The Small Business Administration (“SBA”) and the Treasury Department have continued to provide guidance to lenders and borrowers in relation to forgivable loans issued under the Paycheck Protection Program (“PPP”), Congress’ $349 billion dollar forgivable loan program to assist small businesses with maintaining payrolls during the COVID-19 pandemic. New updates on the PPP establish the importance of record keeping for borrowers applying for and receiving a PPP loan.
Under the PPP, borrowers may use a PPP loan for payroll costs, costs to the continuation of group health care benefits during periods of paid sick, medical, or family leave, and insurance premiums, mortgage interest payments, rent payments, and utility payments. However, the SBA has made clear that since the “overarching focus” is on “keeping workers paid and employed,” 75% of the PPP loan must be used for payroll costs. Otherwise, the entire loan, or a portion thereof, will not be forgiven and subject to repayment.
Payroll costs consist of compensation to employees (whose principal place of residence is the United States) in the form of salary, wages, commissions, or similar compensation; cash tips or the equivalent (based on employer records of past tips or, in the absence of such records, a reasonable, good-faith employer estimate of such tips); payment for vacation, parental, family, medical, or sick leave; allowance for separation or dismissal; payment for the provision of employee benefits consisting of group health care coverage, including insurance premiums, and retirement; payment of state and local taxes assessed on compensation of employees; and for an independent contractor or sole proprietor, wage, commissions, income, or net earnings from self-employment or similar compensation.
Given the 75% payroll costs requirement and the other requirements for forgiveness of a Paycheck Protection Program loan, document retention is absolutely critical to avoid any issues. Thus, a borrower should keep detailed records and an accounting of how the PPP loan is used, including payroll tax filings, state income, payroll and unemployment filings, cancelled checks, payment receipts (associated to payroll or payments of other allowed expenses under the PPP), transcription of accounts, or other documents verifying payments on covered mortgage obligations, payments on covered lease obligations, and covered utility payments.
Borrowers should also be mindful of other documents that should be retained to ensure that the borrower meets the requirements for PPP loan forgiveness. For example, the entire PPP loan must be used for allowed expenses during the eight week period beginning on the date the lender makes the first disbursement of the PPP loan to the borrower (which the lender should disburse to the borrower no later than ten calendar days from the date of loan approval). In addition, forgiveness will be reduced if a borrower decreases full-time employee headcount, and/or if a borrower decreases salaries and wages by more than 25 percent for any employee that made less than $100,000 in 2019. Accordingly, document retention related to headcount and wages is also important for borrowers.
Questions
Kronick attorneys across all of the firm’s practice groups – Public Agencies, Natural Resources, Labor & Employment, and Business/Healthcare – will continue to provide clients and the community with ongoing updates and advice regarding COVID-19 related issues as developments warrant. Please feel free to contact us for assistance with issues arising from the current health crisis.
Bruce Scheidt
bscheidt@kmtg.com | 916.321.4502
Gabriel Herrera
gherrera@kmtg.com | 916.321.4334