When to Apply for Forgiveness of a PPP Loan

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This Article is based on information available as of June 22, 2020.  The information is subject to change as additional guidance is provided.

NOTE—This article updates the information in the following Articles previously published:

The Paycheck Protection Program Flexibility Act of 2020 ("PPPFA") became law on Friday, June 3, 2020, modifying critical provisions of the CARES Act and the Interim Final Rules implementing the CARES Act, adopted by the Small Business Administration ("SBA") regarding loan forgiveness.   Subsequently, the SBA published two new PPP Loan Forgiveness Applications, SBA Form 3508 (06/20), which can be downloaded here, and SBA Form 3508EZ (06/20), which can be downloaded here.  Instructions for SBA Form 3508 are located here, and instructions for SBA Form 3508EZ are located here. 

As enacted, the CARES Act required that loan proceeds be expended on Payroll Costs and other approved non-payroll expenses during an 8-week "Covered Period."  The PPPFA changed the definition of the Covered Period to begin on the date of the origination of the PPP Loan and ending on the earlier of 24 weeks after origination or December 31, 2020.[1]  This lengthening of the Covered Period provides borrowers with greater flexibility as to when to spend the proceeds of a PPP Loan and ensures that Borrowers will be able to expend all of the proceeds of a PPP Loan on allowed Payroll Costs and non-payroll expenses. 

With the longer Covered Period, Borrowers have been asking when can an application for loan forgiveness be submitted.  For example, if a Borrower has expended all of the PPP Loan proceeds by the 15th week of the Covered Period, can the Borrower apply for loan forgiveness then or must the Borrower wait until the expiration of the Covered Period?  On June 22, 2020, the SBA issued an Interim Final Rule (the "Rule") that answers this question.

The Rule confirms that a Borrower may submit an application for forgiveness of a PPP Loan at anytime on or before the maturity date of the loan (either 2 years or 5 years after the origination date of the loan, depending on whether the loan was made prior to June 5, 2020).  If the Borrower has used all of the proceeds of its PPP Loan before the end of the Covered Period, the Borrower is permitted to apply for forgiveness then—the Borrower does not need to wait for the expiration of the Covered Period to apply for loan forgiveness.  Note,  if the Borrower applies for forgiveness before the end of the Covered Period, adjustments to  the loan forgiveness due to a reduction in the number of full time equivalent employees ("FTEEs"), or a reduction in employee salaries, wages or work hours in excess of 25%, is still required.  The Borrower presumptively loses the ability to avoid these reductions by restoring salaries, wages or work hours or increasing the number of FTEEs after the application for loan forgiveness is submitted if submitted prior to December 31, 2020.

Even though a Borrower need only apply for forgiveness of a PPP Loan prior to the maturity date of the loan, the payment deferral period will expire 10 months after the Covered Period.  Thus, if the Borrower does not apply for forgiveness within the 10 months after the last day of the Covered Period, the PPP Loan is no longer deferred and the Borrower must begin making principal and interest payments.  The Borrower's lender is required to notify the Borrower of the date on which the fist payment is due.

The Rule does not address whether the Borrower will receive a refund of principal and interest payments made on a PPP Loan should the Borrower be granted forgiveness of the full amount of the PPP Loan after the Borrower begins making payments.

[1] For PPP Loans made before June 5, 2020, the Borrower can elect to use the original 8-week Covered Period.

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