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Law360 (May 29, 2020, 6:01 PM EDT) --
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| Amal Dave |
Ever since lenders started making disbursements of PPP loans in early April, borrowers have been eagerly awaiting guidance on forgiveness calculations that is needed for borrowers to make critical operational decisions, such as when and how to bring back employees.
The application and rule provide some answers, but raise many more questions; and with some borrowers more than halfway through their forgiveness periods, there is limited time for many borrowers to make informed decisions and get concrete answers.
The Good: Borrower-Favorable Guidance
The application and rule include some borrower-favorable guidance.
Alignment of Forgiveness Period With Payroll Cycle
To calculate forgivable payroll costs, the application and rule permit borrowers to elect to start their eight week forgiveness period either on the date of loan disbursement or on the first day of the first pay period after the PPP loan is disbursed.
Additionally, payroll costs incurred but not paid during the borrower's last pay period of the forgiveness period, are eligible for forgiveness if paid on or before the next regular payment date after the forgiveness period ends.
These provisions can align the forgiveness period with the borrower's payroll cycle and help ensure that borrowers are able to take advantage of the full 56 days of the forgiveness period for payroll costs.
Business-Friendly Indications Surrounding Nonpayroll Expenses
The application hints that the SBA will take a more business-friendly view towards nonpayroll expenses. Specifically, the interim final rule issued on April 2, introduced a restriction limiting the use of PPP proceeds for nonpayroll expenses to 25% of the loan amount.
The use restriction, which was separate from a limitation capping forgiveness of nonpayroll expenses at 25% of the forgiveness amount, raised speculation about what penalty would befall borrowers violating the use restriction. However, a note in the application's instructions states that borrowers are not required to report all eligible nonpayroll payments if they are not seeking forgiveness for such payments.
This implies that borrowers are permitted to spend more than 25% of their loan on otherwise permissible nonpayroll expenses, but that those nonpayroll expenses must be reduced to 25% of the total forgiveness request, and that the excess spend will simply be treated as a loan.
Expansion of Safe Harbor for FTE Headcount Reductions
The application also expands the safe harbor that limits full-time equivalent, or FTE, headcount reductions in a number of instances. In addition to employees who rejected good faith written offers of reemployment, any employees who were fired for cause, voluntarily resigned, or voluntarily requested and received fewer hours, are also not counted as reducing the borrower's FTE headcount.
The Bad: Continued Ambiguity and Complicated Calculations
Many questions remain unanswered.
Forgiveness Period for Late Applicants Remains Uncertain
The treatment of expenses incurred by borrowers whose forgiveness period ends after the June 30, the statutory end of the PPP, remains uncertain.
No Clarity on Scope of Covered Rent
The CARES Act only defines "covered rent" as "rent obligated under a leasing agreement in force" before Feb. 15, 2020. There remains no guidance as to whether additional rental costs such as common area maintenance charges, property taxes or late fees are included in the definition of covered rent.
Confusion Surrounding Forgiveness Adjustments
The application's instructions concerning calculating adjustments for FTE reductions and salary/hourly wage reductions require complicated calculations and a detailed listing of employees, which are sure to trip up borrowers.
For example, the application indicates that employees hired in 2020 whose salary was subsequently reduced would be taken into account in calculating the salary/hourly wage reduction. And while there's a carveout for high-wage employees hired prior to 2020, it's not clear whether 2020 hires with salaries greater than $100,000 would be similarly excluded.
In many cases, professional assistance will be required to parse the rules, which seems unduly burdensome for small business owners who are already stretched thin by the demands of planning for and executing reopening in the midst of a global pandemic.
The Ugly: The Not-So-Subtle Threat of Investigations
Perhaps most concerning is the statement in the application indicating that borrowers are required to keep detailed records supporting the application for six years and to permit the SBA Inspector General to access such files upon request.
Instead of threatening borrowers with investigations, the SBA could do more for the economy and for already-ailing business owners by adopting a more permissive attitude toward reasonable loan forgiveness calculations.
Moreover, it could clarify that a later determination by the SBA that a borrower's position is not consistent with subsequent guidance from the SBA will simply result in the challenged portion of the borrower's calculation being treated as a loan rather than triggering a more stringent penalty.
Otherwise, this sentence, buried at the bottom of page 10 of the application provides a stark warning to borrowers: "[F]orgiveness of your loan does not end your relationship with the SBA."
Amal U. Dave is a partner at Arent Fox LLP.
Partners Richard J. Krainin and Tal M. Unrad, and associates Justin A. Goldberg and Bryce W. Donohue, contributed to this article.
The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
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