The CARES Act was signed into law on March 27, 2020, in response to the impact of the COVID-19 pandemic. The law established the Paycheck Protection Program (“PPP”). Section 1106 of the CARES Act sets forth the statutory rules relating to the PPP loan forgiveness. After much Guidance and FAQS were released by the Small Business Association (“SBA”) and the Department of Treasury, on June 5, 2020, the Paycheck Protection Program Flexibility Act was signed and offered additional changes to section 1106 of the CARES Act. On June 11, 2020, the SBA posted an interim final rule revising the first PPP interim final rule to incorporate the Flexibility Act amendments, including those relating to loan forgiveness. On June 17, 2020, SBA posted another interim final rule revising the interim final rule again, to incorporate Flexibility Act amendments, including those relating to loan forgiveness. Most notably, forgiveness for PPP loans was amended to reduce, from 75% to 60%, the portion of PPP loan proceeds that must be used for payroll costs for the full amount of the PPP loan to be eligible for forgiveness. Guidance on all the Covid-19 legislation continues to be released almost weekly, and the information recommended in this article is subject to change.
In general, whether all or a portion of a PPP loan can be forgiven depends on the amounts for specified expenditures by the borrower during the eight-week or 24-week period, depending on the borrowers’ designation, beginning on the date PPP loan proceeds are distributed to the borrower (“Covered Period”). The SBA PPP Interim Final Guidance explicitly notes that “[f]or purposes of loan forgiveness, however, the borrower will have to document the proceeds used for payroll costs in order to determine the amount of forgiveness.”
The SBA has issued two updated Loan Forgiveness Applications, Form 3508 and an alternative Form 3508Z. When a borrower submits SBA Form 3508, 3508Z or lender’s equivalent form, the lender shall: 1) Confirm receipt of the borrower certifications contained in the form; 2) Confirm receipt of the documentation the borrower must submit to aid in verifying payroll and nonpayroll costs, as specified in the form; 3) Confirm the borrower’s calculations on the borrower’s form, including the dollar amount of the Cash Compensation, Non-Cash Compensation and Compensation to Owners and Business Mortgage Interest Payments, Business Rent or Lease Payments, and Business Utility Payments, as defined by the PPP, by reviewing the documentation submitted with form; and 4) Confirm that the borrower made the calculation on the form correctly, by dividing the borrower’s Eligible Payroll Costs, as defined by the PPP, by 0.60.
Importantly, remember, providing an accurate calculation of the loan forgiveness amount is the responsibility of the borrower, and the borrower attests to the accuracy of its reported information and calculations on the loan forgiveness form. Lenders are expected to perform a good-faith review, in a reasonable time, of the borrower’s calculations and supporting documents concerning amounts eligible for loan forgiveness. The borrower shall not receive forgiveness without submitting all required documentation to the lender. As the First Interim Final Rule indicates, lenders may rely on borrower representations. If the lender identifies errors in the borrower’s calculation or material lack of substantiation in the borrower’s supporting documents, the lender should work with the borrower to remedy the issue. The lender does not need to independently verify the borrower’s reported information if the borrower submits documentation supporting its request for loan forgiveness and attests that it accurately verified the payments for eligible costs.
Stan L. Tinter, Shumaker Williams, P.C.