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Early PPP Forgiveness Application Process Still Vexes Companies

Posted on July 24, 2020

Businesses that received small business loans and have already spent the proceeds aren’t sure whether they must wait until the end of the year to apply for forgiveness because of scant guidance on the topic.

As Congress considers extending and tweaking the Paycheck Protection Program (PPP), which provided loans that can be forgiven on a tax-free basis to businesses struggling during the coronavirus pandemic, companies that already took advantage of the program are waiting on the Small Business Administration and Treasury to clarify some of the finer points regarding forgiveness.

The government so far has released some forms and guidance on forgiveness, including interim final rules, FAQs, and forgiveness applications. One application is standard; the other is an EZ application meant to streamline the process for borrowers that can meet at least one of a few criteria.

One of those criteria is a certification by the company that it didn’t reduce annual salary or hourly wages of an employee by more than 25 percent during a specified period.

The government has recognized that a borrower can apply for forgiveness before the end of the covered period in which the proceeds must be spent, Adam Sweet of Eide Bailly LLP told Tax Notes. One example in an interim final rule says a borrower applying for early forgiveness should account for employee salary reductions at the time of the application and then prorate any reductions exceeding 25 percent over the full covered period.

However, under the Coronavirus Aid, Relief, and Economic Security Act (P.L. 116-136), in order to achieve full forgiveness, companies generally can’t reduce the number of full-time equivalent (FTE) employees during the covered period. That covered period was eight weeks under the initial coronavirus relief legislation, but Congress later extended it to 24 weeks — but ending no later than December 31 — and even provided some relief on the FTE reduction requirement for businesses that tried but weren’t able to rehire employees.

Even still, the guidance on the PPP so far doesn’t tell borrowers what to do when they have spent all the loan proceeds before the 24-week period ends and they want to apply for forgiveness early.

Sweet said the FTE component is presumably tested at the time of the application for forgiveness, but it’s unclear whether the borrower has to account for its FTE count over the full covered period, similar to the salary reduction test.

“One of the new exceptions to the FTE forgiveness reduction refers to a borrower being unable to return to its pre-COVID-19 business activity during the period beginning on February 15 and ending on December 31 due to federal and state COVID-19 guidelines,” Sweet added. “Again, if a borrower is relying upon this exception, do they need to wait until December 31 to apply for forgiveness, even if they have generated enough eligible expenditures to qualify for full forgiveness before the end of their covered period?”

Eric J. Kodesch of Lane Powell PC agreed that the SBA’s prior guidance generally has been helpful, and said it would be even more helpful if the SBA provided clear, bright-line guidance for the submission of PPP loan forgiveness applications before the end of the covered period and before December 31. The SBA provided clear guidance about calculating weekly FTEs, which uses a 40-hour workweek and a simplified method, and whether there is a reduction in compensation, he added.

Calculating Ratios

Absent an election to use a covered period between eight and 24 weeks, clear guidance is especially needed for calculating the FTE ratio for regular forgiveness applications submitted before the end of the covered period, Kodesch said.  

“After all, the numerator is average weekly FTEs during the covered period. Given the 24 weeks businesses have to compile forgivable costs against which the ratio is applied and the SBA’s favorable rules for the ratio, the ratio likely will not reduce forgiveness,” Kodesch said. 

However, Kodesch added, the regular forgiveness application can’t be completed without the ratio.

It would also help businesses if the SBA allowed them to use the numbers and ratios at the time of the application, with a certification that the actual numbers at the end of the covered period wouldn’t result in less forgiveness, Kodesch said.

For example, say a business has a PPP loan of $1 million. As of the date of the application for forgiveness, it has forgivable costs of $1.3 million and an FTE ratio of 95 percent. The business anticipates that by the end of the covered period it will have forgivable costs totaling $2.5 million, and it is confident that its FTE ratio won’t be below 50 percent at the end of the covered period.

“It would be helpful if the SBA provided guidance allowing the business to submit the application using the $1.3 million and 95 percent ratio, with a possible follow-up certification after the end of the covered period,” Kodesch said.

Lewis Horowitz, also with Lane Powell, said more SBA guidance could be helpful, and that most of the time it is. That said, he added, guidance on the PPP often complicates the process and confuses borrowers because there doesn’t seem to be a clear policy mandate beyond helping most borrowers, avoiding bad press, and incorporating into law whatever off-the-cuff comment is made by President Trump or Treasury Secretary Steven Mnuchin.

The PPP has been followed by inconsistent and unclear guidance, and after it was revealed that some large companies, such as Shake Shack and Ruth’s Chris Steakhouse, received loans, many rushed to give the money back to avoid bad press.

There was still nearly $130 billion left in the PPP funds as of early July, but Congress is considering extending the program yet again.

Horowitz said one reason for extending or expanding the program could be political: Perhaps lawmakers can’t agree on much else and desperately need to return to their districts or states for the August recess and show voters that they did something.

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