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Congratulations, you just received your PPP Loan! Now what?

Well, first you need to start using those PPP loan funds for the purposes they are intended and permitted under the CARES Act (“Act”), Pub. L. 116-136. According to the Act, PPP loan proceeds are to be used for only the following purposes:

  • payroll costs;
  • interest payment on any mortgage incurred prior to February 15;
  • payment of rent on any lease in force prior to February 15;
  • payment on any utility for which service began prior to February 15;
  • interest payments on any other debt obligations that were incurred before February 15, 2020; and
  • refinancing an SBA EIDL loan made between January 31, 2020 and April 3, 2020.

Further, the Act and the SBA’s series of Interim Final Rules (“IFR”) provide that (1) the borrower must apply the PPP loan proceeds towards any or all of the eligible purposes during the eight (8) week period after the first disbursement of the PPP loan and (2) not more than 25% of the loan forgiveness amount may be attributable to non-payroll costs. It is important to note that payroll costs and eligible non-payroll costs are two (2) separate buckets that must be independently filled.

Second, if PPP loan forgiveness is important to you, you need to know that forgiveness is based on the employer maintaining or quickly rehiring employees and maintaining salary levels. So, while the Act and IFR provide that the PPP loan may be forgiven up to the full principal amount of the loan and any accrued interest, they also specify that the amount of loan forgiveness shall be reduced by:

  • the reduction in the number of full-time employees of a PPP loan borrower; and
  • the reduction in excess of 25% the total salary/wages of any employee during the eight (8) week period after loan disbursement compared to the most recent full quarter before loan disbursement during which the employee was employed, but not including reductions for salary and wage amounts for employees earning over $100,000.

In other words, Loan forgiveness will be reduced if full-time employee headcount declines, or if salaries and wages for full-time employees decrease. Accordingly, be prepared and keep very organized records.

Third, while you are doing all you can to properly and diligently spend all of the PPP loan during the eight (8) week period and to satisfy the employee headcount number and/or salary figures sufficiently to meet the Act’s forgiveness criteria, you may be concerned that you don’t understand exactly what you must submit to your lender for PPP loan forgiveness.  While the details of what’s required to be submitted by the borrower for PPP loan forgiveness under the Act continue to evolve, at this time the Act appears to require the following documentation:

  • evidence of full-time employees on payroll and pay rates (for example, a copy of Form 941 and state quarterly wage and unemployment insurance tax reporting forms);
  • documentation on non-payroll costs;
  • borrower’s certification that the (a) documentation is true and correct and (b) the amount for which forgiveness is requested was used for eligible purposes; and
  • any other documentation the SBA Administrator determines is necessary.

And, after you’ve delivered the documentation required by the SBA for forgiveness of your PPP loan, you’ll undoubtedly be curious about whether your PPP loan was forgiven.  Here are some important timelines provided by the Act concerning the lender’s submission process for PPP loan forgiveness:  (a) not later than sixty (60) days after the date on which a lender receives an application for loan forgiveness from an eligible recipient, the lender shall issue a decision on the application; and (b) no later than ninety (90) days after the date on which the amount of forgiveness is determined, the SBA Administrator shall remit to the lender an amount equal to the forgiveness, plus any interest accrued through the date of payment.

So, does the foregoing mean the lender is entitled to make a unilateral decision on loan forgiveness?  If not, and a lender does make that decision by itself, what are the consequences, if any, to the borrower and/or the lender for making an incorrect decision?  The Act provides some guidance in that it states that a lender will be held harmless if it has received the documentation required “from an eligible recipient attesting that the eligible recipient has accurately verified the payments for payroll costs, payments on covered mortgage obligations, payments on covered lease obligations, or covered utility payments during covered period…”  As the SBA’s position on many PPP loans topics continues to develop, it is in the best interest of the borrower and lender for the borrower to keep accurate records and very carefully track the use of PPP loan proceeds.

And fourth, keep in mind that if a borrower uses PPP funds for unauthorized purposes, the SBA will direct the borrower to repay those amounts. In addition, if a borrower knowingly uses the PPP funds for unauthorized purposes, that borrower will be subject to additional liability such as charges for fraud AND if one of the borrower’s shareholders, members, or partners uses PPP funds for unauthorized purposes, the SBA will have recourse against the shareholder, member, or partner for the unauthorized use.

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