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Posts Tagged ‘SBA’

SBA Updates PPP Forgiveness Guidance: The Good News and The Bad News

Posted on: May 27th, 2020

By: Justin Boron

If you borrowed less than $2 million for all of your businesses under the Paycheck Protection Program, you can feel re-assured that you won’t be questioned by the government on whether you really needed the money.

The Small Business Administration made clear that those circumstances amount to a good-faith certification of need under the PPP’s requirements. 

That doesn’t mean that you are home free.  There are still important limits to how you spend the money so that when you apply for forgiveness, you can in good-faith certify that your business used the money to retain employees, make interest payments on a covered mortgage obligation, make payments on a covered rent obligation, or make covered utility payments, according to the guidelines.

Fortunately, the SBA recently published a model forgiveness application that instructs borrowers on important issues related to how they can spend their PPP money to maximize forgiveness.

Probably No Bonuses for Owner-Employees, Self-Employed, and General Partners

The PPP’s most recent guidance on forgiveness caps compensation for “owner-employees,” self-employed individuals, and general partners to “the eight-week equivalent of their applicable compensation in 2019.”

If you fit one of those categories and you made more than $100,000 last year, that means your forgivable compensation over the eight-week forgiveness period cannot exceed $15,385. 

If you fit one of those categories and paid yourself less than $100,000 last year, that means your forgivable compensation over the eight-week forgiveness period cannot exceed the eight-week equivalent of your compensation in 2019.

Without saying it expressly, the SBA’s guidance tells business owners that they may not increase their compensation or pay themselves bonuses using PPP funds for which they seek forgiveness. However, there is still an open question about whether the SBA will forgive compensation in the form of bonuses for non-owner employees.

Timing of Forgiveness Period

To obtain full forgiveness of the loan, the PPP requires the borrower to spend all of the loan proceeds—and at least 75 percent on payroll costs—in the eight weeks from when the loan is disbursed.  That requirement has proved daunting to some employers, particularly seasonal ones or those whose employees refuse to return to work.

There was hope that before it adjourned Thursday, the Senate would pass a House-approved bill that extended this period.  But that did not happen.  As a result, the eight-week period remains in place.  But the most recent SBA guidance does provide some limited flexibility.

First, it allows employers to line up the eight-week forgiveness period with their payroll using the Alternative Payroll Covered Period.  Second, it makes clear that forgivable expenses must be either paid or incurred during the eight-week forgiveness period.  Additionally, costs incurred during the eight-week period but paid outside of it must be paid during the next regular payroll or billing date.

Full-Time Equivalent Employees

The PPP requires a reduction in the forgiveness amount of a loan if an employer fails to maintain certain headcount levels of employment.  The PPP measures this head account according to Full-Time Equivalent (FTE) employees.  But the PPP didn’t define FTE.

Although the SBA and the Internal Revenue Code had defined this term in other contexts like the Affordable Care Act, the SBA chose a different definition than used in those contexts.  For purposes of the PPP, an FTE is a person that averages at least 40 hours per week during the relevant period or the combination of multiple employees whose part-time hours add up to 40 hours per week.

Here’s how you calculate your FTE level according to the SBA guidance:

For each employee, enter the average number of hours paid per week, divide by 40, and round the total to the nearest tenth. The maximum for each employee is capped at 1.0. A simplified method that assigns a 1.0 for employees who work 40 hours or more per week and 0.5 for employees who work fewer hours may be used at the election of the Borrower.


The PPP also requires a reduction in the forgiveness amount of a loan based on an employee pay reductions.  Frankly, the statute that Congress passed didn’t make sense and would have inevitably resulted in a reduction in forgiveness if the language was applied literally as it read.  Fortunately, the SBA’s guidance fixed what was likely a drafting error: as long as an employer maintains 75 percent of its salary or wage levels when compared to the first quarter of this year, it can avoid reductions in forgiveness.

If you don’t do that, it gets complicated.  On page 7 of its forgiveness application, the SBA has supplied the formulas to use in its model forgiveness application.  You should work closely with a legal or accounting professional in assessing the reduction in forgiveness based on compensation reductions.

If you have questions or would like more information, please contact Justin Boron at [email protected].

Finding Shelter from the Storm: SBA Issues New Guidance on Safe Harbors for PPP Borrowers

Posted on: May 20th, 2020

By: Anastasia Osbrink

The safe harbor period for businesses that received the Small Business Administration’s (“SBA”) Paycheck Protection Program (“PPP”) loans expired on May 18, 2020 after a 4-day automatic extension. That safe harbor provided that businesses that repaid loans by that date would automatically be deemed to have satisfied the “good faith” requirement of the PPP wherein borrowers certified that “current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” This safe harbor arose after reports of large businesses, such as Shake Shack and the NBA, receiving loans under the program. Under normal circumstances, a business must provide documentation of making unsuccessful attempts to obtain loans from other sources prior to receiving an SBA loan. However, the PPP required self-certifications of good faith and eligibility without requesting separate documentation. The purpose of this was to quickly get an injection of cash into the economy – particularly to small businesses – so that companies could retain and rehire employees. When it came out that large companies were also receiving these loans, a public outcry ensued and the SBA provided additional guidance allowing for this safe harbor period so that large businesses would be encouraged to repay loans without facing any further investigation, audits, or consequences based on the “good faith” certification. Many of these larger businesses may still satisfy the “good faith” requirement, but making quick repayments creates good optics for these companies and eliminates further audits based on this certification.

Now, in a further effort to conserve resources and protect small business’ payroll capacities, the SBA has announced an additional safe harbor. This second safe harbor provides for an automatic assumption of good faith for any borrower that, along with its affiliates, received under $2 million in PPP loans, regardless of whether that loan was repaid by May 18, 2020. This means that audits for good faith will only be conducted for companies that received over $2 million and did not repay that loan by May 18th. The SBA cited three reasons for this additional safe harbor: 1)  borrowers that received under $2 million are more likely to satisfy the “good faith” requirement because they are less likely to have had access to other loan sources; 2) it will help promote economic stability by helping small businesses retain and rehire employees that otherwise may not have the ability to do so; and 3) it will enable the SBA to conserve resources by only investigating and auditing those companies that received bigger loans, which could yield larger returns if successful. It should be noted, though, that neither of these safe harbors apply to other requirements, such as the eligibility certification, or outright false statements or fraud. However, except where there is evidence of actual fraud, it appears that companies that fall into one of the safe harbors are unlikely to be audited.

It also seems that the SBA is less focused on punishment and more focused on recouping loans that did not satisfy the good faith requirement. That is because the SBA additionally stated that if it does determine a company failed to satisfy the good faith requirement after being audited, the company will not face any further action or fines if it repays the loan in full. This though, again, does not apply to determinations of actual fraud.

As the focus shifts to larger companies and the safe harbor for these larger loans expires, the Securities and Exchange Commission (“SEC”) is ramping up its investigations of public companies that received PPP loans. The SEC is seeking information from several of these public companies in order to ascertain whether they satisfied the PPP requirements. As part of this sweeping probe, the SEC is sending out letters to these public companies entitled “In the Matter of Certain Paycheck Protection Program Loan Recipients,” in which it requests additional information and documentation. This again demonstrates the focus of audits and investigations on large companies that received significant loans rather than on small businesses.

If you have questions or would like more information, please contact Anastasia Osbrink at [email protected].

Additional Information:

The FMG Coronavirus Task Team will be conducting a series of webinars on Coronavirus issues on a regular basis.  Click here to view upcoming webinars.

FMG has formed a Coronavirus Task Force to provide up-to-the-minute information, strategic advice, and practical solutions for our clients.  Our group is an interdisciplinary team of attorneys who can address the multitude of legal issues arising out of the coronavirus pandemic, including issues related to Healthcare, Product Liability, Tort Liability, Data Privacy, and Cyber and Local Governments.  For more information about the Task Force, click here.

You can also contact your FMG relationship partner or email the team with any questions at [email protected].

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