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Legal Alert

CARES Act: Paycheck Protection Program Loan Forgiveness

April 16, 2020

UPDATE: As of April 16, 2020, the Small Business Administration is no longer accepting new loan applications for the Paycheck Protection Program after reaching its $349 billion lending limit. Approved applications that remain undisbursed are not expected to be affected by this application freeze, but unprocessed applications will be on hold unless Congress approves additional funding.

Pursuant to the CARES Act (the "Act"), up to 100% of a Paycheck Protection Program ("PPP") loan may be forgiven if loan proceeds are used for specified eligible expenses during the 8-week period (the "Covered Period") following origination. Certain questions about forgiveness remain unanswered, and the Small Business Administration (the "SBA") is not required to issue guidance and regulations about forgiveness until April 26, 2020. However, based on what we know thus far, important considerations and proactive steps to take to maximize loan forgiveness are outlined for your convenience below:

Please note: The outline does not address additional considerations for borrowers who are independent contractors, sole proprietors, or self-employed individuals.

Loan Forgiveness Requirements under the PPP

  • Loans under the PPP are eligible for forgiveness to the extent the proceeds are used to pay the eligible expenses incurred during the Covered Period, which are payroll costs, interest on secured debt, rent, and utilities. The amount of loan forgiveness is only for that portion of the loan used to pay such expenses, which can be up to the full loan amount (including principal and interest).
  • The SBA requires that at least 75% of the loan proceeds used on eligible expenses be used for payroll costs for those loan proceeds to be eligible for forgiveness.
  • For the purposes of federal income tax, amounts forgiven are not considered gross income of the borrower. However, borrowers should note that each state will determine whether forgiven amounts will be considered income for state income tax purposes.

Eligible Expenses

More specifically, expenses eligible for forgiveness are:

  • Payroll costs
    • Proceeds used to pay compensation to employees:
      • Salary, wages, commissions, or similar compensation (including the employee's share of federal payroll taxes);
      • Payment of cash tip or equivalent;
      • Payment for vacation, parental, family, medical, or sick leave;
      • Allowance for dismissal or separation;
      • Payment required for the provision of group health care benefits, including insurance premiums;
      • Payment of any retirement benefits; and
      • Payment of state or local tax assessed on the compensation of employees.
    • Payroll costs do not include:
      • The sum of payments of any cash compensation of an individual employee, including severance payments, in excess of $100,000, as prorated for the period between February 15, 2020, through June 30, 2020 (put otherwise, employees who make more than $100,000 of cash compensation are capped at $100,000 for the purpose of calculating payroll costs);
      • The borrower's share of federal payroll taxes;
      • Qualified sick leave or family leave wages for which credit is allowed under the Families First Coronavirus Response Act (which provides for, among other things, 14-day paid leave for American workers affected by the pandemic); or
      • Payments made to independent contractors.
  • Mortgage Interest (Real Estate & Other Secured Credit)
    • Proceeds used to pay interest on a mortgage loan are eligible for forgiveness if the mortgage:
      • Was first incurred prior to February 15, 2020.
      • Is on real or personal property (i.e., the statute seems to cover interest on secured credit lines, etc., even if they are secured by something other than real estate, provided the other requirements are met); and
      • Is the borrower's liability;
      • However, to be forgivable, loan proceeds may not be used to prepay or make principal payments on the mortgage obligation.
  • Rent
    • Proceeds used to pay for rent owed under a lease agreement in force prior to February 15, 2020, are eligible for forgiveness.
  • Utilities
    • Proceeds used to pay for electricity, gas, water, transportation, telephone, or internet access ("Covered Utility Payments") are eligible for forgiveness, so long as service began prior to February 15, 2020.

Reduction of Amounts Forgivable

  • The amount eligible for forgiveness will be reduced if the borrower, during the Covered Period:
    • Reduces the number of full-time equivalent employees ("FTEs"); or
    • Reduces an employee's salary or wages by more than 25% compared to what the employee earned during the most recent full quarter during which the employee was employed before the Covered Period. Note that this applies to any employee who did not receive wages or salary of more than $100,000 annualized during any single pay period during 2019.
  • For non-seasonal borrowers, the reduction in the amount that can be forgiven due to a reduction of FTEs is calculated as:
    • Amounts used for eligible expenses, multiplied by:
      • The average number of FTEs per month employed by the borrower during the Covered Period, divided by, at the borrower's election, either:
        • The average number of FTEs employed per month during the period between February 15, 2019, through June 30, 2019; or
        • The average number of FTEs employed per month during the period between January 1, 2020, through February 29, 2020.
  • For the purposes of forgiveness, the average number of FTEs is determined by calculating the average number of FTEs employed during each pay period falling within a month. Put otherwise, borrowers should find the average FTEs per pay period in a given month, do that for each month, and then find the average of the monthly numbers.

Re-Hire Exemption

  • If the borrower reduced the number of FTEs or salaries and wages paid to any employees during the period between February 15, 2020, and April 26, 2020, thereby reducing the loan proceeds eligible for forgiveness, such proceeds become re-eligible for forgiveness if:
    • The borrower eliminates the reduction in the number of FTEs by June 30, 2020; or
    • The borrower eliminates the reduction in salary or wages of employees by June 30, 2020.
  • A plain reading of the Act indicates a 100% elimination of the reduction of FTEs or employee salary or wages is required to make loan proceeds re-eligible for forgiveness. However, the Act gives the SBA discretion to issue regulations granting minor exceptions to this 100% elimination requirement, and we are hopeful the SBA will do so. Maslon will update this legal alert as additional guidance becomes available on this key issue.

Application for Forgiveness

  • To seek loan forgiveness, borrowers will "apply" to the lender originating the loan, each of whom will have their own specific process. Documents that all lenders will require from borrowers include:
    • Payroll tax filings reported to the Internal Revenue Service (for the 8-week covered period);
    • State income, payroll, and unemployment insurance filings (for the prior-year baseline period);
    • Evidence of the payment of eligible expenses, including cancelled checks, payment receipts, transcripts of accounts, or other documents verifying payments on eligible mortgage interest payments, rent obligations, and utility payments;
    • Certifications that: (i) the documentation provided is true and correct; and (ii) the amount for which forgiveness is being requested was used to retain employees, make interest payments on eligible mortgage interest, rent, or utilities; and
    • Any other documentation the SBA deems necessary.
  • The lender is required to issue a decision within 60 days after receiving an application for forgiveness.

What If A Loan Isn't Forgiven?

Loan portions that are not forgiven have a term of 2 years and an interest rate of 1%. There is no pre-payment penalty.

Proactive Steps To Take

Although the SBA has not yet issued specific guidance on loan forgiveness (including an application deadline), borrowers can take the following steps to maximize their chances of loan forgiveness:

  • Properly document fund use and allocation. This includes keeping track of cancelled checks, payment receipts, and transcripts of accounts.
  • Consider separating PPP loan proceeds from other funds (i.e., in a different bank account) and putting other accounting controls in place (such as keeping a separate ledger for loan proceeds). Many SBA lenders are requiring borrowers to take similar actions.
  • If there has been any reduction in FTEs or employee salaries or wages, begin strategizing now to try and ensure a full elimination of the reduction by June 30, 2020 (if feasible, understanding that your business circumstance may not allow for this).
  • Work with your accountant to calculate your total eligible expenses in the first 8-weeks (the potential forgivable amount). After the proceeds hit your bank account, spend as much as you can on eligible expenses, but not more than 25% of your anticipated forgivable amount on non-payroll expenses.

We Can Help

Please contact Maslon's Corporate & Securities Group if you have questions or need assistance taking advantage of loan forgiveness afforded by the Paycheck Protection Program.


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