ppp loan forgiveness: what we know...general concepts of the ppp: interim final rule #15: sba loan...

PPP Loan Forgiveness: What We Know

Presenter: Elizabeth K. Madlem

Associate General Counsel

W E B I N A R

Agenda• Introduction• Disclaimer• General Concepts of the PPP• Interim Final Rules #14 and 15• PPP Loan Forgiveness Application Breakdown• Worksheet Schedule A• PPP Schedule A Overview and Review• Application Process and Documentation• SBA Form 1502 Requirements• Conclusion

2A Division of Bankers Alliance

DisclaimerToday’s webinar focuses on the most recent Interim Final Rules, regulatory guidance and FAQ commentary regarding the Payment Protection Program accurate as of May 26, 2020.

It is not intended to constitute legal, tax-advisory or other advice.

It is not intended to be all-encompassing.

Definitive guidance should always be coming from your governing regulatory agency, along with the Treasury, the U.S. Small Business Administration, and other applicable governmental entities.


General Concepts of the PPP

• March 27, 2020—President Trump signed into law the Coronavirus Aid,

Relief, and Economic Securities (CARES) Act • $2.3 trillion relief package to help individuals and small businesses respond to the economic

harms caused by the COVID-19 pandemic

• Created the PPP—new loan program under Section 7(a) of the Small Business Act allocating

nearly $600 billion to small businesses to pay employee wages and other critical expenses

• Concept of “loan only in name”—borrower receives funds, spends money over 8-weeks on

payroll, mortgage interest, rent and utilities and will be eligible for complete forgiveness


General Concepts of the PPP (2)

• CARES Act provided that forgiveness of a PPP loan is completely tax free• IRS subsequently issued guidance that a principle which provides that expenses “allocable to

tax-exempt income” are not deductible by the payor

• Any expenses paid by a borrower, if ultimately forgiven by the lender on a tax-free basis,

will not be deducible on the borrower’s 2020 tax return (Section 265 of the Internal

Revenue Code)

• Friday, May 15th—SBA released 11 page PPP Loan Application and

Instructions with supporting schedules: Schedule A and the Worksheet

to Schedule A


https://www.govinfo.gov/content/pkg/USCODE-2010-title26/pdf/USCODE-2010-title26-subtitleA-chap1-subchapB-partIX-sec265.pdf

https://www.sba.gov/sites/default/files/2020-05/3245-0407%20SBA%20Form%203508%20PPP%20Forgiveness%20Application%20FINAL_Fillable.pdf

General Concepts of the PPP: Interim Final Rule #14 - Loan Forgiveness (1)

• Borrowers must complete and submit the Loan

Forgiveness Application (SBA Form 2508 or

lender equivalent) to their lender or servicer.

• Lender must review and make decision

regarding loan forgiveness within 60 days of

receipt of a complete application and issue

decision to SBA.

• If Lender determines borrower is eligible for

forgiveness on some or all of the amount

applied for, lender must request payment

from SBA at the time the lender issues it’s

decision to the SBA.

• SBA, subject to any SBA review of the loan

or application, will remit appropriate

forgiveness amount to the lender plus

interest accrued through the date of

payment, not later than 90 days after the

lender issues its decision to the SBA.


Alternative Payroll Covered Period Example


General Concepts of the PPP: Interim Final Rule #14 - Loan Forgiveness (2)

• SBA will deduct EIDL Advance amounts from forgiveness amount remitted to Lender per

1110(e)(6) if applicable

• Lender is responsible for notifying borrower of forgiveness amount

• If amount remitted by SBA to lender exceeds remaining principal balance (i.e.- borrower

made scheduled payments on loan after initial deferment period), Lender must remit

excess amount, including accrued interest to borrower

This general forgiveness process only applies to loan forgiveness applications that were not

reviewed by the SBA prior to the Lender’s decision on the forgiveness application.


General Concepts of the PPP: Interim Final Rule #15: SBA Loan Review Procedures and Related Borrower and Lender Responsibilities (1)

Key Takeaways:

• SBA may review any PPP loan at its

discretion, for the following:

• Borrower Eligibility

• Loan Amounts and Use of Proceeds

• Loan Forgiveness Amounts

• Lender will be required to contact

borrower in writing to request additional

information or SBA will request directly

from borrower

• If SBA determines borrower in ineligible for

the PPP loan, SBA will direct Lender to

deny loan forgiveness application in whole

or in part.

• SBA may seek repayment of the

outstanding PPP loan balance or pursue

other available remedies



• For each Forgiveness Application, Lender must:

• Confirm receipt of borrower certifications in Application Form

• Confirm receipt of documentation borrower must submit verifying payroll and nonpayroll costs

• Confirm borrower’s calculations on the borrower’s Application, including dollar amount of the:

• Cash Compensation, Non-Cash Compensation, and Compensation to Owners in Schedule A

and

• Business Mortgage Interest Payments, Business Rent or Lease Payments, and Business Utility

Payments

• Confirm borrower made the calculation on Line 10 of the Calculation Form correctly, by dividing

borrower’s Eligible Payroll Costs claimed in Line 1 by 0.75



• When Lender issues decision to SBA approving an application (in

whole or part), it must include:• PPP Loan Forgiveness Calculation Form

• PPP Schedule A

• Optional PPP Borrower Demographic Information Form

• Lender Confirmation information provided to SBA accurately reflects lender’s records for

the loan

• Review procedures for when SBA notifies Lender is it reviewing a

loan 11A Division of Bankers Alliance


a. Is the lender eligible for a processing fee if SBA determines

that a borrower is ineligible?

No. If SBA conducts a loan review and determines that the

borrower was ineligible for a PPP loan, the lender is not eligible for

a processing fee.

b. Are lender processing fees subject to clawback if SBA

determines that a borrower is ineligible?

Yes. For any SBA-reviewed PPP loan, if within one year after the

loan was disbursed SBA determines that a borrower was ineligible

for a PPP loan based on the provisions of the CARES Act or

applicable rules or guidance available at the time of the

borrower’s loan application, or the terms of the loan application,

SBA will seek repayment of the lender processing fee from the

lender. However, SBA’s determination of borrower eligibility will

have no effect on SBA’s guaranty of the loan if the lender has

complied with its obligations under section III.3.b of the First

Interim Final Rule and the document collection and retention

requirements described in the lender application form (SBA Form

2484).

c. Are lender processing fees subject to clawback if a lender has

not fulfilled its obligations under PPP regulations?

Yes. If a lender fails to satisfy the requirements applicable to

lenders that are set forth in section III.3.b of the First Interim Final

Rule or the document collection and retention requirements

described in the lender application form (SBA Form 2484), SBA will

seek repayment of the lender processing fee from the lender and

may determine that the loan is not eligible for a guaranty.


PPP Loan Forgiveness Application Breakdown (1)


• Borrower Name• Borrower Address• Borrower EIN• SBA PPP Loan Number• Lender PPP Loan Number



• PPP Loan Amount—Maximum amount of loan eligible for forgiveness (limiting forgiveness to principal of loan and not any accrued but unpaid interest)

• PPP Loan Disbursement Date—Date borrower received funds generally signals 8-week period to accumulate expenses eligible for forgiveness

• Employees at Time of Loan Application

• Employees at Time of Forgiveness Application



• Economic Injury Disaster Loan Advance Amount—generally capped at $10,000 (Refer to Line 11 Maximum Loan Amount: SBA will reduce the amount forgiven by and EIDL advance that was received)

• Economic Injury Disaster Loan Application Number—EIDLs taken out after January 31, 2020 and used to cover payroll were generally refinanced into a PPP loan

• Payroll Schedule—Check box for regular payroll schedule to determine when payroll costs are paid or incurred



Covered Period—the 8-week period generally beginning on the date the borrower received the loan disbursement

• Only costs paid or incurred within the 8-week period are generally eligible for forgiveness• But, some costs are eligible for forgiveness even though they were incurred before the covered

period but paid during the period • And, other costs may be eligible for forgiveness even though they were incurred during the

covered period but paid after the period• Payroll costs are paid on the day the paychecks are distributed or borrower originates an ACH credit

transaction• Payroll costs are incurred on the day they are earned• Non-payroll costs (mortgage interest, rent, utilities) must be either:

• Paid during the 8-week covered period or• Paid by the next regular due date, even if it is outside the 8-week period



• Alternative Payroll Covered Period, if applicable—flexibility in borrower choosing an 8-week covered period specific to their payroll costs

• Alternative payroll covered period: 8-week (56 day) period beginning on the first day of the first pay period following the disbursement date

• Benefit is a business can align their covered period with the beginning of a pay period

• If Borrower (together with affiliates, if applicable) received PPP loans in excess of $2 million, check the box—safe harbor for borrowers who received less than $2 million in PPP funds with assumption required certification that loan was necessary was made in good faith



• Line 1: Payroll Costs (Enter the amount from PPP Schedule A, Line 10)—Borrower cannot compute until determined items on Worksheet for Schedule A

Must start with Worksheet Schedule A and work back up the Application!!!

Worksheet Schedule A (1)

• Where Borrowers will:

• Compute eligible compensation for each employee capped at $100,000 on an

annualized basis

• Determine number of full-time equivalent employees (FTEs) for the covered

period or alternative payroll period if applicable

• Use FTEs to determine if a reduction in amount eligible for forgiveness is

required because FTEs were reduced during covered period

Will not include: Independent Contractors, Owner-Employees, Self-Employed

Individuals, or Partners!

A Division of Bankers Alliance 19



• Table 1 is for employees with annualized compensation for ALL pay periods in 2019 of less than $100,000



• Table 2 is for employees with annual compensation in excess of $100,000 during 2019


Table 1: Cash Compensation Column


Payroll Costs include:

• Certain compensation amounts including

• Salary, wage, commission or similar compensation

• Payment of cash tip or equivalent

• Payment for vacation, parental, family, medical, or sick leave

• Allowance for dismissal or separation

Compensation does not include:

• Compensation of individual employee in excess of $100,000 annual

salary as prorated over covered period (Max amount is $15,385 in this

column)

• Any compensation of employee with principal place of residence

outside of the United States

• Qualified sick leave wages where credit is allowed under 7001 of the

Families First Coronavirus Response Act

• Qualified family leave wages where credit is allowed under 7003 of the

Families First Coronavirus Response Act

Worksheet Schedule A (5)Table 1: Average FTE Column


• Average FTE for 8-week period (or alternative payroll covered period)

• For each qualified employee, determine the average number of

hours worked per week

• Divide by 40

• Round to the nearest 10th

• The maximum amount for each employee is 1.0

• Alternatively, borrower can use 1.0 for every employee who worked 40

hours per week and 0.5 for every employee who didn’t meet the

standard


Table 1: Salary/Hourly Wage Reduction


• Total amount of loan forgiveness is reduced by the amount of

any reduction in total annual salary or average wage of any

employee during the 8-week covered period who did not

receive, during any single pay period during 2019, wages or

salary over $100,000 annualized.

• Reduction in forgiveness amount is required if reduction in

wages over 8-week period is in excess of 25% of the total

salary or wages of the employee during the period January 1,

2020 through March 31, 2020

Must calculate for each employee!


Table 1: Salary/Hourly Wage Reduction


• Step 1: Determine average annual salary or hourly wage for

each employee during the covered period (or alternative

payroll period)

• Step 2: Determine average annual salary or hourly wage for

each employee during the period from January 1, 2020

through March 31, 2020

• Step 3: Divide Step 1 by Step 2

• Step 4: If Step 3 is greater than 75%, no reduction is required

(Do not fill out column in table for this employee)

• Step 5: If Step 3 is less than 75%, reduction is required

• Reduction is determined by multiplying the amount in

Step 2 by 75% and then subtracting from that result the

amount from Step 1

Salary/Hourly Wage Reduction Step 5 Explained

Reduction Calculation--Reduction is determined by multiplying the amount in Step 2 by 75% and then

subtracting from that result the amount from Step 1

• Salary Employee—• Take result determined above and multiply by 8.

• Then divide the amount by 52

• This is the required amount of reduction

• Hourly Employee—• Multiply the average number of hours worked per week from January 1, 2020 through March 31, 2020 by the amount

determined by subtracting the amount determined in Step 1 from 75% of the amount determined in Step 2.

• Then multiply the result by 8

• This is the total reduction required in forgiveness


Salary/Hourly Wage Reduction Step 5 Example

Employee John was paid an annual salary of less than $100,000 for 2019. John was paid $8,000 during the 8-

week covered period. He was paid $20,000 for the period January 1, 2020 through March 31, 2020.

Step 1: John’s average annual salary was $52, 000 for the 8-week covered period ($8,000 /8 x 52)

Step 2: John’s average annual salary was $80,000 for the period January 1, 2020 through March 31, 2020 ($20,000

x 4)

Step 3: $52,000 / $80,000 = 65%

Step 4: N/A because Step 3 is less than 75%

Step 5: Prior to Safe Harbor, John’s employer would reduce forgiveness attributable to John by the following:

$80,000 x 75% = $60,000

$60,000 - $52,000 = $8,000

$8,000 /52 x 8 = $1,230


Salary/Hourly Wage Reduction Step 5 Example with Safe Harbor (1)

Safe Harbor DeterminationStep 1: Determine employee’s annual salary or hourly wage as of February 15, 2020Step 2: Determine average annual salary or hourly wage for the period February 15, 2020 through April 26, 2020Step 3: If Step 2 is greater than Step 1, Safe Harbor does not apply and Borrower would compute reduction in forgiveness as determined in prior Step 5


Salary/Hourly Wage Reduction Step 5 Example with Safe Harbor (2)

Step 4: If Step 2 is less than Step 1, determine average annual salary or

hourly wage for the employee as of June 30, 2020. If the amount of

average annual salary or hourly wage for employee as of June 30, 2020 is

equal to or greater than Step 1, Safe Harbor has been met. • SBA will ignore reduction in salary during the covered period relative to the 1st quarter of 2020

but only if the salary was restored to what it was on February 15, 2020 by June 30, 2020

• If a safe harbor it not met, Borrower would enter $1,230 in the

“Salary/Hourly Wage Reduction Column in Table 1


Worksheet Schedule A

Table 2


• Table 2, unlike Table 1, does not include “Salary/Hourly Wage Reduction”

Worksheet Schedule A FTE Reduction Safe Harbor Explanation


Loan forgiveness amount can be reduced if Borrower reduces headcount during covered period.

Forgiveness is reduced is average FTEs during covered period is less than average number of FTEs for any of the following periods, at Borrower’s election:• Period beginning February 15, 2019 and ending June

30, 2019• Period beginning January 1, 2020 and ending

February 29, 2020 OR• For Seasonal Employers (per SBA) either of the two

previous periods or any 12-week period between May 1, 2019 and September 15, 2019

FTE Reduction Safe Harbor Example (1)

Tim’s Tools Co. received a $100,000 PPP loan on April 10, 2020 and

incurred $100,000 eligible costs for forgiveness over the 8-week

period. Tim’s employees were the following for the 8-week period:• John averaged 45 hours per week during the period

• Paul averaged 40 hours per week during the period

• George averaged 28 hours per week and

• Ringo and Yoko averaged 20 hours per week each.



• Tim’s Tool Co. had for the 8-week covered period 3.7 FTEs:

• John: 45/40 = 1.0 (capped)

• Paul: 40/40 = 1.0

• George: 28/40 = 0.7

• Ringo and Yoko: 20/40 = 0.5 each

• Or, using the simplified method, Tim’s Tool Co. would only have

had 3.5 FTEs (so encourage Borrowers to try both methods!)



For the periods February 15, 2019 through June 30, 2019 and January 1, 2020 through February 29, 2020, Tim’s Tool Co. had the following employees:• John averaged 45 hours per week during the period [45/40 = 1.0 (capped)]• Paul averaged 40 hours per week during the period [40/40 = 1.0]• George averaged 40 hours per week [40/40 = 1.0]• Ringo and Yoko, averaged 28 hours per week each and [28/40 = 0.7 each]• Mick and Keith averaged 40 hours per week each [40/40 = 1.0 each]

For the above 8-week periods, Tim’s Tool Co. had 6.4 FTEs (see in [ ] above)Before any safe harbor or reinstatement, Tim’s Tool Co.’s amount eligible for loan forgiveness ($100,000) must be reduced by $57,813 ($100,000 x 3.7/6.4)



But there is a safe harbor!

• To satisfy, Tom’s Tool Co. must first determine FTEs for two additional periods:• The period from February 15, 2020 through April 26, 2020 AND

• For the pay period that includes February 15, 2020.

• If average FTEs for the first period is less than the FTEs for the second period, Tom’s Tool Co. must

compare the average FTEs for the second period to the total FTEs as of June 30, 2020.

• If the FTEs on June 30, 2020 are greater than the FTEs on February 15, 2020, the safe harbor is met so

NO REDUCTION.

• Also, if Tim’s Tool Co. can return its number of FTEs at June 30, 2020 to the level it was prior to COVID-

19 beginning (February 15, 2020) forgiveness amount will not be reduced even if the February 15th,

2020 numbers are less than they were in 2019 or the average of the first two months of 2020


FTE Reduction Safe Harbor Final Thoughts

• If Tim’s Tool Co. can show it made a good faith, written offer to rehire

an employee during the covered period but that offer was rejected by

the employee, that reduction in headcount will not count towards a

reduction in the loan forgiveness amount!

• If the employee was fired for cause, voluntarily resigned or voluntarily

required and received a reduction in hours, those reasons also will not

count towards a reduction in the loan forgiveness amount.


PPP Schedule A Overview


Information in Schedule A is used to answer question on the PPP Loan Forgiveness Application itself

Schedule A Review (1)


• Line 1: Enter Cash Compensation (Box 1) from PPP Schedule A Worksheet, Table 1

• Line 2: Enter Average FTE (Box 2) from PPP Schedule A Worksheet, Table 2

• Line 3: Enter Salary/Hourly Wage Reduction (Box 3) from PPP Schedule A Worksheet, Table 1—Take total from this column in Table 1



• Line 4: Enter Cash Compensation (Box 4) from PPP Schedule A Worksheet, Table 2—Enter total cash compensation paid (Cannot exceed $15,385 for any one employee!)

• Line 5: Enter Average FTE (Box 5) from PPP Schedule A Worksheet, Table 2

• Lines 6-8: Non-Cash Compensation Payroll Costs During the Covered Period or Alternative Payroll Covered Period—These amounts are in addition to the annualized compensation cap of $100,000



• Line 9: Total amount paid to owner-employees/self-employed individual/general partners—Confusion! • Were not included in Table 1 or 2 of Worksheet A because health care and retirement costs to

owners/general partners are not forgivable • Does not require amounts be paid as “compensation” • The amount is capped at $15,385 or the 8-week equivalent of their applicable compensation for

2019, whichever is lower• Prevents owners from increasing their compensation during the covered period to maximize

forgiveness (Interim Final Rule April 14, 2020)

https://www.govinfo.gov/content/pkg/FR-2020-04-20/pdf/2020-08257.pdf



• Line 10: Payroll Costs (add lines 1, 4, 6, 7, 8 and 9)

• Full-Time Equivalency (FTE) Reduction Calculation—If a borrower has not reduced the number of employees or average paid hours

of employees between January 1, 2020 and the end of the covered period, the Borrower is to skip the rest of Schedule A.

• Remainder of Schedule A determines the reduction in forgiveness caused by a reduction in headcount during the covered

period relative to the optional look-back periods

Even if FTEs were reduced related to the Borrower-elected look-back period, no reduction is required provided the FTEs are the

same at the end of the covered period as they were on January 1, 2020



Borrowers would complete Lines 11-13 if they did not satisfy the safe harbor for rehires before June 30, 2020 or the Salary/Hourly Wage Reduction (Reviewed in Slide 24). Lines 11-13 compute the reduction in forgiveness.

• Line 11: Average FTE during the Borrower’s chosen reference period—Borrower must choose the base period, compute FTEs and provide that number here.

• Line 12: Total Average FTE (Add lines 2 and 5)—This is the FTEs for the covered period.

• Line 13: FTE Reduction Quotient—Divide Line 12 by Line 11 to reach the reduction quotient. If safe harbor is met, amount should be 1.0 and no reduction is required

Application For Forgiveness Breakdown (1)


• Line 1: Payroll Costs—Input amount from Schedule A, Line 10 (amount of compensation, health care costs, retirement benefits and state taxes for each eligible employee)

• Line 2: Business Mortgage Interest Payments—Mortgage interest owed prior to covered period can be paid during covered period, and mortgage interest incurred during the covered period but paid before or on the next scheduled due date may also be forgiven (even if after the end of the covered period)

• Line 3: Business Rent or Lease Payments—Enter amount paid or incurred during the covered period. Same rules as above apply.

• Line 4: Business Utility Payments—Enter amount paid or incurred during covered period. Same rules as above apply.



• Line 5: Total Salary/Hourly Wage Reduction—Any amount relating to a reduction in salaries reported on Table 1 are reported here on Line 5, reducing total amount eligible for forgiveness.

• Line 6: Add the amounts on lines 1, 2, 3, and 4, then subtract the amount entered in Line 5—Provides the maximum amount eligible to be forgiven.

• Line 7: FTE Reduction Quotient—Line 13 of Schedule A Worksheet is inputted here if the safe harbor for reduction in headcount was not satisfied.



Lines 8-10 determine the forgiveness amount, which is the lesser of the three amounts:

• Line 8: Modified Total—Net amount from Line 6 (total costs less salary reduction amount) multiplied by the quotient on Line 7 for headcount reduction

• Line 9: PPP Loan Amount—Principal balance of the loan

• Line 10: Payroll Cost 75% Requirement (divide line 1 by 0.75)—Verifies the requirement that no more than 25% of the total forgiveness was used for non-payroll costs.

• Line 11: Forgiveness Amount (enter the smallest of lines 8, 9, and 10)—This is the forgiveness amount.

PPP Forgiveness Application Documentation (1)

• Borrower must submit the PPP Loan Forgiveness Application to the lender servicing the loan

Must include:

• Documentation for payroll tax filings reported to IRS, state income, payroll, unemployment

insurance filings to verify number of FTEs on payroll and their pay rates for:• 8-week covered loan period

• February 15, 2019 through June 30, 2019 OR January 11, 2020 or February 29, 2020 depending on the dates Borrower used to

measure drop in employees or salary per Section 1106(d)

• If seasonal employer, February 15, 2019 through June 30, 2020

• The last full quarter prior to the covered period AND

• February 15, 2020 through April 27, 2020


PPP Forgiveness Application Documentation (2)

• Documentation for covered obligations (mortgage interest, lease obligations,

utility payments) including cancelled checks, payment receipts, transcripts of

accounts, or other documentation

• Certification from eligible representative that documentation presented is

true and correct, and that the loan forgiveness amount requested was used

for retaining employees, making interest payments on covered obligations

• Any other documentation the SBA determines necessary.


SBA PPP Form 1502• SBA has already begun accepting Form 1502 filings from Lenders• Lender must submit Form 1502 data for all PPP loans by May 29, or 10 calendar days after

the loan is disbursed or canceled, whichever is later.• Must have existing account or create a new account with SBA’s fiscal transfer agent, Colson

Services• Lenders must submit separate 1502 reports for PPP and other 7(a) program loans• If a PPP loan has been sold, originating lender is responsible for the initial Form 1502

submission• Even though Lenders must file Form 1502 data for all PPP loans disbursed or cancelled,

Lenders will not be paid if the PPP loan is canceled before disbursement or if the loan was canceled or voluntarily terminated after the funds were disbursed and repaid by May 18th.


https://www.sba.gov/sites/default/files/2020-05/5000-20028.pdf

Questions?

Thank you for your participation!

We hope you found value in today’s presentation.

Review Compliance Alliance’s Pandemic and PPP Toolkits for additional guidance, comments,

tools and FAQs.

If you have any additional questions,

contact Compliance Alliance at 888-353-3933 or [email protected].


https://compliancealliance.com/about-us/pandemic-planning-for-banks

ppp loan forgiveness: what we know...general concepts of the ppp: interim final rule #15: sba loan...

Documents