Use of PPP Loan Proceeds and Forgiveness


By: Colleen Lyons

April 19, 2020

Businesses whose Paycheck Protection Program (“PPP”) loan applications were approved by the United States Small Business Administration (“SBA”) as part of the initial $349 billion appropriation under the CARES Act have or will soon receive PPP loan proceeds from their lenders. While the SBA has not yet issued regulations concerning permitted uses of the proceeds and details with respect to forgiveness of the PPP Loans, the CARES Act itself and the interim rules from the US Treasury Department and SBA do provide some preliminary general guidance.

When will the PPP Loan funds be received? The lender is required to make its first loan disbursement no later than ten days from the date of the SBA loan approval.

Is there any requirement to segregate the PPP Loan proceeds?  There is no requirement to have a separate bank account. As a best practice, the proceeds can be set aside in a business savings account and then transferred to checking and payroll accounts as the funds are spent for permitted uses.

What can the PPP Loan proceeds be used for?

  1. At least 75% of the proceeds must be used for “Payroll Costs” which are defined to include the following amounts paid by the employer (i) salaries, wages, commissions or similar compensation; (ii) cash tips or equivalents; (iii) payment for vacation, parental, family medical or sick leave; (iv) allowance for dismissal or separation; (v) payments required for the provision of group health care benefits, including insurance premiums; (vi) payment of any retirement benefits; and (vii) state and local taxes assessed on the compensation of employees. The following amounts are specifically excluded from the definition of “Payroll Costs” (i) the cash compensation of an individual employee in excess of $100,000 as prorated for the covered period; (ii) certain federal employment taxes; (iii) any compensation to an employee whose principal residence is outside of the United States; and (iv) qualified sick or family leave under the Families First Coronavirus Act.
  2. Up to 25% of the proceeds can be used for (i) payment of interest on any mortgage obligation that was incurred before February 15, 2020; (ii) payment of rent under a leasing agreement in force before February 15, 2020; and (iii) any utility payments, including payments for the distribution of electricity, gas, water, transportation, telephone or internet access for which service began before February 15, 2020 (referred to herein as “Other Permitted Costs”).

What period is used to determine the amount eligible to be forgiven? The “Covered Period” for determining the forgiveness amount is the eight-week period beginning on the date the lender makes the first disbursement of PPP Loan proceeds to the business.

How is the amount eligible to be forgiven determined? Generally speaking costs incurred and payments made during the Covered Period for Payroll Costs and Other Permitted Costs are eligible to be forgiven subject to the following:

  1. At least 75% of the amount forgiven must be for Payroll Costs;
  2. The amount of Other Permitted Costs that can be forgiven is limited to no more than 25% of the Payroll Costs eligible for forgiveness; and
  3. The amount forgiven cannot exceed the principal amount of the PPP Loan plus accrued interest.

Once a maximum forgiveness amount is determined, it is subject to adjustment for reductions in employee headcount and certain salary/wage reductions. Recall that the purpose of this program is to help employers maintain employees who are paid less than $100,000 per year on payroll and at their normal rates of pay. Given this purpose, reductions in the number of employees, or in their pre-existing levels of pay (subject to the $100,000 cap) can have negative consequences when it comes time to determine the amount that will be forgiven.

          Headcount Reduction: The headcount reduction (if any) is determined by multiplying the maximum forgiveness amount by the following fraction if it is less than one:

Average number of full-time equivalent employees (“FTEs”)
___________employed during the Covered Period____________
Lesser of the average number of FTEs employed during the period
(i) beginning on February 15, 2019 and ending on June 30, 2019 or
(ii) for non-seasonal employers only, beginning January 1, 2020 and ending on February 29, 2020

          Salary/wage Reductions: In addition to any headcount reduction based on FTEs, the adjusted maximum forgiveness amount will be further reduced to the extent that the cash wages of any employee with an annualized rate of pay that is less than $100,000 during any pay period in 2019 are reduced by more than 25% of the total cash salary or wages paid during the most recent full quarter during which the employee was employed before the Covered Period.

If the reduction in FTEs or salaries occurred during the period February 15, 2020 through April 26, 2020, the amount of loan forgiveness will not be reduced, if the reduction in FTEs and salaries is restored by June 30, 2020.

What is the process to obtain PPP loan forgiveness? At the end of the Covered Period, the recipient will be required to apply to the lender servicing the loan for forgiveness. No form has yet been promulgated by the SBA for this purpose; once an approved form is available each lender likely will have their own process and requirements which, based on existing guidance, will require at least the following: (i) documentation verifying the number of FTEs and pay rates, payroll tax filings reported to the Internal Revenue Service and state income, payroll and unemployment insurance filings; (ii) documentation, including cancelled checks, payment receipts, transcripts of accounts or other documents verifying payments of Other Permitted Costs; and (iii) a certification that the documentation presented is true and correct and that the amount for which forgiveness is requested was used to retain employees and to make payments of Other Permitted Costs. The lender is required to issue a decision on forgiveness not later than 60 days after the completed application for forgiveness has been submitted.

What happens to the portion of the PPP loan that is forgiven? Amounts which are forgiven will be considered cancelled indebtedness by the lender but for federal tax purposes will be excluded from gross income.

What happens to the portion of the PPP loan that is not forgiven? Although there is no clear guidance, it appears that there are two options: (a) repay the excess immediately and reduce the loan amount, or (b) keep the excess and repay it within the two-year loan period.

Will there be additional guidance? We expect that substantial additional guidance concerning forgiveness will be released by April 26, 2020; when it is available, we will update the information in this Client Alert.