PPP Updates: Loan Forgiveness and Foreign Affiliates

May 20, 2020

By: Lindsay R. Kaplan, Allan Grauberd, and Benjamin Danieli

Loan Forgiveness Application

On May 15, 2020, the Small Business Administration (“SBA”) and U.S. Department of Treasury released the much anticipated Loan Forgiveness Application (the “Application”). [1]  A borrower of funds under the Paycheck Protection Program (“PPP”) seeking to take advantage of the PPP’s unique forgiveness component must submit its completed Application to its lender (or the lender servicing its loan).  Thereafter, pursuant to Section 1106 of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), the lender has 60 days to issue a decision on the Application.

The Application includes detailed instructions for completing the various components of the form, including the PPP Loan Forgiveness Calculation Form and the PPP Schedule A (which is used to determine reduction in forgiveness amounts).  The Application also includes a list of the required documents that a borrower will need to submit with its Application (as well as a list of documents that a borrower will need to maintain for six years after its loan is forgiven or repaid in full) and an optional PPP Borrower Demographic Information Form, which contains questions designed to collect data on the gender, race, ethnicity and veteran status of borrowers.

While the Application’s instructions provide some clarity around certain questions that were previously a source of confusion among PPP borrowers, the SBA has stated that it “will also soon issue regulations and guidance to further assist borrowers as they complete their applications, and to provide lenders with guidance on their responsibilities.[2]

While not intended to be an all-inclusive list, some of the key takeaways from the Application and instructions include:

  • The inclusion of an “Alternative Payroll Covered Period,” which allows borrowers with “a biweekly (or more frequent) payroll schedule” to elect, “for administrative convenience,…to calculate eligible payroll costs using the eight-week (56-day) period that begins on the first day of their first pay period following their PPP Loan Disbursement Date” with respect to certain questions asked in the Application.  This flexibility may enable these borrowers to further maximize their loan forgiveness amounts.
  • A brief description of the eligible payroll costs and non-payroll costs that may be included in the forgiveness calculations, with a reminder that “eligible non-payroll costs cannot exceed 25% of the total forgiveness amount.”
  • A statement that, if applicable, the SBA will deduct Economic Injury Disaster Loan (“EIDL”) Advance Amounts from the forgiveness amount remitted to the lender.
  • A recitation of various full-time equivalency (FTE) employee reduction exceptions and an FTE Reduction Safe Harbor.
  • A requirement that the PPP borrower confirm whether it, “together with its affiliates” (to the extent that a waiver of the affiliate rules was not applicable), received PPP funds over $2 million.  This field is likely in response to the SBA’s and Treasury’s Frequently Asked Questions (“FAQ”) 46, which indicated that loans to borrowers and their affiliates in excess of $2 million will be subject to review by the SBA.[3]
  • Various certifications and acknowledgements, including ones related to the use of funds on eligible payroll and non-payroll costs, verification as to the payments for which the borrower is seeking forgiveness, confirmation that the borrower has submitted the required documents and acknowledgment of certain penalties and consequences for failing to provide any additional information requested by the SBA or submitting incorrect documents or making false statements.

Calculation of Employee Count for Foreign Affiliates

Also, on May 18, 2020, the SBA and Treasury provided further clarification on certain eligibility criteria through their twelfth Interim Final Rule on the “Treatment of Entities with Foreign Affiliates” (“Twelfth IFR”).[4] The Twelfth IFR states that all PPP applicants are subject to the affiliation rules outlined in 13 C.F.R. § 121.301.  As such, “for purposes of determining eligibility for the PPP, an entity must include all employees of its domestic and foreign affiliates,” except where applicants are otherwise expressly exempt from the affiliation rules.  This guidance was issued in direct response to conflicting answers in the SBA’s and Treasury’s FAQ, as well as the second IFR on “Applicable Affiliation Rules” (“Second IFR”).[5]

Prior to May 5, 2020, FAQ 3 seemingly addressed whether foreign based employees of the PPP borrower’s affiliates should be included in the PPP’s 500-employee eligibility cap.  The relevant portion of the answer to FAQ 3 stated, “In addition to small business concerns, a business is eligible for a PPP loan if the business has 500 or fewer employees whose principal place of residence is in the United States, or the business meets the SBA employee-based size standards for the industry in which it operates (if applicable).” The Second IFR, used similar language.  On May 5, 2020, however, the SBA and Treasury published FAQ 44.  The relevant portion of the answer to that question stated, “For purposes of the PPP’s 500 or fewer employee size standard, an applicant must count all of its employees and the employees of its U.S and foreign affiliates, absent a waiver of or an exception to the affiliation rules. 13 C.F.R. 121.301(f)(6).” Thus, many practitioners and PPP borrowers felt that FAQ 44 contradicted the previously published guidance in FAQ 3 and the Second IFR, which appeared to exclude employees whose principal place of residence was not in the United States from the 500-employee count.

In an effort to address the confusion stemming from these inconsistent provisions and guidance, which the SBA acknowledges the prior guidance caused, the SBA provided a safe harbor provision under the Twelfth IFR.  The safe harbor provides that the eligibility of a borrower who applied for a PPP loan prior to May 5, 2020, and who did not include their foreign affiliates' employees in their employee count, will not be affected by this factor alone. It further provides that the certification provided by such a borrower will not be deemed inaccurate based on this factor alone. The relevant language from the Twelfth IFR is included below:

“However, as an exercise of enforcement discretion due to reasonable borrower confusion based on SBA guidance (which was later resolved through a clarifying FAQ on May 5, 2020), SBA will not find any borrower that applied for a PPP loan prior to May 5, 2020 to be ineligible based on the borrower’s exclusion of non-U.S employees from the borrower’s calculation of its employee headcount if the borrower (together with its affiliates)[6] had no more than 500 employees whose principal place of residence is in the United States. Such borrowers shall not be deemed to have made an inaccurate certification of eligibility solely on that basis.”

This article is current as of May 20, 2020 and reflects the state of the relevant laws, regulations, and guidance to that point.  Any subsequently issued, legislation, rules, and guidance by Congress, the United States Treasury, the Small Business Administration and other various government agencies may change the information contained herein.  While this article is meant as a useful resource concerning matters arising under the Paycheck Protection Program, it should not be considered legal advice for any specific situation.

[2] The SBA’s May 15, 2020 press release concerning additional and forthcoming guidance on forgiveness is available at https://www.sba.gov/about-sba/sba-newsroom/press-releases-media-advisories/sba-and-treasury-release-paycheck-protection-program-loan-forgiveness-application.

[3] The most recent SBA and Treasury FAQ is available on the SBA’s website at https://www.sba.gov/document/support--faq-lenders-borrowers.

[5] The full text of the Second IFR, originally posted on April 3, 2020, is available on the Treasury website at https://home.treasury.gov/system/files/136/SBA%20IFR%202.pdf

[6] “Section 7(a)(36)(D)(iv) of the Small Business Act (15 U.S.C. 636(a)(36)(D)(iv), as added by the CARES Act, waives SBA’s affiliation rules for (1) any business concern with not more than 500 employees that, as of the date on which the loan is disbursed, is assigned a North American Industry Classification System code beginning with 72; (2) any business concern operating as a franchise that is assigned a franchise identifier code by the Administration; and (3) any business concern that receives financial assistance from a company licensed under section 301 of the Small Business Investment Act of 1958 (15 U.S.C. 681). SBA also applies affiliation exceptions to certain categories of entities. 13 CFR 121.103(b).”