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Events escalated and unfolded quickly in the wake of theCOVID-19 pandemic. Government relief also came quickly in the formof the Paycheck Protection Program (PPP) loanprogram—and many business owners immediately rushed toapply.

As things begin to calm down and businesses move towardreopening, small business clients must now turn to thequestion of loan forgiveness. These clients should be advised topay close attention to the new small business administration (SBA)form loan forgiveness application, as well as the recent Paycheck Protection Program Flexibility Act (which modifies theCARES Act rules and was released after the SBAapplication). The need to continue monitoring ongoing guidance isalso important—as we have recently learned that elements ofemerging guidance may be effective retroactively.

Paycheck Protection Program Loan Forgiveness parameters

PPP loan forgiveness is determined based on how the smallbusiness client spent the loan proceeds. Importantly, at least 60%of the loan must be used for payroll costs (note that this 60%threshold was reduced from 75% under the CARES Act by the PaycheckProtection Program Flexibility Act (PPPFA), passed in earlyJune).

Under the terms of the CARES Act, amounts used to cover eligibleexpenses could be forgiven if used during the eight-week periodfollowing the loan origination date. The PPPFA extended theeight-week period to 24 weeks from the date the lender made thefirst loan payment to the small business owner. Unless Congressacts again, the funds must all be spent by December 31, 2020, inorder to be eligible for forgiveness.

Eligible expenses (other than payroll costs) include operatingcosts like rent, mortgage interest, interest on outstanding debt,utilities, employee retirement benefits and health insurance costs.Compensation that exceeds $100,000 per employee, as pro-rated forthe period, is excluded from the definition of payroll costs forloan forgiveness purposes.

The amount forgiven can also be reduced if the employerimpermissibly reduced staffing or employee compensation levels(although the PPPFA gives employers until December 31, 2020, tobring workers back to work/restore wage levels and continue toqualify for loan forgiveness (extended from prior law, which setthe deadline at June 30)). Reducing compensation for employeesearning under $100,000 by more than 25% can also reduce the amountforgiven.

The SBA loan forgiveness application

Every PPP lender can use its own version of the SBA formapplication. At the most basic level, after the small businessowner completes the application for loan forgiveness, the lenderhas 60 days to decide whether the borrower qualifies. The SBA thenhas an additional 90 days to providing funding for the lender.

Importantly, the original SBA loan forgiveness applicationmentions the original eight-week period, which has now beenextended. Presumably, the application will be updated to reflect this change.

There is also a divergence between the SBA loan application andthe actual terms of the PPPFA. While the SBA loan forgivenessapplication indicates that 75% of the "forgiveness amount" had tobe used for payroll costs, the terms of the new law, which wasreleased after the application, says that 60% of the "loanamount" must be used for payroll costs. This difference can besignificant for small business clients who only anticipatedrequesting forgiveness for part of the loan. (However, there arerumors that the IRS will release business-favorable guidance toclear up the divergence.)

The loan application also now requires employers to certifywhether they received loans in excess of $2 million (alsoconsidering loans by affiliates). (Generally, if the loan amountwas $2 million or less, the government will presume that it wasmade in good faith—i.e., that the borrower did not have a viablealternate liquidity source).

Employers must certify that loan amounts were used to covereligible expenses and that the borrower has accurately confirmedpayments made for both payroll costs and non-payroll costs.

The application itself contains a worksheet to help smallbusiness clients calculate their loan forgiveness amount, as wellas any reductions that may be necessary because the employerreduced its workforce or employee salaries. The document alsoprovides a cure provision for employers who impermissibly reducedworkforce (and may wish to bring employees back to work) or salarylevels.

Required documentation for PPP loan forgiveness

The employer must provide documentation to show the payrollcosts it paid out during the relevant period—whether in the form ofbank records or reports from a third-party payroll service. IRSpayroll tax filing forms (i.e., Form 941) and state quarterly wagereporting forms, as well as payment receipts, cancelled checks orother account statements showing contributions to employeeretirement accounts or healthcare are also necessary.

Importantly, employers will be required to document the numberof full-time employees employed between February 15, 2019, and June30, 2019, when compared to the same period in 2020. Two methods areavailable for counting FTEs: employers can elect to (1) assign "1"for every employee working at least 40 hours per week and "0.5" forall other employees, or (2) divide the average number of hoursworked weekly by each employee by 40, rounding up to the nearesttenth (up to a maximum of "1" per employee).

For employers that used funds to pay costs such as rent ormortgage interest, copies of lender amortization schedules, accountstatements and/or lease agreements must be submitted with theapplication.

Small business clients should also be advised of the need tomaintain all PPP records for at least six years after the date theyhave repaid the loan or received confirmation that their loan wasforgiven.

Maintain detailed records

The SBA loan forgiveness guidance to date has answered manysmall business clients' questions—but some issues have not yet beenaddressed. Clients should be advised to take the applicationseriously and to maintain detailed records of the rationale behindany assumptions or interpretations that the client made. This canbe key to avoiding problems down the road.

Robert Bloink, Esq.,LL.M., has taught at the Texas A&M University Schoolof Law and the Thomas Jefferson School of Law; in the past decade,Bloink has initiated $2B+ in insurance & alternative assetclass portfolios, and previously served as a senior attorney in theIRS Office of Chief Counsel for the Large- and Mid-Sized BusinessDivision. Bloink is also the co-author of Tax Facts,a reference solution that helps to answer critical tax questionsand provides the latest tax developments.

William Byrnes, Esq., LL.M.,CWM, is an executive professor and associate dean ofspecial projects at the Texas A&M University School of Law. Apioneer of online legal education, he also is the author orco-author of 20 tax books and legal treatises. Byrnes is also theco-author of Tax Facts,a reference solution that helps to answer critical tax questionsand provides the latest tax developments.

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