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

June 16, 2020 Update

On June 16, 2020, the Small Business Administration (“SBA”) released several documents that clarify the changes to the Paycheck Protection Program (“PPP”) enacted by the passage of the PPP Flexibility Act.  These documents include an updated borrower forgiveness application, revisions to two of the previous regulations issued by the SBA, and a new expedited application called the “EZ application” for certain borrowers that will substantially simplify the forgiveness process for those borrowers that qualify.  The primary purpose of these new applications is to cement the application of the new twenty-four-week covered period and extended rehire safe harbor, both of which were established by the PPP Flexibility Act—and the applications do that effectively.  However, we are still forced to wait on accepting forgiveness applications until the SBA releases the documentation and functionality that will permit us to forward these applications to them for review and approval.

The "EZ" Application

The “EZ” application was a welcome surprise from the SBA and we expect that it will allow certain borrowers much more efficient access to the forgiveness process.  The application is designed for borrowers that are not subject to forgiveness reductions due to decreased compensation or headcounts.  Accordingly, borrowers who are able to use this application do not have to contend with any of the exercises involved in calculating these reductions, although they have to do enough to ensure that they are entitled to full forgiveness. 

In order to be eligible to use the “EZ” application, a borrower must fall into one of the three following categories: 

  • The borrower is a self-employed individual, independent contractor, or sole proprietor and did not include any employee salaries in the calculation of its monthly payroll on the PPP application. 
  • The borrower did not reduce annual salary or hourly wages of any employee by more than 25%; AND the borrower did not reduce its average number of FTEs between January 1, 2020 and the end of the covered period (except for reductions the borrower was unable to rehire).
  • The borrower did not reduce annual salary or hourly wages of any employee by more than 25%; AND the borrower was unable to operate during the covered period at the same level of business activity as before February 15, 2020 due to compliance with certain federal requirements and guidance issued in connection with COVID-19. 

These requirements are described more fully in the instructions for the EZ application.  Borrowers should review these instructions carefully and, if they are unsure about their eligibility, may want to consult with a certified accounting professional or an attorney.  Of particular note is the requirement that the reduction in the ability of the borrower to operate be due to compliance with federal, as opposed to state, regulations, and guidance.  If your business was impacted by, for example, a state-mandated shutdown, you need to look carefully at the corollary federal guidelines to determine whether you were in fact impacted by those federal regulations. 

Although the EZ application does simplify the process significantly for borrowers, the documentation requirements remain fairly robust.  For example, in the event you qualify to use this application based on the second criterion, above, you will still need to provide documentation that shows your average number of FTEs on January 1, 2020 and the end of the covered period.  Borrowers using this form still need to review the documentation requirements carefully, both for the required submissions and the documentation that the borrower does not have to submit but does have to keep on file. 

Updates to the Regular Forgiveness Application: 

For the most part, the changes to the regular forgiveness application track the changes from the PPP Flexibility act that we outlined in our previous update.  One point that bears re-emphasis is that, at this point, borrowers who received loans on or after June 5th have to use a twenty-four-week covered period.  All other borrowers can choose either an eight-week or a twenty-four-week covered period, but those are the only two options.  As of now, covered periods between eight and twenty-four-weeks are not permitted.  The obvious issue with this is that borrowers that run out of PPP loan funds before the twenty-four weeks are up may have to contend with reduced forgiveness eligibility if they reduce their workforce prior to the end of the covered period, even though they will not have the benefit of PPP funds to pay their payroll costs.

Timing of the Forgiveness Process: 

We are hearing from our customers on a regular basis asking when the forgiveness process will be available for them to start applying.  At this point, we do not have a real answer to this question because we have not heard from the SBA when they might release the portal and documentation necessary for us to submit forgiveness applications to them.  The applications that have been released are for borrowers to begin assembling their information and filling out their paperwork, but until the SBA is ready to accept those applications, our hands our tied.  At this point, any borrower that is going to use the eight-week covered period can begin assembling their documentation and completing the appropriate forgiveness application, be it the EZ application or the standard application.  In the meantime, we will continue to update you with any news that comes out of the SBA related to the forgiveness process and timeline.  

June 5, 2020 Update

On June 5, 2020, the Paycheck Protection Program Flexibility Act (the “Act”) was enacted.  The Act makes several substantial revisions to the Paycheck Protection Program (“PPP”).  As with so many of the updated regulations issued by the Small Business Administration (“SBA”) to date, this new Act provides at least as many questions as it does answers.  On the morning of Monday, June 8, the Secretary of the Treasury and the Administrator of the SBA issued a joint statement promising forthcoming regulations that would clarify all the terms of the Act.  In the meantime, it is our expectation that those borrowers who maintained their employee headcounts and were able to spend their loan amounts during the eight-week covered period will be able to proceed with applications for forgiveness on schedule.  For those borrowers that were unable to do so—the new Act provides those borrowers with additional time and flexibility to fully leverage their PPP loans funds.  Below is a summary of publicly available information.  Further detailed information on this bill can be found here:

Overview of the PPP Flexibility Act

Extension of the Covered Period:
The most significant change made in the Act is the extension of the covered period (the period a borrower must spend their loan proceeds) from eight to twenty-four weeks.  This is optional, meaning that a borrower can decide whether they want to use the original eight-week period, or use the longer period instead.  If the borrower opts for the longer period, up to twenty-four weeks’ worth of covered expenses (both payroll and non-payroll expenses, like rent) will be eligible for forgiveness, up to a maximum equal to the original loan amount.  At this point, it remains unclear whether or not a borrower can opt for a period longer than eight weeks, but shorter than twenty-four weeks. 

More Flexibility on Non-Payroll Expenses:
From the early days of the PPP, borrowers in certain industries have struggled to spend 75% of their PPP funds on non-payroll expenses.  This is especially true for borrowers that have been unable to return to normal operation during the COVID-19 epidemic.  The Act provides these borrowers with relief in two different ways: a reduction in the proportion of the loan funds that need to be spent on payroll expenses from 75% to 60%, and through a new FTE safe harbor (the latter of which is discussed in Section IV below). 

The “60% Cliff”: 
When the Act was first passed, much was written in the press about the so called “60% cliff” that essentially required a borrower to spend 60% of the total loan amount on payroll costs or else lose all forgiveness eligibility.  As of June 8, 2020, the SBA and the Treasury Department issued a joint statement, available here, that clarifies that the 60% requirement will apply to the total forgiveness amount—meaning that a business spending less than 60% on payroll will have their forgiveness reduced and not eliminated.  The takeaway is that this forgiveness cliff has been addressed and should no longer be a concern for borrowers applying for loan forgiveness. 

Exceptions to Employee Headcount-Based Forgiveness Reduction


  •  The June 30th Safe Harbor:  Under the original PPP, a borrower could earn an exemption from a headcount-based forgiveness reduction by rehiring former employees “no later than” June 30, 2020.  Under the new Act, this date has changed to December 31, 2020.  While at first glance, this appears to be good news: borrowers have more time to rehire or replace employees, the reality is that it creates a great deal of confusion for borrowers looking to apply for forgiveness before December 31, 2020 because the current application form treats this safe harbor date as a fixed point in time: borrowers report their FTE count “as of” the date, not “no later than” the date on the existing application form.  This is an area that will have to be clarified by the SBA. 
  • The Rehire Safe Harbor:  According to recent regulations published by the SBA, employers who can document their (failed) attempts to rehire former employees may be eligible for an exemption from the FTE based reduction of their loan forgiveness as long as they document and report their offers of reemployment to their State unemployment offices.  In this Act, however, Congress has stated that the safe harbor is only available if employers can demonstrate both their failed efforts to rehire former employees and their efforts to hire replacement employees.  The result is an inconsistency between the currently available version of the forgiveness application and the Act.  This discrepancy is going to have to be resolved through further regulations by the SBA, and it is impossible to predict where they will land on the requirements for the rehire safe harbor.  Unfortunately, this is another instance of “wait and see.” 
  • Safe Harbor for Businesses Unable to Return to Normal Operations:  The Act creates a brand-new safe harbor rule that has been strongly advocated for by businesses that have been unable to return to work due to COVID-19 based shut-down orders.  This new rule allows these businesses to get an exemption from the employee headcount based forgiveness reduction if they can demonstrate that they were unable to reopen, or unable to return to normal operations, as a result of COVID-19 guidelines or regulations issued by certain federal agencies.  The critical distinction here is that state mandated closures that are stricter than the federal requirements or guidelines may not qualify under this new rule. 

IRS Guidance on Tax Treatment of Forgiven Amounts:
Previously, the IRS has issued guidance clarifying that, even though the CARES Act states that amounts forgiven under the PPP are not considered taxable income, businesses will be unable to deduct the expenses that gave rise to that forgiveness.  Many business owners were hopeful that Congress would legislate to counter this IRS position—but that legislation did not come in this Act.  Fortunately, both the bi-partisan Small Business Expense Protection Act (introduced in early May) and the latest stimulus package that was passed two weeks ago in the House and that is currently under consideration by the Senate do include a provision to reverse this IRS decision—although there is no guarantee that these new laws will be passed.

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