Additional Guidance Released On PPP Loan Forgiveness, Loan Review Process and Lender Responsibility

October 12, 2020

By Richard Shapiro

On October 8, the Small Business Administration (“SBA”) and the Treasury Department issued an interim final rule providing additional guidance concerning the forgiveness and loan review processes for Paycheck Protection Program (“PPP”) loans of $50,000 or less and, for PPP loans of all sizes, lender responsibilities with respect to the review of borrower documentation of eligible costs for forgiveness in excess of a borrower’s loan amount.

Reductions to Loan Forgiveness Amount Eased For Small Loans

Under this interim rule, a borrower of a PPP loan of $50,000 or less, other than any borrower that together with its affiliates received loans totaling $2 million or more, may use a new SBA form, Form 3508S (or lender’s equivalent form), to apply for loan forgiveness.  A borrower that uses this form (or lender’s equivalent form) is exempt from any reductions in the borrower’s loan forgiveness amount based on (i) reductions in full-time equivalent employees or (ii) reductions in employee salary or wages that would otherwise apply.

Loan Forgiveness Process – Documentation

According to the instructions to Form 3508S, the following documents must be submitted by each borrower with the form:

Payroll – Documentation verifying the eligible cash compensation and non-cash benefit payments from the covered period or the alternative payroll covered period  consisting of the following:

  • Bank account statements or third-party payroll service provider reports documenting the amount of cash compensation paid to employees.
  • Tax forms (or equivalent third-party payroll service provider reports) for the periods that overlap with the covered period or the alternative payroll covered period:
    • Payroll tax filings reported, or that will be reported, to the IRS (typically, Form 941); and
    • State quarterly business and individual employee wage reporting and unemployment insurance tax filings reported, or that will be reported, to the relevant state.
  • Payment receipts, cancelled checks, or account statements documenting the amount of any employer contributions to employee health insurance and retirement plans that the borrower included in the forgiveness amount.

Nonpayroll - Documentation verifying existence of the obligations/services prior to February 15, 2020 and eligible payments from the covered period:

  • Business mortgage interest payments: copy of lender amortization schedule and receipts or cancelled checks verifying eligible payments from the covered period; or lender account statements from February 2020 and the months of the covered period through one month after the end of the covered period verifying interest amounts and eligible payments.
  • Business rent or lease payments: copy of current lease agreement and receipts or cancelled checks verifying eligible payments from the covered period; or lessor account statements from February 2020 and from the covered period through one month after the end of the covered period verifying eligible payments.
  • Business utility payments: copy of invoices from February 2020 and those paid during the covered period and receipts, cancelled checks, or account statements verifying those eligible payments.

A borrower must maintain the following documentation in its files for six years after the date the loan is forgiven or repaid in full: all records relating to the borrower’s PPP loan, including documentation submitted with its PPP loan application, documentation supporting the borrower’s application, and documentation demonstrating the borrower’s material compliance with PPP requirements.  The borrower must also permit authorized representatives of SBA, including representatives of its Office of Inspector General, to access such files upon request.

Loan Forgiveness Process for Lenders

When a borrower submits Form 3508S or lender’s equivalent form, the lender must:

  • Confirm receipt of the borrower certifications contained in Form 3508S or lender’s equivalent form.
  • Confirm receipt of the documentation the borrower must submit to aid in verifying payroll and nonpayroll costs.

Providing an accurate calculation of the loan forgiveness amount is the responsibility of the borrower, and the borrower attests to the accuracy of its reported information and calculations on the loan forgiveness application.  The borrower will not receive forgiveness without submitting all required documentation to the lender.  The lender does not need to independently verify the borrower’s reported information if the borrower submits documentation supporting its request for loan forgiveness and attests that it accurately verified the payments for eligible costs.

Borrower Submission of Excess Costs

The interim rule notes that, in some cases, a borrower may submit to a lender documentation of eligible payroll and nonpayroll costs that exceed the amount of the borrower’s PPP loan.  In response to that situation, the interim rule affirms that the amount of loan forgiveness that a borrower may receive cannot exceed the principal amount of the PPP loan.  A lender should confirm receipt of the documentation the borrower is required to submit to aid in verifying payroll and non-payroll costs, and, if applicable (for Form 3508, 3508EZ, or lender’s equivalent form), confirm the borrower’s calculations on the borrower’s loan forgiveness application, up to the amount required to reach the requested forgiveness amount.

Observation

For borrowers on the approximately 3.57 million outstanding PPP loans of $50,000 or less (according to this interim rule), the simplification of the forgiveness and loan review process should certainly be welcome news.  Nonetheless, the documentation required to complete the new Form 3508S remains exceedingly comprehensive. 

About Richard J. Shapiro

Richard Shapiro, Tax Director and member of EisnerAmper Financial Services Group, has over 35 years' experience in federal income taxation, including the taxation of financial instruments and transactions, both domestic and international.