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April 15, 2020

COVID-19 UPDATE: Using PPP Funds

We continue our efforts to keep you informed of key legal developments relating to COVID-19. Today, we provide some guidance based on questions we have been getting on the use of loan proceeds from the Paycheck Protection Program (“PPP”) under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). For our previous updates, please see HERE.


Now that Paycheck Protection Loans (“PPL”) are being processed and funded, borrowers are advised to give careful attention to the provisions of the CARES Act to maximize the portion of these loans that will be forgiven. In this regard, there are several key points to keep in mind.

Permitted Uses vs. Forgivable Uses. The proceeds of a PPL can be used for any allowable uses of a loan made under Section 7(a) of the Small Business Act (the “SBA Act”) and uses specified in the CARES Act. However, only proceeds used for certain uses are subject to forgiveness. Those forgivable uses are:

  • Payroll costs (which is defined as the same payroll costs used in calculation of the amount of the loan).
    • The SBA’s Interim Rule (see HERE) clarifies that businesses shall not include as part of the payroll costs in their loan amount calculation any compensation paid to independent contractors, as reported on 1099 tax forms. Similarly, independent contractor costs do not count toward loan forgiveness amounts.
    • The CARES Act excludes employee compensation in excess of an annual salary of $100,000; however, the Treasury, in its FAQ #7 (see HERE), clarified the exclusion of compensation in excess of $100,000 annually applies only to cash compensation, not to non-cash benefits.
  • Payments of interest (but not principal) on any covered mortgage obligation. Mortgage obligations are defined to include “a mortgage on real or personal property”. It is not clear whether this language would include equipment financing agreements or is just intended to include real properly mortgages, including real property mortgages that provide for a lien on fixtures or other immovable personal property.
  • Payments of rent. Rent is defined as rent under a leasing agreement. It is not clear whether this language would include equipment leases or is just intended to cover leases of real property.
  • Utility payments. Utility payments also include telephone and internet access.

The SBA’s Interim Rule clarifies that – to qualify for forgiveness – the mortgage, rent or utility payments referenced above must be pursuant to agreements dated before February 15, 2020.

Cap on Non-Payroll Costs. SBA’s Interim Rule clarifies that not more than 25% of loan forgiveness may be attributable to non-payroll costs.

Eight Week Use Period. Only costs incurred and payments made for forgivable uses during the 8-week period beginning on the date that the lender makes the first disbursement of the PPL to the borrower (the “Use Period”) are subject to forgiveness. There is some ambiguity in the language “costs incurred and payments made.” The intent seems to be costs accrued during the 8-week period and payments made with respect to costs accrued during the 8-week period. So, for example, accrued rental obligations from prior periods paid within the 8-week Use Period may not be subject to forgiveness.

What portion of the PPL loan spent on forgivable uses will actually be forgiven? The PPP is designed to incentivize employee retention. To determine the amount of loan forgiveness, the portion of the PPL used on forgivable expenses during the Use Period (the “Amount Subject to Forgiveness”) is multiplied by a fraction, the numerator of which is the borrower’s average FTEs per month during the Use Period and the denominator is the Borrower’s average monthly FTEs during a prior measuring period which may be, at the borrowers election, either (a) February 15, 2019, to June 30, 2019, or (b) January 1, 2020 to February 29. 2020. Borrowers should use the denominator calculation that yields the lower number.

The CARES Act seems to allow borrowers to add back to the numerator any employees that are added prior to June 30, 2020, although the language of this provision will require some interpretative guidance from the SBA. Additionally, salary reductions to certain employees in excess of 25% may result in additional deduction from the forgivable amount.

Borrowers will need to maintain clear and accurate records to support their forgivable expenses and calculation of PPL loan forgiveness, and to otherwise demonstrate compliance with the CARES Act. Separately, borrowers should review and consider covenants under existing loan obligations – particularly with lending institutions that are different than their PPP lender – that may require lender notification and/or consent.

The foregoing is a summary of certain key provisions of the CARES Act, as well as related rules and issues. It is not intended to be complete or offered as legal advice. The CARES Act is providing substantial benefits to small and medium sized business. However, careful compliance with the CARES Act is essential for business owners to maximize the benefits of the program.

We will continue to send periodic updates on topics that may be helpful to your businesses. If you have a particular issue that you’d like us to address or if you’d like to be removed from the distribution list, please let us know.

Feel free to contact us with any questions.

Gery Chico, Jon Leach, and Alpita Shah

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