business mortgage obligations could include the interest on your mortgage for the warehouse you purchased to store business equipment or the interest on an auto loan for a vehicle you use to perform your business.

Rent means business rent payments, such as for the warehouse where you store business equipment or the vehicle you use to perform your business.

Utility payments are limited to business utility payments made pursuant to service agreements entered into prior to February 15, 2020. Utility payments are limited to payment for electricity, gas, water, transportation, telephone or internet access service. Non-payroll costs can be forgiven if they are incurred during the Forgiveness Period and are paid on or before the next regular billing date, even if that billing date is after the end of the Forgiveness Period.

Note that while you can use your PPP loan to pay interest payments on any other debt obligations that were incurred before February 15, 2020 or any refinancing of an SBA EIDL loan made between January 31, 2020 and April 3, 2020, these expenses are not counted in determining your loan forgiveness, and if you took the advance of the EIDL loan of up to $10,000 the full advance amount will be deducted from your permissible loan forgiveness.

6. Determine If You Need to Take Steps to Rehire or Reinstate Wages

Your PPP loan forgiveness amount may be reduced if, during the Forgiveness Period, you reduce wages of any employee earning salary or wages of $100,000 or less by more than 25% (determined by annualizing salary or wages during the Forgiveness Period). This 25% reduction is measured against the most recent full calendar quarter before the loan was disbursed and is analyzed separately for each employee. If you have decreased wages by more than 25% or have reduced your number of FTEs, you can still avoid any reduction if you restore wages or rehire FTEs by June 30, 2020. Those restored/rehired will not count against you when calculating any reductions to your PPP loan forgiveness.

Your PPP loan forgiveness amount may also be reduced if, during the Forgiveness Period, you decrease the number of your full-time equivalent employees (“FTEs”). This is calculated by comparing the average number of monthly FTEs during the Forgiveness Period with the number of FTEs during either the period from February 15, 2019 – June 30, 2019, or January 1, 2020 – February 29, 2020. You can choose which time period to use. According to the SBA form Application, you can choose one of two methods to calculate FTEs. Under the first method, for each employee, you enter the average number of hours paid during a week, divide by 40, and round the total to the nearest tenth. The maximum for each employee is 1.0. Under the second, simplified method, you assign 1.0 for employees that worked more than 40 hours during a week and 0.5 for employees who work fewer than 40 hours during a week. You should consult legal counsel to determine how to handle employees on vacation, leave, or other absences.

The SBA has announced that when counting employees, if you laid off an employee but you offered to rehire the same employee on or before June 30, 2020 (at the same salary or wages and the same number of hours), but the employee declined the offer, the employee may be excluded from the PPP loan forgiveness reduction calculation. You must have made a good faith written offer of rehire and you must document the employee’s rejection of that offer to take advantage of this rule. You may also exclude employees who were fired for cause, voluntarily resigned, or voluntarily requested and received a reduction in hours.

If you intend to apply for forgiveness, you should begin planning how you will return the number of FTEs and wages to pre-PPP loan levels.

7. Document, Document, Document...

You should collect sufficient records during the Forgiveness Period to substantiate your claim that your PPP loan was necessary (if you do not qualify for the safe harbor certification granted to recipients of loans of less than $2 million) and that you used the disbursed amounts for approved purposes.

When applying for loan forgiveness, the CARES Act requires that you provide documentation verifying your number of FTEs and payroll rates and provide other documentation to substantiate your claims. To support your application, you should collect:

  • IRS Form 941;
  • State quarterly wage reporting and unemployment insurance tax filings;
  • Payroll processing records, including bank account statements or third-party payroll service provider reports;
  • Evidence of retirement and health insurance premium payments and information/elections, such as payment receipts, cancelled checks and account statements;
  • Canceled checks or other evidence of business rent, and the underlying dated rental agreement;
  • Canceled checks or other evidence of payments on covered mortgage obligations, and the underlying dated mortgage contract and lender amortization schedule; and
  • Canceled checks or other evidence of payment of utilities, copies of bills, and evidence of when the utility service agreement was entered into.
  • Documentation regarding any wage decreases that could trigger a reduction in forgiveness, along with evidence that such wages were later returned to their prior level so as to avoid any reduction in forgiveness.
  • Documentation regarding any employee job offers and refusals, firings for cause, voluntary resignations, and written requests by any employee for reductions in work schedule.

Even if your PPP loan is less than $2 million, the SBA and Department of Treasury are still expected to perform random audits of PPP loan and forgiveness requests, so it is important that you maintain adequate records to substantiate your PPP loan forgiveness request.

All of this information should be retained for a minimum of six years after the date the loan is forgiven or repaid in full.

The Nelson Mullins Employee Benefits Group is ready to assist with questions or compliance steps. Please contact one of our Employee Benefits attorneys or the Nelson Mullins attorney with whom you work. For additional information on COVID-19 related issues, please visit the Nelson Mullins COVID-19 resource page.