The SBA has indicated additional guidance is forthcoming on loan forgiveness from Payroll Protection Program (PPP) loans. While the CARES Act statute is clear on its availability, the process by which it is determined and how to maximize the forgiveness available is a developing issue that PPP loan recipients should be watching closely.
What we know about forgiveness currently is limited:
- Forgiveness in General – The PPP allows for forgiveness of amounts paid during the initial 8-week period of the loan for payroll and a limited amount of rent, utilities, and interest on existing debt (these other costs are limited to 25% of the total forgiveness under SBA’s guidance). The forgiveness is not taxable under the statute.
- Reduced Forgiveness – The statute reduces the amount available for forgiveness based upon an employer’s reduction in full-time equivalent employees or reduction in each employee’s wages during the initial 8-week period of the loan as compared to wages from the full prior quarter. There are options available to cure the reductions in the forgiveness amount if an employer rehires or reinstitutes salaries before June 30, 2020.
- Obtaining Forgiveness – It is unclear as of now what the process of obtaining forgiveness will involve. What is known is that borrowers will have to apply for forgiveness from their lender. It is further known that lenders should not require verification of the forgiveness amounts attested to and documented by borrowers.
With limited guidance now, employers must manage their businesses with these provisions in mind. Maximizing forgiveness is a goal that can be managed and considered with the other business decisions to be made during this time. Management considerations are:
- Is Maximizing Forgiveness the Goal? – It is certainly a goal, but it is not the only goal in managing through this downturn. Forgiveness is great, but ensuring the future of your business is mission critical. Forgiveness cannot be the sole focus during this time.
- Employee Retention – Employers should focus their retention efforts on retaining those employees who are most important to their businesses. Special attention should be given to those employees who will be critical to their business’s emergence in the post COVID-19 economy. While retention is a key factor to maximizing forgiveness, employers may consider sacrificing forgiveness in favor of covering other critical covered costs such as rent or debt service.
- Rehiring Plans – Many employers have already reduced workforces. The opportunity to cure these reductions between now and June 30, 2020 incentivizes employers to use loan proceeds to hire back critical employees. Cash flow planning to plan these rehires is needed now.
With good planning, maximizing forgiveness can be a positive result of the PPP program, but one cannot lose sight of managing their business through to the other side. Please note that representations made in this article are based on current interpretations of Interim Rules and SBA Q&A’s as of April 27rd, 2020 and does not reflect currently adopted law or to-be issued regulations.