Additional Guidance Regarding the Paycheck Protection Program

The past several weeks have seen a trickle of additional guidance from the Small Business Administration (“SBA”) regarding the Paycheck Protection Program (“PPP”).  Although much remains unclear about how the loan forgiveness application process is going to work, this update is intended to provide our customers with current information as it becomes available from the SBA.  This newsletter summarizes several key provisions that the SBA has clarified recently and highlights areas where we are still waiting on guidance. 

Recent Guidance Issued by the Small Business Administration

May 28, 2020 Update

Late last week, the Small Business Administration (“SBA”) released two interim final rules that provide further guidance on how the forgiveness application process will work; the rules can be accessed here.  In response, BayCoast Bank will be releasing our own customer portal and guidelines to help borrowers calculate and complete their applications for loan forgiveness.  At this point, we do not have a date for the release of this platform, but are working diligently to get it live as soon as possible. 

In the meantime, we have compiled the below update both to highlight several noteworthy points from the recent regulations and to outline the types of documentation the SBA is going to require in support of your forgiveness application.  We strongly encourage all of our customers to review these publications for themselves.  Additionally, given the complexity of the calculations and supporting documentation required—it may be advisable for you to retain an accounting or legal professional to assist you in the preparation of your forgiveness application and supporting materials

I.    Takeaways from the Recent Interim Final Rules: 

Forgiveness Timeline:  Upon receipt of your completed application for forgiveness, BayCoast Bank will make an initial recommendation to the SBA regarding your forgiveness amount.  We will complete this initial process within sixty (60) days, assuming that you have provided a complete set of documents and have complied with the forthcoming requirements that will be posted when we launch our forgiveness application portal in the coming weeks.  Once this initial recommendation is made, the SBA will make a final determination on your eligibility within ninety (90) days of their receipt of our initial recommendation.  Until we release our forgiveness application portal, we are not accepting applications for forgiveness.  However, there are still things you can be doing to get your documentation together to be able to submit your application as soon as possible, as explained below. 

FTE Calculation:  The SBA has defined the calculation of Full Time Equivalent (“FTE”) employees.  The concept of an FTE is used in connection with the Paycheck Protection Program (“PPP”) in order to calculate a reduction in the amount of the loan that is forgivable.  The SBA has defined an FTE as someone who works 40 or more hours per week, on average, over the eight-week period.  Additionally, for ease of calculations, the SBA is allowing borrowers to use .5 as the FTE value for any employee who works less than 40 hours for the purpose of calculating the reduction in forgiveness.  If you have had a reduction in employee headcount, you may want to calculate your reduction using both methods to see which will maximize your forgiveness amount. 

Payroll Period Flexibility:  In order to make their payroll calculations easier, Borrowers who process payroll weekly or bi-weekly are now allowed to use an alternative eight-week period to calculate their payroll costs.  This alternative eight-week period is for payroll costs only and starts on the first day of the first payroll cycle after your loan was disbursed.  

Employees Paid More than $100,000/Year:  When the SBA released its initial guidance, it was unclear whether the forgiveness of bonuses or commissions paid to an employee in a given week would be limited to an amount equal to $100,000 divided by 52 weeks.  The SBA has clarified that an employee’s compensation for the purpose of the $100,000 cap should be prorated for the eight-week period.  Accordingly, as long as the employee’s total compensation for the eight-week period does not exceed $15,385, all compensation paid to that employee during the period is eligible for forgiveness. 

Bonuses are OK:  On a related note, the SBA has clarified that wages to furloughed employees, bonuses and hazard pay paid during the covered period are eligible for loan forgiveness—as long as they do not exceed that pro-rated $100,000 cap.  

Expenses Paid OR Incurred During the Covered Period:  All of the regulations posted since the PPP was launched are subject to change and revision by the SBA—we have seen this occur multiple times already.  However, based on these most recent regulations, the SBA has indicated that expenses paid or incurred during the eight-week period are eligible for forgiveness (you cannot count the same expense twice, but, according to this regulation, it appears you can count money paid during the eight-week period but that corresponds to liabilities incurred prior to that period. 

Safe Harbor for Offers to Rehire:  When the SBA released the forgiveness application form two weeks ago, they indicated that there would be an exemption from the FTE based forgiveness reduction for employees who refused offers for rehire.  In the interim final rule, the SBA expanded on this safe harbor and has added a requirement that, in addition to documenting the written offer and rejection of rehire on the same terms, the employer needs to document the fact that they notified their state unemployment office of the rejected offer of reemployment within 30 days of the rejection.  This is a new requirement and one that bears close attention. 

Audit Risks and Retention of Documentation:  The SBA has made it very clear: you need to keep all of your documents, calculations and supporting documents pertaining to your PPP loan.  You are required to maintain these records for six years.  All PPP loans and forgiveness applications are subject to potential review by the SBA at any time. 

II.    Information and Documentation you Can Start Compiling: The following, based on lists of information identified by the SBA, are documents and reports that you can begin assembling that will be needed to complete and support your application for loan forgiveness. 

  • Payroll Documentation: 
    • Payroll service provider reports showing cash compensation paid (sum of gross salary, wages, tips, commission, or paid leave) or accrued by each employee during the eight-week period in a format similar to the information you submitted with your original loan application; 
    • Payroll tax filings reported, or that will be reported, to the IRS (Form 941); 
    • State quarterly business and individual employee wage reports and unemployment insurance tax filings; and 
    • Documentation demonstrating any reduction in pay for any employee as compared with the period from February 15, 2019 to June 30, 2019 or January 1, 2020 to February 29, 2020. 
  • Health Insurance and Retirement Documentation: 
    • Payment receipts, cancelled checks or account statements documenting the amount of employer contributions to health insurance and retirement plans.  This includes payments made during the eight-week period as well as obligations incurred during the eight-week period, as discussed above.  
  • FTE Calculation Documentation: 
    • A payroll report or other documentation demonstrating the average number of FTE employees on payroll per month between February 15, 2019 and June 30, 2019 or between January 1, 2020 and February 29, 2020 (if you are a seasonal employer this may not apply to you); and
    • A payroll report or other documentation demonstrating the: (i) number of FTE employees on payroll for the payroll period including February 15, 2020; and (ii) average number of FTE employees on payroll from February 15, 2020 to April 26, 2020. 
  • Non-Payroll Documentation: 
    • Business mortgage lender account statements for February 2020 and the months in which the eight-week period occurred, showing interest payments due and evidence of payments;
    • Copies of any lease agreements and receipts or cancelled checks verifying payment of rent during the eight-week period; and
    • Copies of utilities invoices for February 2020 and utilities invoices paid or incurred during the eight-week period. 
May 18, 2020 Update

The Small Business Administration (“SBA”) has issued its application form and instructions for borrowers to use to apply for forgiveness of their Paycheck Protection Program (“PPP”) loans.  The SBA has yet to issue its formal guidance for lenders on how to process and review these applications.  BayCoast Bank is reviewing these materials from the SBA and will be releasing our own guidance on how our borrowers will go about submitting their applications for forgiveness for our review.   

In the interim, the SBA application and instructions are available here.  In reviewing this information, please bear in mind that further information may be forthcoming from the SBA in the coming days.  We will be sending a follow-up update in the coming days with BayCoast Bank’s guidelines on how to proceed with your loan forgiveness application.

May 13, 2020 Update

On May 13, the Small Business Administration (“SBA”) issued new guidance on two significant issues pertaining to the Paycheck Protection Program (“PPP”) loans.  In the first, the SBA clarified that they will not be reviewing the good faith certifications made by loan applicants who receive loans of less than $2 million.  In the second update, the SBA has decided to allow lenders to revise the loan applications for applicants who left partners off of their initial applications due to unclear guidance. 

Safe-Harbor Created for Borrowers with Loans Less than $2 Million.

Over the last few weeks, the SBA and Secretary of the Treasury Steven Mnuchin have been aggressive in attempting to bolster the requirements of the certification required on PPP loan applications.  On April 23, in their “Frequently Asked Questions”, the SBA indicated that this certification requires borrowers to take into account their access to other sources of liquidity at the time of their application.  This, coupled with Steven Mnuchin’s public comments implying the potential for liability for companies that applied for these loans while having access to other sources of liquidity, led to a rash of borrowers returning funds and significantly decreased demand for the program.  
Against this backdrop, on May 13, the SBA issued further guidance that “any borrower that, together with its affiliates, received PPP loans with an original principal amount of less than $2 million will be deemed to have made the required certification concerning the necessity of the loan request in good faith.”  According to the SBA, borrowers who borrow less than $2 million can take solace in knowing that their loan request will not be audited by the SBA on these grounds and as a result, their forgiveness eligibility will not be affected by a review of their access to liquidity at the time of the loan request. 
The SBA also revised their guidance regarding borrowers with loans greater than $2 million to say that, although those loans will be subject to review for compliance with the certification, in the event the SBA determines that the borrower lacked an adequate basis for the certification and subsequently repays the loan amount, the SBA will not pursue administrative action and will not refer the case to other agencies for erroneous certifications. 
Finally, if, even considering this new information, a borrower still wants to take advantage of the safe harbor discussed in our update last week and return their loan funds, the safe harbor to do so has been extended to May 18, 2020. 

Allowance of Loan Amount Increases in Limited Circumstances.

When the SBA first issued guidance pertaining to the PPP, two of the many ambiguities were 1) whether applicants should include partners who were compensated through self-employment income in their payroll cost calculations and 2) who qualified to use the seasonal employer calculation.  Although these questions were eventually resolved by the interim final rule (85 FR 21747) published on April 14, many applicants in the first round of the program completed their applications without the benefit of this clarification, resulting in reduced loan amounts.  As of May 13, 2020, the SBA is permitting borrowers who effectively understated their loan amounts due to either ambiguity to amend their applications in limited circumstances and receive the additional loan funds via a second disbursement.  This amendment is time sensitive—if you believe you may be affected, please reach out to your lender. 

May 6, 2020 Update

The Borrower's Certification: The SBA's Recent Interpretation of the Required Borrowers Certification.

Under Section 1102 of the CARES Act, “[a]n eligible recipient applying for a covered loan shall make a good faith certification…that the uncertainty of current economic conditions makes necessary the loan request to support the ongoing operations of the eligible recipient….” (emphasis added).  This certification is familiar; it is required on the PPP Loan Application that every borrower must submit in order to apply for a PPP loan.  Recently, in their “Frequently Asked Questions”, the SBA has indicated their belief that this certification requires borrowers to take into account their access to other sources of liquidity at the time of their application.

Additionally, and relatedly, the SBA has signaled their intent to review all loan applications for loans in excess of $2 million—although the details of this audit remain undefined (the SBA has promised forthcoming regulations pertaining to the forgiveness process).  The SBA did create a safe-harbor where, as long as a borrower returns all disbursed loan funds by May 14, 2020, they will be considered to have made their certification in good faith.  

Accordingly, the practical guidance from this publication boils down to two points: 1) if you applied for a loan that really was not necessary, you should consider consulting with an attorney and potentially returning the money by May 14, 2020; and 2) if you are concerned that, for whatever reason, your basis for applying for the loan might be questioned, you should consider preparing an internal memorandum establishing the reasons the loan application was necessary to support your ongoing business operations as of the date you made the certification.  This memorandum may include a summary of the economic risks facing your business at that time, whether they materialized or not, and financial projections of what those risks might mean for the health and existence of your business.  For example, a projection based on real expenses that shows your business running out of cash reserves after eight weeks of being shut down would be excellent evidence that your certification was made in good faith.  To the degree possible, this exercise should be completed with information that was available at the time you made the certification. 

Limitation on Deductibility of Expenses: IRS Notice 2020-32 Regarding the Deductibility of Forgiven Expenses.

Section 1106(i) of the CARES Act establishes that for Federal income tax purposes, forgiven loan amounts are to be excluded from gross income.  However, according to recent SBA Notice 2020-32, any expenses that correspond to the calculation of this forgiven loan amount, cannot be deducted against income.  What this effectively means is that borrowers cannot get a ‘double’ tax benefit by deducting expenses that were paid for with non-taxable forgiven loan funds.  However, this clarification comes late in the process for many business owners who have been relying on the tax-free nature of the forgiveness amount in order to calculate the benefit of bringing back employees rendered unproductive (or less productive) by the COVID-19 epidemic. 

There is a prospect that this ruling could be legislated around—and the American Institute of CPAs is leading the charge to push for such a tweak to the language of the law.  Their argument is that the ruling essentially renders the language of the law meaningless, since the fact that the forgiveness is non-taxable is made irrelevant since the underlying expenses become non-deductible at the same time.  You may want to consult with a CPA to determine the effect this notice will have on your business. 

Exception to Rehire Requirement: Former Employees Do Not Count Against Headcount Calculations When They Refuse a Written Offer of Reemployment.

Section 1106(d)(2) of the CARES Act establishes that a borrower’s forgiveness eligibility is reduced by an amount that is proportional to the reduction of full-time equivalent (“FTE”) employees as compared with their FTE headcount during the period from January 1, 2020 to February 29, 2020 or February 15, 2019 to June 30, 2019 (the borrower gets to select the measuring period).
However, in their “Frequently Asked Questions” that were updated on May 3, 2020, the SBA has altered this position and stated that a former employee will not count against the headcount calculation when a borrower has made a good faith, written offer of rehire (on the same compensation terms) and is able to document the employee’s refusal of that offer.  This is a departure from all previous guidance on how the forgiveness amount was to be calculated. 
Practically speaking, it may be advisable to document offers of reemployment, and the rejection of those offers, in writing.  When assessing whether to make such an offer of rehire, it is also critical to focus on the term “good faith.” 

Information Still Forthcoming from the Small Business Administration

The most glaring holes in the information published by the SBA to date surround the forgiveness process, timing and specifics on how the calculation will work.  There are ambiguities remaining around key points, including whether a rehire by June 30th preserves forgiveness for the entire eight-week period, or just the portion prior to April 26, 2020 (30 days after the passage of the act), what the SBA’s review process will entail, and the timeline on which applicants will receive confirmation of their loan forgiveness.  Most critically, we are still waiting on guidance on exactly what information will be required in connection with a loan forgiveness application.  
Accordingly, until such further guidance is issued, the best practice is to over-document: keep records backing up how your PPP loan funds were spent and, where at all possible, keep those funds segregated from your normal operating account.  BayCoast has issued previous guidance suggesting that borrowers keep the PPP funds in a segregated account, this along with careful record-keeping will provide borrowers with the best likelihood of receiving efficient, accurate forgiveness of their loans. 

Download Our Tracking Tool

As we await the publication of further guidance on the loan forgiveness application process, we have assembled a loan tracking tool to assist borrowers in logging and assembling information that might be helpful during the forgiveness process; the loan tracking tool is downloadable below.  It is our goal to have the loan forgiveness process run as smoothly as possible and it is our hope that, by assembling the information identified on this tracking tool, we can expedite this process.

Click here to download our tracking tool

The first tab in the loan tracking tool, “Covered Expenses” will allow you to track how much of your PPP loan you have spent on covered expenses during the eight-week period following the day your loan funded. The cells have formulae in them—you can populate the blank cells and the rest will calculate for you. The second tab, “Supporting Documentation” includes a list of the type of documentation you should be assembling to back-up the expenses listed on the first sheet. For your payroll calculations, you can use the same spreadsheet you used when you applied for the PPP loan, modified with data for only the eight-week period from the day your loan was funded. 

When putting together the attached information, please keep in mind that this tool is intended only as a guide and is based on provisional guidance—the information identified on it may or may not be required to support an application for loan forgiveness, and further information may also be required. Nothing in this loan tracking tool is intended to make any representations regarding your eligibility for loan forgiveness and it should not be interpreted as such. 


Please note, this page is intended as a summary of publically available information.  BayCoast Bank cannot provide legal or accounting advice and nothing herein should be construed as such.  To the degree that you have any questions or concerns relating to any of the subjects raised in this notice, you may want to discuss them with your attorney and/ or accounting professional.  Further information is being published by the SBA on a regular basis.  Updated information can be found on