Roadmap to Paycheck Protection Program Loan Forgiveness – Part V: The Application

On August 10, 2020, the Small Business Administration (SBA) opened up its Paycheck Protection Program (PPP) loan forgiveness portal to lenders, which means banks may now process loan applications from borrowers. Unfortunately, given the ever-changing standards and large volume of loans, many lenders have been hesitant to broadly open their own forgiveness platforms until the rules are well established and final guidance has been issued. Additionally, some banks are prioritizing the loan forgiveness process, focusing first on the large balance loans.

Based on what we know so far, this article will provide an overview of the application process and the documents and forms borrowers should have on hand when applying for loan forgiveness.

Which Loan Application to Choose?

Form 3508 is the SBA form that must be submitted to the lender to apply for forgiveness. However, certain borrowers may be eligible for the Form 3508EZ. If the borrower can meet at least one of these requirements, Form 3508EZ may be submitted instead:

• No employees: The borrower is a self-employed individual, independent contractor, or sole proprietor who had no employees at the time of the PPP loan application and included no employee salaries in the computation of average monthly payroll in the Borrower Application Form.
• No salary or FTE reductions: The borrower did not reduce the salary or wage for any employee by more than 25% and experienced no FTE reductions (see Part III for a detailed discussion on this).
• No salary reduction but full operations suspended: The borrower did not reduce the salary or wage for any employee by more than 25% and could not operate at the same pre-COVID activity levels due to compliance with agency imposed restrictions for sanitation, social distances, or other COVID-19 safety requirements (see Part III for a detailed discussion on this).

For borrowers that received $150,000 or less, Form 3508S is available. Previously the threshold was $50,000, but under the revised form issued January 19, 2021, the threshold increases to $150,000. Note, if the borrower is affiliated with other businesses and the PPP loan total for all affiliated organizations is $2 million or more, the borrower is ineligible for Form 3508S.

Form 3508S is much more simplified than the other forms. Instead of showing the calculations for forgiveness, Form 3508S simply asks you to provide the forgiveness amount requested and the loan forgiveness amount is not reduced for FTE reductions. Furthermore, no additional documentation is required when submitting Form 3508S to the lender. However, borrowers should maintain records and be prepared to provide documentation if requested.

What Documents to Gather

Form 3508 and Form 3508EZ include several documents that must be submitted with the forgiveness application and others that should be maintained. As mentioned previously, no additional documentation is required when submitting Form 3508S.

Information that must be submitted with Form 3508 or Form 3508EZ may include:

• Bank statements or third-party payroll reports that document cash compensation paid during the covered period or alternative payroll period;
• Tax forms (or equivalent payroll provider reports) during the covered period, such as Form 941 and quarterly state payroll and unemployment filings;
• Documentation supporting any employer contributions to employee health insurance and retirement plans that are part of the loan forgiveness calculation;
• Records that show the average FTE calculations for the relevant periods in 2019, 2020, and seasonal employees (if applicable);
• Amortization schedules and checks showing payments for mortgage interest from February 2020 through the covered period;
• Copies of current lease agreements and payment documentation from February 2020 through the covered period; and
• Copies of utility invoices from February 2020 and those paid during the covered period, along with payment documentation records.

Other information that a borrower should maintain records for, but is not required to submit to the SBA at the time of application, include:

• Documentation to support the calculations in Form 3508, Schedule A (Table 1, Table 2, and FTE Reduction Safe Harbor);
• Documentation to show salaries or hourly wages were not reduced by more than 25% during the covered period (Form 3508EZ);
• Information regarding employee job offers and refusals, voluntary resignations, firing for cause, reductions in work schedules, and inability to rehire individuals; and
• Documentation, by business location, of any government order that caused a full or partial shutdown between February 15, 2020 and the end of the covered period.

These records must be maintained for six years after the loan is deemed forgiven or repaid in full.  Additionally, borrowers must permit authorized representatives of the SBA to access such files upon request.

Be Prepared for an SBA Audit

If the PPP loan amount exceeds $2 million, the SBA intends to review the forgiveness application when the lender submits the application to the SBA for final approval. Loans of $2 million or less will not automatically be subject to the compliance audit, however, the SBA still has the right to audit them. We anticipate those selected will be in effort to “spot check” compliance with the forgiveness requirements.

If the SBA selects a borrower for audit, it will notify the lender in writing. The lender is required to subsequently notify the borrower in writing within five business days. If the SBA determines the borrower did not meet requirements for the loan or its forgiveness, the borrower may appeal the decision.

As far as how the audit process will work, there are two key areas we are seeing the audits focus on:

1. Verifying the borrower was eligible for the PPP loan; and
2. Verifying the calculations are correct.

For verifying eligibility, the focus is on the good faith certification made when the loan application was submitted. This is why documentation of all facts and circumstances at the time of application is critical.  The SBA also may evaluate how a borrower’s business was negatively affected by COVID-19. This may include providing government orders that indicate the borrower was subject to a full or partial shutdown. Additionally, the evaluation of liquidity is an important factor. This includes access to a line of credit or other funding sources to sustain the borrower during the pandemic.

Regarding the calculation review, the SBA has been issuing Form 3509 (for-profit borrowers) or Form 3510 (not-for-profit borrowers) to gain further details on operating income and liquidity. Borrowers generally must submit tax forms, bank statements, and payment records to support the calculations for qualifying expenses. As borrowers are working through the forgiveness application, it is critical these documents are gathered and maintained to make the SBA audit process smooth.

Because of the looming risk of an audit, all borrowers should maintain detailed records of all paperwork during the PPP loan process. As mentioned previously, the paperwork must be retained for six years from the date the loan was forgiven or repaid in full.

What is Made Public?

Previously, only the contact information for borrowers who received more than $150,000 was released to the public. However, in early December, the detailed records for all borrowers was made available. It isn’t unusual for this type of information to be subject to public access. However, borrowers should be aware the information is public, and they should be prepared to tell the story of why they applied and accepted a PPP loan. It is possible that the media, owners, customers, and competitors may look at this information with speculation and questions.

If you have any questions regarding the PPP loan forgiveness process, please contact a Clark Nuber advisor.

This is the fifth post in a series of articles on Paycheck Protection Program loan forgiveness. Click here to read Part I: The Covered Period, Part II: Eligible Expenses, Part III: Maintaining Wages and Employees, and Part IV: Accounting for PPP Loans.

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