The CARES Act Paycheck Protection Program: Forgiveness and Why Documentation Matters

By Spencer Hathaway April 10, 2020

On Friday, April 3, lenders around the country began accepting applications for loans under the Paycheck Protection Program (PPP) currently being rolled out by the Small Business Administration (SBA). In recent days, the SBA has put forth a number of clarifications and answers to frequently asked questions regarding the program. A key feature of the program, and a top of mind consideration for many borrowers or potential borrowers, is the loan forgiveness provision.

The CARES Act (the Act) that established the PPP provides for forgiveness of some or all of the principal balance of the loan if certain conditions are met. The basic conditions under which the principal of any loan can be forgiven are that the loan was utilized to cover:

• Payroll costs (as defined in the Act and from which the maximum loan amount was calculated)
• Interest on a qualifying mortgage
• Rent on a qualifying lease
• Utilities

In order to help ensure the finite amount of funds earmarked for the PPP is directed primarily toward payroll protection, the SBA has stated that a maximum of 25% of the funds can be utilized for non-payroll costs. Furthermore, forgiveness is reduced if the average number of full-time equivalent employees decreases during the forgiveness period, or if salaries and wages are reduced by more than 25% for any non-highly compensated employees (defined as earning an annualized rate of pay of more than $100,000). Any amount of debt forgiven will not be subject to federal income taxes, though it remains to be seen how the individual states will treat this.

One concern is that potential borrowers might simply consider the loan a grant, and assume that as long as they use the funds appropriately, they will be automatically forgiven. However, it is important to remember that although lenders are able to rely upon a borrower’s documentation according to the SBA’s Interim Final Rule, forgiveness is ultimately subject to the lender’s approval.  According to the Act, in approving any loan forgiveness, eligible recipients should provide to their lender:

• Payroll tax filings reported to the IRS
• State income, payroll, and unemployment insurance filings
• Other documentation, including cancelled checks, payment receipts, account statements, etc., which support payments made on mortgage obligations, lease payments, or payments for utility bills

The recipient will also be required to certify that the documentation provided is true and correct, and that the amounts utilized were used to retain employees or to pay other qualifying expenses. The Act also allows for the lender to request any other documentation that it deems necessary in making the forgiveness determination.

We anticipate that the documentation required will vary on a lender-by-lender basis unless more concrete guidance is put forth by the SBA. As such, it is imperative to maintain detailed records of the costs for which the loan proceeds were utilized. This includes maintaining records with sufficient backup for the dates and the types of expenses.  Some things to consider:

• Maintenance of related invoices, cancelled checks, or other support for any qualifying costs will be critical.
• We strongly encourage borrowers to establish a record and track all funds received and expended under the program separately which can be supplied with their forgiveness application. This can be achieved through simply maintaining a spreadsheet log of the flow of funds, with associated backup for each expense.
• Some borrowers may be able to lean on reporting from third party administrators as support for payroll-related costs. Third party administrators or human resource information systems may be available to borrowers to support the number of active FTEs during the covered period.

We are aware that some clients are applying for funds through the PPP and the earlier Economic Injury Disaster Loan (EIDL) program. It is important for borrowers to know that if EIDL funds were used for payroll costs, those amounts must be refinanced using their PPP loan. Also note that advances in the form of an EIDL emergency grant (up to $10,000) must be deducted from the loan forgiveness amount on the PPP loan, as the advance does not need to be repaid. Borrowers who have obtained funds under both programs may well face additional scrutiny from lenders seeking to ensure that funds were not utilized for the same purpose. We strongly recommend that borrowers track the proceeds and expenses for each loan separately in order to ensure expenses that qualify under both programs are not double-counted. Some borrowers may find it helpful to establish separate deposit accounts to track the flow of funds for each loan program, though we understand there could be potential logistical issues in doing so.

As it currently stands, there appears to be considerable latitude granted to lenders in their determination of what support will be required to substantiate forgivable amounts, and therefore it is our recommendation that borrowers begin the process of documenting the use of funds now. With potential “free money” on the table for program participants, and considerable unknowns about what documentation will be required to obtain it, more is better.

Please contact your BNN advisor with specific questions related to any provisions of the PPP or other COVID-19 related legislation. The above is a general description of the forgiveness provisions of the program, and should not be relied upon for any decisions related to applying for a loan or utilization of funds obtained from the program.

To discuss this legislation, please contact your BNN service provider at 800.244.7444.