By Eric A. Rosen
As published in the Daily Business Review, June 9, 2020
On May 15, the U.S. Department of the Treasury released the long-awaited loan forgiveness application. Below are some answers to what we anticipate will be the most frequently asked questions.
What amount of the loan is forgivable?
Borrowers are eligible for forgiveness for the payroll costs paid and payroll costs incurred during the eight-week (56-day) covered period and alternative covered period. Additionally, certain nonpayroll costs are eligible for forgiveness. These include covered mortgage obligations, including payments of interest (not including any prepayment or payment of principal) on any lien against real or personal property, covered rent obligations, including business rent or lease payments pursuant to lease agreements for real or personal property, and covered utility payments, including business payments for electricity, gas, water, transportation, telephone, or internet access. Please keep in mind that these costs must have been incurred or in force before Feb. 15.
A borrower’s eligibility for loan forgiveness will be evaluated in accordance with PPP regulations and guidance issued by the SBA through the date of the application. The SBA may direct a lender to disapprove the borrower’s loan forgiveness application if the SBA determines that the borrower was ineligible for the PPP loan. It is crucial that borrowers make every effort to determine whether they meet eligibility requirements before submitting the application.
What is the difference between the covered period and the alternative covered period?
The covered period refers to the eight-week (56-day) period beginning the day of your PPP loan disbursement. The alternative covered period is an option for borrowers with a biweekly (or more frequent) payroll schedule. These borrowers may elect to calculate eligible payroll costs using the eight-week (56-day) period that begins on the first day of their first pay period following their PPP loan disbursement.
How do I request forgiveness?
Loan forgiveness is not automatic. The application for forgiveness will include documents that verify the number of full-time employees and pay rates, as well as payments on eligible mortgage, lease and utility obligations. The lender must make a decision regarding forgiveness within 60 days. The loan forgiveness application can be found on the U.S. Department of the Treasury’s website.
All borrowers must certify whether the total loan amount of their business or affiliated businesses, is $2 million or above. The SBA has previously notified small businesses that loans of $2 million or above will likely be audited.
What if all or a portion of the loan is not forgivable?
If all or a portion of the loan is not forgivable, the loan will need to be repaid. The loan will become due in 2 years from the date it was funded. Although interest will accrue, payments can be deferred for 6 months and there is no prepayment penalty.
What happens if I had to reduce my full-time workforce during the covered period or alternative covered period?
If you had to reduce the number of full-time equivalent employees during the covered period or alternative covered period, your forgivable amount may be reduced. However, if a borrower reduced its full-time equivalent employee levels in the period beginning Feb. 15, and ending April 26, but then restores its full-time equivalent employee levels by no later than June 30 to its full-time equivalent employee levels in the borrower’s pay period that included Feb. 15, a borrower can avoid a reduction in the amount forgiven.
Loan forgiveness reductions will not be reduced for employee reductions related to individuals to whom the borrower has made a written offer in good faith to rehire but the employee declined, employees whose employment was terminated for cause, or employees who voluntarily resigned.
What if I pay myself via an owner’s draw?
The SBA has clarified that any owner-employee or self-employed individual may calculate payroll costs as eight weeks of 2019 compensation. However, the total forgivable amount is capped at $15,385 per individual.
Eric A. Rosen is a shareholder and chair of the bankruptcy, creditors’ rights and business restructuring practice group at Fowler White Burnett in West Palm Beach. Contact him at ERosen@fowler-white.com.