SBA Reaches $349 Billion PPP Loan Limit; Businesses Should Plan for Loan Forgiveness Rules


April 16, 2020


By Bob Barton and Ryan Gonzales
bob.barton@taylorporter.com
ryan.gonzales@taylorporter.com

On Thursday, the SBA reached its $349 billion limit in loans under the Paycheck Protection Program of the CARES (Coronavirus Aid, Relief, and Economic Security) Act. On its website, the SBA states, "The SBA is currently unable to accept new applications for the Paycheck Protection Program based on available appropriations funding." While the House and Senate work on establishing more funds for the program, it is important for any businesses that have applied, or have been thus far approved by the SBA, to begin planning with respect to the amount of loaned funds eligible for forgiveness. The amount eligible for forgiveness is dependent upon the actions taken by borrowers during the eight-week period after funds are received, and certain business decisions could lead to a reduction in forgiveness of loaned funds. However, the language of the Act is unclear in several areas and the limited guidance published to date does not offer much clarity.

The following is a summary of the loan forgiveness provisions and several areas of uncertainty pertaining to the $2 trillion CARES Act signed into law on March 27, 2020.

 

Loan Forgiveness General Rules

Under the CARES Act, four categories of expenses are forgivable if incurred during the “covered period” (i.e., the 8-week period beginning upon receipt of a borrower’s first disbursement of funds):

  1. Payroll costs, including gross salaries and wages up to a cap of $100,000 of annualized pay per employee (a maximum of $15,385 per individual for the eight-week period), employer-paid health insurance, employer-paid 401(k) matching contributions, and employer-paid state and local taxes on payroll;
  2. Rent, including payments made under a lease agreement in effect before February 15, 2020;
  3. Utilities, including electricity, gas, water, transportation, telephone, or internet service for which service began before February 15, 2020; and
  4. Interest on any mortgage obligation incurred before February 15, 2020. No more than 25 percent of the loan forgiveness amount may be attributable to non-payroll costs. Moreover, because independent contractors have the ability to apply for a loan on their own they are not counted for purposes of a borrower’s loan forgiveness.

The total amount eligible for forgiveness can be up to the full principal amount of the loan and any accrued interest. A borrower will not be ultimately responsible for any loan payment if the borrower i) uses all of the loan proceeds for the forgivable purposes described above and ii) meets certain requirements related to keeping employees on the payroll. If employee or compensation levels are not maintained the amount eligible for forgiveness may be reduced under either of two formulas provided in the Act. The calculations are meant to ensure that debt forgiveness is directly related to keeping employees working and at wage rates which are comparable to rates earned prior to the coronavirus pandemic.

Employee Headcount

If a borrower reduces the number of its full-time employees during the covered period, the amount of the loan otherwise eligible for forgiveness will be reduced to the percentage determined by the following ratio:

  • The average number of full-time equivalent employees during the covered period (the numerator),
    • divided by
  • the average number of full-time equivalent employees during either i) February 15, 2019 through June 30, 2019 or ii) January 1, 2020 to February 29, 2020 (the denominator).

The borrower may choose which time period to use as the denominator.

Example. A borrower receives a loan amount of $100,000 and spends all of the funds on qualifying expenses. The borrower’s average number of full-time equivalent employees during the covered period following the first loan disbursement is 50, and the borrower’s average number of full-time equivalent employees from February 15, 2019 to June 30, 2019 is 100. The maximum amount of loan forgiveness would be $50,000 (50/100 = 50%; $100,000 x 50% = $50,000). The borrower would have to repay $50,000.

Employee Wages

Loan forgiveness will also be impacted if a borrower reduces the salary or wages of any employee by more than 25 percent, as compared to the most recent quarter before the loan was received, for any employee that made less than $100,000 annualized in 2019. The amount of any reduction in wages that is greater than 25 percent will be deducted from the amount of the loan otherwise eligible for forgiveness.

Example. A borrower receives a loan amount of $100,000 and spends all of the funds on qualifying expenses. An employee’s salary in the first quarter of 2020 is $50,000, and the same employee’s salary during the covered period is $25,000. The amount of loan forgiveness would be reduced by $12,500 (($50,000 - $25,000) – ($50,000 x 25%) = $12,500), and the borrower would have to repay $12,500.

Rehiring of Employees

Borrowers have until June 30, 2020 to restore full-time employee headcount and salary levels for any reductions made between February 15, 2020 and April 26, 2020.

Example. A borrower receives a loan amount of $100,000 and spends all of the funds on qualifying expenses. The borrower’s average number of full-time equivalent employees from February 15, 2019 to June 30, 2019 is 100. At February 15, 2020, the borrower’s average number of full-time equivalent employees is still 100, however sometime after February 15, 2020 the borrower terminates 50 employees and the borrower’s average number of full-time equivalent employees during the covered period following the first loan disbursement drops to 50. By June 30, 2020, the borrower has rehired employees or hired new employees such that the average number of full-time equivalent employees is 100 or greater. The maximum amount of loan forgiveness would be the full $100,000 and the borrower would not have to repay any of the loan.

Areas of Uncertainty

The language of the Act leaves uncertainty in many areas of the loan forgiveness program. For example, with respect to the ratio that considers full-time equivalent employees at different time periods, there is no guidance defining the term “full-time equivalent employee” or clarifying whether part-time employees should or should not be considered for purposes of the calculation.

Furthermore, although the Act permits borrowers to restore any reductions in headcount or wages by June 30, 2020, it is unclear how exactly to execute such restorations. What is also unknown is whether borrowers are expected to see reductions in loan forgiveness resulting from employees departing or receiving less wages for reasons unrelated to the coronavirus pandemic (e.g., employees leaving voluntarily).

With regard to the method for determining the amount of loan forgiveness, the Act provides that the amount of forgiveness may be impacted if there is a reduction in employee headcount or wages, yet the SBA has issued guidance providing that no more than 25 percent of the loan forgiveness amount may be attributable to non-payroll costs. However, neither the Act nor the SBA guidance provides an ordering rule for the calculations provided. Different orders of the calculations may lead to differing amounts of loan forgiveness.

Partners in Partnerships Are Eligible for Loan Forgiveness

A former area of uncertainty, which has been clarified by recently issued SBA guidance, was whether partners in partnerships are eligible for loan forgiveness. The new SBA guidance provides that self-employment income of partners in a partnership may be reported as a payroll cost, up to $100,000 annualized, on a loan application filed by the partnership or Limited Liability Company filing income tax returns as a partnership. Individual partners cannot submit separate loan applications as self-employed individuals.

Planning and Accounting for Loaned Funds

For any borrowers of loans offered under the Paycheck Protection Program, now is the time to be thinking about how to spend loaned funds and manage personnel over the coming weeks to best position oneself to receive the maximum amount of loan forgiveness. Borrowers should also be thinking about best practices with respect to accounting for the loaned funds used to pay for qualified expenses, as lenders will most likely require borrowers to present financial records as evidence that loaned funds were spent on qualifying expenses.

Taylor Porter attorneys continue to closely monitor the developments of the SBA loan programs, and we plan to release additional guidance as we receive new information. Visit the Taylor Porter
Coronavirus – Legal News and Business Resources website for updated legislation, news, and legal developments pertaining to COVID-19.

Disclaimer: This article is for general information purposes only. Information posted is not intended to be legal advice. For more information, please see our Disclaimer message.


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