For an SBA loan to be forgiven under the Paycheck Protection Program, which was enacted as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, numerous strings are attached. Given the program’s strict restrictions on the use of loan proceeds, as well as its limitations on ultimate loan forgiveness, borrowers face the very real prospect that some or all of their PPP loans may not be forgiven, or even worse.
It must be understood at the outset that compliance with all PPP restrictions must be certified by an officer of the borrower, and a false or misleading certification could give rise to civil, or potentially criminal, liability of that certifying officer under federal law. There is more. While PPP loans are generally non-recourse to the owners of a borrower, if and to the extent loan proceeds are used for unauthorized purposes, the owners may have personal liability for repayment.
Bottom line: it is critically important that borrowers securing PPP loans establish procedures to comply with relevant CARES Act requirements and keep accurate records of their compliance to ensure maximum loan forgiveness. Michelman & Robinson can help. Indeed, we are seeing an increasing demand from businesses seeking our assistance in managing PPP loan proceeds and maximizing loan forgiveness. If you too would like our guidance, please contact us immediately so that we can get you in the queue for these services.
In the meantime, M&R provides the following overview covering PPP loan use and forgiveness.
Managing Use of Loan Proceeds
Q. What can PPP loan proceeds be used for?
A. The CARES Act provides that proceeds of PPP loans may be used to pay for the following expenses incurred during the “covered period” between February 15 and June 30, 2020:
- Payroll costs including wages, salaries, commissions or similar compensation, and healthcare benefits
- Mortgage interest (but not payments of principal)
- Rent
- Utilities
- Interest incurred during the covered period on obligations incurred before the covered period
Q. Does a borrower have to track the use of PPP loan proceeds?
A. As part of the PPP loan application, the borrower must certify that loan proceeds will be used solely for permitted purposes. Therefore, recipients of PPP loans must keep careful track (and records) of the use of all loan proceeds. At the same time, the borrower must be able to show that all other (non-PPP) payments have independent sources. Toward that end, the borrower needs to establish careful accounting practices and carefully monitor all uses of cash, both those identified as PPP loan proceeds and, to assure compliance, cash from other sources, such as operations and capital contributions.
One approach to simplifying recordkeeping and tracking of PPP loan proceeds would be for borrowers to open and utilize one or more separate bank accounts from which loan proceeds flow in and out. This would limit the amount of accounting effort necessary to (1) track loan use, (2) demonstrate compliance with the program’s use restrictions, and, as discussed in more detail below, (3) make the forgiveness application process smoother and more streamlined.
Loan Forgiveness
Q. How much of a borrower’s PPP loan can be forgiven?
A. Up to 100% of PPP loans are forgivable, but only to the extent of certain qualified uses of loan proceeds during the eight weeks following loan origination, which means that careful recordkeeping is essential. A borrower must (1) track use of PPP loan proceeds with precision, (2) provide backup evidence to the SBA, and (3) certify to the SBA such backup materials as true and complete, in order to receive any loan forgiveness. Long story short: a borrower must be in a position to accurately account and retain complete records of these data sets.
Q. How is the amount of loan forgiveness calculated?
A. The percentage of the eligible loan proceeds that may be forgiven is determined by a formula based upon the number of jobs retained by the borrower adjusted by any reductions in compensation in excess of 25% for any employees. The basic formula is relatively straightforward: the average monthly number of full-time equivalent (FTE) employees during the covered period divided by either (at the borrower’s election) the average monthly number of FTE employees between February 15 and June 30, 2019, or the average monthly number of FTE employees in January and February 2020 (this assumes no reductions in compensation of greater than 25% for any employee). A reduction in employee headcount is disregarded if employees are terminated between February 15 and April 26, 2020, but rehired by June 30, 2020. Similarly, reductions in employee salary level greater than 25% between February 15 and April 26, 2020 are disregarded if reversed by June 30, 2020.
Q. What can a borrower use PPP loan proceeds for and still be eligible for loan forgiveness?
A. Expenditures of PPP loan proceeds eligible for forgiveness are almost, but not completely, identical to the restrictions on uses of PPP loan proceeds. For example, the following permitted uses of PPP loan proceeds are not forgivable:
- Interest on obligations incurred before February 15, 2020
- Lease payments under leases entered into after February 15, 2020
- Utility payments contracted for after February 15, 2020 (e.g., if a borrower contracts for Internet service after such date, loan proceeds used to pay such expenses during the covered period are not forgivable, but electric service contracted before such date but incurred during the covered period would be forgivable)
Q. What must a borrower provide to its lender to facilitate PPP loan forgiveness?
A. The CARES Act requires borrowers to submit to its lender an application for forgiveness, which shall include the following documentation:
- Verification of FTE employees on payroll and pay rates during the covered period
- Payroll tax filings to the IRS
- State income, payroll, and unemployment insurance filings
- Cancelled checks, payment receipts, transcripts of account, or other documents verifying mortgage, rent, and utility payments
- Certification from the borrower as to the accuracy and completeness of the submission
Clearly, very precise recordkeeping must be maintained in order to compute the amount of available loan forgiveness. Failure to submit adequate records will result in denial of loan forgiveness, and false certifications can result in significant liability and potential criminal exposure. The takeaway: borrowers must have systems and recordkeeping policies in place designed to track these expenses and employment-related information, and be meticulous in maintaining these systems and policies.
This blog post is not offered, and should not be relied on, as legal advice. You should consult an attorney for advice in specific situations.
