SBA issues Loan Forgiveness Form and instructions

The SBA has now issued long awaited guidance on the loan forgiveness process under the Paycheck Protection Program established pursuant to the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The form and instructions cover the mathematical computations needed to apply for loan forgiveness as well as specifics on the loan forgiveness process.

The SBA highlights a new rule that allows companies to choose one of two payroll measurement periods for identifying which payroll costs to count for the 56-day measurement period. Further, certain other approved expense categories have been clarified for purposes of loan forgiveness. While the SBA release provides needed guidance, the forms and instructions also leave open many of the pre-existing questions discussed below.
 
Definitional Issues Remain

Both the CARES Act and the SBA/Treasury Guidance contain terms and conditions that are not defined and the interaction of which are uncertain. These definitions impact the three stages to your PPP loan: (i) loan application, (ii) approved spending during the loan term, and (iii) the application for loan forgiveness. Have you considered the following?

• What is the proper definition of payroll costs under each PPL stage? 
• If your business has incurred expenses for union dues, employee subsidized costs of cars, trucks, and tools, or masks, shields, gloves, and other PPE, how are these and other employee costs treated under the three PPP stages?
• Are re-negotiated leases as a result of COVID-19 excluded from allowable expenses under the three stages?
• What is the difference between “utilities” as an allowable expense and the defined term “covered utility payment” for purposes of the loan forgiveness stage?
• What happens if June 30 falls within the 8-week testing period for the loan forgiveness stage? Do you still have a make-up period for loan forgiveness testing?
• How can the potential forgiveness amount be reduced by SBA? If so, what is your legal recourse?
• What substantiation is required for proving your expenses to sustain a loan forgiveness review? How long do you need to retain back-up documentation?

The Nexus between Loan Forgiveness and Loan Eligibility for Loans Over $2 Million

Note that, as the form indicates, the SBA “may direct a lender to disapprove the Borrower’s loan forgiveness application if SBA determines that the Borrower was ineligible for the PPP loan.” The application form also asks borrowers to check the box if their original loan is over $2 million – in the context of prior guidance that SBA will deem “economic certifications” made by borrowers to be in good faith on such loans of $2 million or less. SBA also had previously indicated that it will review borrowers whose original loans were over $2 million for compliance with the certification. Thus, read together, the implications of these statements are that SBA may review or audit compliance with the economic certification requirement by borrowers of more than $2 million in the context of determining whether to forgive the outstanding balance on the loan (i.e., rather than months later after forgiveness has been determined). Thus, borrowers should take care to have adequate documentation to support their certification available for such a review, and should be aware that, consistent with prior guidance, SBA may take the view that borrowers are ineligible (and will not be approved for loan forgiveness) where they had alternative sources of credit available in a manner that was not significantly detrimental to the business.

Tax Consequences of Your PPP Loan

There also may be ancillary consequences to obtaining a PPP loan and to receiving loan forgiveness. Have you considered the following:

• Are the expenses deductible if a portion of the loan is forgiven? The IRS says “No” but certain members of Congress have expressed other views. Where will this end up?
• Does the timing of forgiveness matter? Can you plan for the year of forgiveness for tax purposes? 
• If a loan is forgiven, will state and local taxing authorities agree with this treatment?

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Please let us know if you would like to discuss these topics or any other aspects of the CARES Act or the PPP loan program.