This article reflects the law prior to the passage of the Consolidated Appropriations Act (CAA) in December 2020. As such, certain sections may now be outdated. To learn more about the CAA updates, read our article here.
As borrowers near the end of their covered period for Paycheck Protection Program (PPP) loans, many questions are surfacing on the forgiveness process.
These uncertainties have arisen from the evolving rules issued since the COVID-19 crisis began. In early June, the Paycheck Protection Flexibility Act (PPPFA) was passed, which modified many PPP loan provisions. The SBA and Treasury have also issued various forms of interim guidance over the past months, including two versions of the loan forgiveness application. These ongoing changes have made it challenging for borrowers to know whether they are eligible for maximum forgiveness. This three-part series will help to clear up some of the confusion.
Overview of Loan Forgiveness Process
The PPP loan application program initially closed on June 30. However, an extension bill was signed on July 4, granting a new deadline of August 8. Through the PPP, Congress made over $659 billion of loan funding available to qualifying borrowers. At the end of June, over $130 billion remained undistributed.
Achieving maximum loan forgiveness requires the following:
- Utilize at least 60% of the proceeds for payroll costs during the covered period (previously the threshold was 75%, but the PPPFA reduced it to 60%);
- Entire loan proceeds are spent on eligible expenses – payroll costs, interest on loans, rental payments, and utility costs;
- Restore the number of full-time equivalent employees by the end of the covered period; and
- Restore wages to employees by the end of the covered period.
Failure to meet any of these required elements may reduce the forgivable amount. Interim rules provide safe harbor provisions for the full-time employee and wage requirements above. A deeper look into the eligible expenses can be found in Part II: Eligible Expenses.
Determining Your Covered Period – 8 weeks vs. 24 weeks
PPP loan forgiveness is driven by the expenses paid or incurred during your “covered period.” When the CARES Act was passed in March, loans were subject to an eight-week covered period. In June, the PPPFA extended this covered period to 24 weeks. Borrowers who received their loan disbursements on June 5 or later are required to use a 24-week covered period. Borrowers with loans prior to the PPPFA date can continue to use the original eight-week covered period or opt to use the extended 24-week period.
The covered period begins on the date the lender distributes the loan funds to the borrower. Sometimes, the covered period starts before the borrower has access to the funds. Some borrowers could not obtain a PPP loan from their primary bank as not all banks are qualified SBA lenders. Additionally, many borrowers struggled in the early weeks to get a PPP loan from their primary bank due to application backlogs. Secondary banks have been utilized in these instances, with the loan proceeds transferring back to the borrower’s primary bank. This fund transfer sometimes takes a few days. Even though the borrower may not have actual receipt of the funds, the covered period begins as soon as the secondary bank initiates the transfer of loan proceeds.
For the PPP loan recipients with a choice in covered periods, determining the one to use is dependent on many factors. If a borrower determines it will receive maximum forgiveness under the eight-week covered period, the recommendation generally is to choose that. This allows the forgiveness process to start earlier. If the forgiveness amount is limited for a borrower due to one of the four requirements above, a borrower may want to choose a 24-week period instead. This gives additional time for the borrower to turn around its business, spend the proceeds as permitted, and reinstate employees and wages as necessary.
Applying for Forgiveness Before the Covered Period Ends
Questions have come up on whether you may apply for forgiveness prior to when the covered period ends. Yes, you can. However, there is a trade-off. If a borrower has reduced its payroll costs by over 25% during the covered period, its eligible forgiveness amount is reduced as well. Regardless of when the borrower applies for forgiveness, it must reduce the forgivable amount by the excess wage reduction for the full covered period. The reduction is not prorated if the borrower applies for forgiveness early. If there is no possibility that the borrower will increase its wages in the remaining weeks of its covered period, then early forgiveness won’t matter – its wage reduction is the same either way. However, if there is a possibility for wages to increase in the remaining weeks of the covered period, the borrower may benefit from waiting to apply.
Now, there may be reasons to apply for forgiveness early. If you don’t have a greater than 25% reduction in wages, the trade-off mentioned above won’t matter. And if a borrower has used the entire PPP loan proceeds, they may want to apply early so the liability can be removed from their financial statements for GAAP reporting purposes. It also simplifies tax reporting if the loan is issued and forgiven within the same tax year.
However, the early bird doesn’t always get the worm. Even if you are ready to apply for forgiveness prior to your covered period ending, your lender may not be ready for you. Many banks are still working out their loan forgiveness process and building their systems to accept the applications.
Key Dates for Loan Forgiveness
Unfortunately, the forgiveness decision is not an immediate one. Both the lender and the SBA are given time to review the application to determine whether a borrower may qualify for forgiveness. Below are the key deadlines when navigating the forgiveness process with your lender. Work with your lender to determine if any other deadlines exist. While the PPP loans are backed by the SBA, the loans themselves are between borrowers and individual banks. Therefore, additional deadlines may exist with the lender when navigating the forgiveness process.
Also, your original lender may not be the ultimate lender you seek forgiveness with. Lenders can sell their PPP loans to other investors. If the loan forgiveness process becomes too burdensome in the upcoming weeks, we may see more lenders selling their loan portfolios to other parties. This may create other complications as borrowers navigate the forgiveness process.
10 Months After Covered Period Ends – Forgiveness Application Deadline
Originally, there was no deadline for a borrower to apply for loan forgiveness. The PPPFA, however, put a deadline of 10 months after the last day of the covered period. If a borrower does not apply for forgiveness by this date, it must begin making payments of principal, interest, and fees by this date instead. For example, if a borrower’s PPP loan is distributed on June 25, 2020, its 24-week covered period will end on December 10, 2020. The borrower must then submit its loan forgiveness application by October 10, 2021, otherwise loan payments are due.
60 Days from Receipt of Completed Forgiveness Application – Lender Approval
Once the loan forgiveness application is complete and submitted to the lender, the lender has 60 days to review the application and provide the SBA with a decision. The lender may approve the forgiveness application, either in part or in whole.
Alternatively, the lender may deny the forgiveness application due to failure to meet the loan and/or forgiveness requirements. If the lender denies a borrower’s forgiveness application, either in whole or in part, the lender will notify the borrower in writing of its decision. The borrower has 30 days to appeal the decision to the SBA. This will prompt the SBA to review the lender’s decision and determine whether it agrees with the lender.
90 Days from Lender Decision – SBA Approval
If the lender determines the borrower is eligible for forgiveness, either in whole or in part, that decision is submitted to the SBA. The SBA has 90 days from that date to review the documents and pay the lender. During this time, the SBA may review the loan or loan application in efforts to prevent fraud or misuse of PPP loan funds, ensure the borrower is an intended recipient of the funds, and that the loan follows all necessary compliance requirements.
The SBA announced it intends to review all loans over $2 million. It also has the authority to review any other loan, regardless of amount, when deemed appropriate. It is unclear at this time what this review process will look like and whether it will extend the 90-day decision window for the SBA. One potential area the SBA may look at is whether a borrower properly certified that “current economic uncertainty makes this loan request necessary to support the ongoing operations.” This has been a contentious issue for some borrowers and heavily scrutinized in the media. However, borrowers with less than $2 million of PPP loans are granted a safe harbor and automatically deemed to have made the certification in good faith.
What If My Loan Isn’t Fully Forgiven?
As borrowers work through their initial loan forgiveness calculations, we are seeing situations where full forgiveness is not possible. The extended shutdown of businesses has prevented some borrowers from resuming full operations, while others are rethinking their entire business model.
If your PPP loan isn’t fully forgivable, the unforgiven amount simply becomes a traditional loan with monthly principal and interest payments. The terms of the loan are far better than what most banks currently offer – interest of 1% and a loan term of up to five years. PPP loans distributed prior to the PPPFA have a loan term of two years, however, this term may be extended up to five years if the borrower and lender agree. All loan payments are deferred for 10 months after the end of the covered period; however, interest will still accrue during this time. The PPP loans also have no prepayment penalties, giving borrowers additional flexibility on repayment options.
If you have questions as you navigate the loan forgiveness process, please reach out to your advisor at Clark Nuber for up to date information on the latest rules surrounding the program. Click here to access Part II: Eligible Expenses.
This is the first post in a series of articles on Paycheck Protection Program loan forgiveness. Click the following links to read Part II: Eligible Expenses, Part III: Maintaining Wages and Employees, Part IV: Accounting for PPP Loans, and Part V: The Application.
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