Updates
April 20, 2020

Documentation – The Difference Between a PPP “Loan” and a “Forgiven Loan”

The key to compliance and maximizing Paycheck Protection Program (PPP) loan forgiveness may be sound record keeping.

With PPP loans now funded, businesses now need to shift their focus to administering the use of the funds to ensure compliance and maximize loan forgiveness. Given the apparent lack of scrutiny in the rushed loan roll-out, and the fact that lenders will have 60 days to review forgiveness applications, many lenders will likely focus their attention on the forgiveness requests, making the need to substantiate forgiveness applications even more important. Questions persist, and regulatory guidance is needed, but it is certain that the difference between a “loan” and a “forgiven loan” may rest on sound record keeping.

Loan proceeds used for an unauthorized purpose are not eligible for loan forgiveness. Under the CARES Act, a borrower that knowingly uses the funds for an unauthorized purpose may be subject to additional liability, such as charges for fraud.

While the list of eligible expenses may seem relatively straightforward, several key questions remain unanswered. For example, if a borrower has its loan funded on April 14, 2020 and has payroll due on April 15, 2020 for the pay period from April 1 to April 15, 2020, does the entire payroll qualify as eligible payroll costs or only the single day portion incurred on April 15? The CARES Act refers to “costs incurred and payments made during the covered period.” The “payments made” implies a cash basis of accounting, however, the “costs incurred” suggests that Congress intended an accrual basis. Is it either? Or both? Hopefully additional clarifying guidance will be issued.

The CARES Act also reduces the amount of eligible forgiveness if the number of full time equivalent (“FTE”) employees is reduced. This is determined by dividing the average FTE employee headcount during the eight-week covered period by the headcount during one of the following periods, at the election of the borrower:

February 15, 2019 to June 30, 2019; or

January 1, 2020 to February 29, 2020

For seasonal businesses, the eight-week covered period is compared to the period from February 15, 2019 to June 30, 2019.

However, neither the CARES Act nor any regulatory guidance thus far issued has definitively stated how to calculate FTE employees. A popular consensus proposes to utilize the FTE standard implemented by the Affordable Care Act (ACA) such that all employees who work 30 hours or more per week will be considered full-time employees and those working fewer than 30 hours are deemed part-time employees. Each employee holding a full-time position then counts as one FTE employee and the hours worked by part-time employees are aggregated on a monthly basis and divided by 120 to determine the number of part-time FTE employees. Collectively, the sum is then utilized as the FTE headcount. While this approach seems reasonable, more guidance is needed.

The CARES Act also provides that the amount of loan forgiveness will not be reduced based upon employee headcount if any reduction in FTE employee headcount is eliminated “not later than June 30, 2020.” This “safe-harbor” appears to an all-or-nothing test: either the borrower restores ALL of its FTE employee headcount not later than June 30, 2020, or the amount forgiven will be reduced. While this seems straightforward, it is unresolved whether an employer who fully rehires its FTE headcount prior to June 30, 2020, may avoid the forgiveness reduction if subsequently but prior to June 30, 2020, a second round of furloughs or lay-offs again reduces the FTE headcount.

Despite these present uncertainties, many of which may be resolved by further regulatory guidance issued in the coming weeks before forgiveness applications become due, borrowers are strongly urged to maintain documentation for all eligible expenses as the costs are incurred and the funds being spent.

The CARES Act requires borrowers applying for loan forgiveness to provide documentation verifying the use of funds on eligible expenses. Borrowers must provide documentation to verify the number of full-time equivalent (FTE) employees on payroll and pay rates for the period. This documentation should include payroll tax filings reported to the IRS and state income, payroll and unemployment insurance filings. Borrowers should also provide documentation such as cancelled checks, payment receipts, transcripts of accounts or other documents verifying payments on covered mortgage obligations, covered lease obligations and covered utility obligations.

Forgiveness applications will also require certification by the applicant that the documentation presented for loan forgiveness is true and correct and that the amount for which forgiveness is requested was used for eligible expenses.

Good documentation and additional regulatory guidance, strongly urged in the coming weeks, should facilitate your PPP loan forgiveness application process.

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