COVID-19 Relief: Loan Forgiveness Requirements and Loan Review Procedures for Renewed Paycheck Protection Program

On January 19, 2021, the SBA issued a further interim final rule on loan forgiveness and loan review procedures for PPP loans under the Economic Aid Act.

Existing Forgivable Expenses

Under the PPP regulations in effect prior to the Economic Aid Act, the only expenses eligible for loan forgiveness were the following – each of which continues to be eligible for forgiveness under the Economic Aid Act.

1. “Payroll costs” consisting of compensation to U.S.-based employees in the form of salary, wages, commissions, or similar compensation, including cash tips (not to exceed $100,000 on an annualized basis); payment for vacation, parental, family, medical, or sick leave; allowance for separation or dismissal; payment for the provision of employee benefits consisting of group health care coverage, including insurance premiums, and retirement; payment of state and local taxes assessed on compensation of employees; and for an independent contractor or sole proprietor, wages, commissions, income, or net earnings from self-employment, or similar compensation;
2. “Covered mortgage obligations” consisting of payments of interest (not including any prepayment or payment of principal) on any business mortgage obligation on real or personal property incurred before February 15, 2020;
3. “Covered rent obligations” consisting of business rent or lease payments pursuant to lease agreements for real or personal property in force before February 15, 2020; and
4. “Covered utility payments” consisting of business payments for a service for the distribution of electricity, gas, water, transportation, telephone, or internet access for which service began before February 15, 2020.

New Forgivable Expenses Under the Economic Aid Act

In addition to the categories of expenses described above, proceeds of PPP loans may be forgiven if paid or incurred during the “covered period” for the following new categories of expenses permitted by the Economic Aid Act.

1. Payments for employee group life, disability, vision, or dental insurance, including insurance premiums, are to be considered “payroll costs”;
2. “Covered operations expenditures” consisting of payments for any business software or cloud computing service that facilitates 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;
3. “Covered property damage costs” consisting of costs related to property damage and vandalism or looting due to public disturbances that occurred during 2020 that was not covered by insurance or other compensation;
4. “Covered supplier costs” consisting of expenditures made to a supplier for the supply of goods that (A) are essential to the operations of the borrower at the time at which the expenditure is made; and (B) is made pursuant to a contract, order, or purchase order (i) in effect at any time before the covered period with respect to the applicable PPP Loan; or (ii) with respect to perishable goods, in effect before or at any time during the covered period with respect to the applicable PPP loan; and
5. “Covered worker protection expenditures” consisting of any operating or capital expenditures to comply with requirements established or guidance issued by the Department of Health and Human Services, the Centers for Disease Control, or the Occupational Safety and Health Administration, or any equivalent requirements or guidance issued by a state or local government, during the period starting March 1, 2020, and ending the date on which the national emergency with respect to the COVID-19 expires, including expenditures for:

• the purchase, maintenance, or renovation of assets that:

-  create or expand drive-through window facility,

-  an indoor, outdoor, or combined air or air pressure ventilation or filtration system,

-  a physical barrier such as a sneeze guard,

-  an expansion of additional indoor, outdoor, or combined business space,

-  an onsite or offsite health screening capability, or

-  other assets relating to the compliance with federal, local or state requirements or guidance;

• the purchase of covered materials described in Section 328.103(a) of title 44, Code of Federal Regulations, or any successor regulation, which currently include surgical N95 filtering facepiece respirators, surgical masks that meet certain fluid barrier protection standards, nitrile gloves, surgical gowns and syringes and hypodermic needles;
• particulate filtering facepiece respirators approved by the National Institute for Occupational Safety and Health, including those approved only for emergency use authorization; and
• other kinds of personal protective equipment, as determined by the Administrator in consultation with the Secretary of Health and Human Services and the Secretary of Labor.

Any expenditures for residential real property or intangible property may not be considered “covered worker protection expenditures.”

The Economic Aid Act expands the forgivable uses of PPP loans retroactively to include PPP loans issued prior to the Economic Aid Act. A borrower of an existing PPP loan may seek forgiveness for the additional eligible expenditures, even if it has submitted a forgiveness application, as long as SBA has not yet made a forgiveness payment on the borrower’s loan to the borrower’s PPP lender as of December 27, 2020.

The Economic Aid Act allows the borrower to select a covered period between eight weeks and 24 weeks, as long as the covered period for its First Draw PPP Loan does not overlap with the covered period for its Second Draw PPP Loan.

The Economic Aid Act repealed the CARES Act provision requiring the SBA to deduct from a borrower’s forgiveness amount any Economic Injury Disaster Loan (EIDL) advance received by the borrower.

Reductions to Forgiveness Amount and Exemptions

Reductions to a borrower’s loan forgiveness amount based on reductions in full-time equivalent (FTE) employees or in employee compensation, discussed here, remain applicable to First Draw and Second Draw PPP Loans made after December 27, 2020.

The Economic Aid Act continues to exempt a borrower’s forgiveness amount from being proportionally reduced based on a reduction in FTEs during the covered period for any of the following reasons.

• The borrower either, on or before the last day of the loan’s covered period:

-  Eliminates the amount of the reduction in FTE employees (if made between February 15, 2020 and April 26, 2020) by restoring its number of FTE employees to the number of FTE employees during the pay period covering February 15, 2020, or

-  Is able to document in good faith the following: (1) an inability to rehire individuals who were employees of the borrower on February 15, 2020; and (2) an inability to hire similarly qualified individuals for unfilled positions.

The documents that borrowers should maintain to show compliance with this exemption include the written offer to rehire an individual, a written record of the offer’s rejection, and a written record of unsuccessful efforts to hire a similarly qualified individual.

• The borrower can prove an inability to return to 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 the last day of the loan’s covered period, by the Secretary of Health and Human Services (HHS), the Director of the Centers for Disease Control and Prevention (CDC), or the Occupational Safety and Health Administration (OSHA) related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID-19, and any orders of state and local governments based on such HHS, CDC or OSHA guidance. Borrowers that intend to rely on this exemption should provide copies of applicable COVID-19 requirements or guidance for each business location and relevant financial records.
• The borrower received a PPP loan of $50,000 or less and together with its affiliates did not receive First Draw PPP Loans totaling $2 million or more or Second Draw PPP Loans totaling $2 million or more.

Loan Forgiveness Process

To receive loan forgiveness on either a First Draw PPP Loan or a Second Draw PPP Loan, a borrower must complete and submit the appropriate forgiveness application to its lender within 10 months after the end of its covered period. The SBA issued three forgiveness application forms:

1. An application for PPP loans in an amount equal to or less than $150,000.
2. An application for borrowers who expect to receive full forgiveness because they (A) have not reduced compensation of any employee earning less than $100,000 annually by more than 25 percent and (B) either (i) have not reduced its number of FTE employees or (ii) has reduced the number of its FTE employees but can claim exemption from forgiveness reduction.
3. An application applicable to all other borrowers.

For Second Draw PPP Loans in excess of $150,000, a borrower must submit their loan forgiveness application for the First Draw PPP Loan before or simultaneously with the loan forgiveness application for its Second Draw PPP Loan, even if it does not expect to receive any forgiveness on its First Draw PPP Loan. As under the CARES Act, the loan forgiveness process can take up to 60 days for the lender’s review and another 90 days for SBA’s approval of the lender’s decision.

SBA may, at its discretion, review a borrower’s First Draw PPP Loan and Second Draw PPP Loan at the same time or at different times. For loans of more than $150,000, the borrower must retain PPP documentation in its files for six years after the date the loan is forgiven or repaid in full. For loans of $150,000 or less, the borrower must retain employment records for four years and all other records for three years following submission of the loan forgiveness application.

Improved Coordination Between PPP and Employee Retention Tax Credit

Under the CARES Act, a business could not receive a PPP loan and also receive the Employee Retention Tax Credit allowed under section 2301 of the CARES Act. The Economic Aid Act eliminates that restriction so that a PPP loan borrower may also claim the Employee Retention Tax Credit, provided that no payroll costs that are qualified wages taken into account in determining the Employer Retention Credit are also included among those payroll costs submitted for loan forgiveness. This change is retroactive to PPP loans taken out before the enactment of the Economic Aid Act.

Additional Guidance

Pillsbury attorneys can help clients interpret and assess the PPP requirements as clients assess and strategize regarding the availability of SBA loans and other stimulus funds. We summarize PPP loan provisions here; what funds, corporate investors and their portfolio companies should know about eligibility for the PPP here; additional regulations and guidance regarding loan forgiveness here and here; and the requirements of the PPP as amended by the Economic Aid Act here. We are proactively monitoring any forthcoming regulations and guidance in response to the new legislation, including additional guidance governing loan forgiveness. This alert and any accompanying materials are not legal advice, are not a complete summary of the subject matter, and are subject to the terms of use found at: https://www.pillsburylaw.com/en/terms-of-use.html.