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Loan Forgiveness Under Paycheck Protection Program: Issues to Consider

April 24, 2020

While the loan forgiveness features of the Paycheck Protection Program loans (“PPP Loans”) have made PPP loans very attractive to eligible small businesses, borrowers wanting to take advantage of loan forgiveness need to comply with the detailed requirements; otherwise, all or a portion of their PPP Loans may not be subject to forgiveness. Complicating the situation is the fact that, at the present time, there are some open issues and ambiguities as to some of the forgiveness requirements. This E-Alert summarizes current guidance on the loan forgiveness provisions and raises some of the ambiguities and open issues that need further clarification. The SBA is expected to issue additional guidance on or before April 26, 2020.

Q: What costs paid with PPP Loan proceeds may be subject to forgiveness?

Answer: A borrower of a PPP Loan will be eligible for forgiveness of that portion of the PPP Loan equal to the sum of “costs incurred and payments made” during the eight-week period following the first date the PPP Loan was disbursed (the “Covered Period”) for:

But what’s still unclear:

Q: Are there costs that are not forgivable?

Answer: Yes, costs not subject to loan forgiveness include the following:

But what’s still unclear:

Q: What else can reduce a PPP Loan forgiveness amount?

Answer:

But what’s still unclear:

Q: How is forgiveness affected by a reduction in FTE employee count?

Answer:

But what’s still unclear:

Q: How is forgiveness affected by a reduction in compensation paid?

Answer:

But what’s still unclear:

Q: What else can reduce a PPP Loan forgiveness amount?

Answer:

But what’s still unclear:

Q: What happens to a portion of a PPP Loan that is not forgiven?

Answer: Any amount not forgiven continues as a loan on the original terms (i.e., 1% interest per annum, no payments for the initial six months of the term and a maturity date 2 years from the date of disbursement).

Q: What documents will be needed to apply for forgiveness?

Answer: The CARES Act provides that a borrower must submit an application to the funding lender or current loan servicer together with the following:

But what’s still unclear: The SBA will be issuing additional guidance with respect to PPP Loan forgiveness which guidance may add or modify the documentation requirements.

Q: What is the timing for determining how much of a PPP Loan has been forgiven?

Answer: The CARES Act requires the lender or servicer to issue a decision on the forgiveness application within sixty days of its receipt of the application. 

But what’s still unclear:

Q: What are the tax effects of forgiveness?

Answer:

But what’s still unclear:

Q: What should a borrower do to get guidance on these open issues and ambiguities?

Answer: The language used in the CARES Act and corresponding SBA Interim Final Rules and Frequently Asked Questions leaves open a significant number of issues with respect to the application of the PPP Loan forgiveness provisions in some circumstances. The CARES Act requires the SBA to issue regulations and guidance on the implementation of the forgiveness provisions of the PPP Loan program not later than April 26, 2020. But even after additional guidance is issued, most borrowers will continue to confront issues of interpreting the rules in order to maximize the availability of loan forgiveness. Accordingly, PPP Loan borrowers are encouraged to consult with their Miller Canfield attorney or other professional advisors to avoid making any missteps.

This is part of a series of our COVID-19 alerts providing clients with practical advice on measures they can take to navigate through these troubled times. Please contact the authors or your Miller Canfield attorney with further questions.

This information is based on the facts and guidance available at the time of publication, and may be subject to change.