Borrowers under the Small Business Administration (“SBA”) Paycheck Protection (“PPP”) Program are required to retain or submit to lenders and the SBA certain documents associated with their application and submission. use of the proceeds of the PPP loan. Since the SBA has provided limited specific guidance to inform borrower documentation efforts, we provide a general summary of the considerations a borrower may keep in mind as they aim to comply with the documentation requirements associated with the request, upon receipt and use of the proceeds of the PPP loan (for remittance or otherwise).

Four main categories of documentation

To facilitate their record-keeping efforts, PPP borrowers can be well served by approaching documentation from four angles: eligibility, necessity, use of funds, and remittance.

Eligibility: First, a borrower should keep complete and up-to-date records containing the information used to determine the borrower’s eligibility to apply for and participate in the PPP. Ideally, these documents would address issues related to SBA size standards, compliance with SBA membership rules, and number of employees, among other considerations.

Necessity: Second, a PPP borrower must be able to produce documents containing information used to justify certification on their PPP loan application that “current economic uncertainty makes this loan request necessary to support ongoing operations” of the borrower. These documents would contain information allowing the borrower to prove that he carried out the certification in good faith, taking into account his business activity at the time of the application, and the borrower’s ability to access other sufficient sources of liquidity to support its operations in a manner that is not significantly detrimental to the business.

Use of Funds: Third, PPP borrowers will benefit from keeping accurate records of how PPP loan funds have been used. The funds are to be used to retain workers and maintain the payroll or make mortgage interest payments, lease payments, and utility payments, as specified in the PPP. These usage records should allow the SBA to track the inflow of PPP loan proceeds from the borrower’s lender and the outflow of PPP loan proceeds to the payment of covered expenses, such as wage costs and lease payments. . Consider having a separate bank account to facilitate this requirement.

Pardon: Fourth, if the borrower seeks a forgiveness, he or she must keep and submit the documentation specified in the SBA loan forgiveness requests, as well as any additional documents that lenders may require. Please see the specific documentation described by the SBA below.

Specific guidance on documents

Eligibility: In the PPP “How to calculate the maximum loan amount – by type of business” document, the SBA has described some documents that can be used to justify the borrower’s calculations of average monthly salary costs, including payroll reports from a recognized third-party payroll processor and some tax records. A borrower must keep the records on which he relied to make the request.

Sorry: Although the SBA did not provide detailed guidance on the documentation, the SBA gave borrowers specific examples of the documentation required for loan forgiveness through the PPP loan forgiveness requests issued on June 16, 2020. , on June 16, 2020, and they provided additional guidance in the draft final rules. The documents that each borrower must submit to their lender along with the rebate request in order to justify salary costs include bank account statements, reports from third-party payroll service providers, payment receipts, tax forms, payroll statements. account and canceled checks. To view the average number of full-time equivalent (“FTE”) employees on the payroll per week for the applicable period, borrowers can include (i) tax returns reported, or to be reported, to the IRS (usually the 941 form); and (ii) quarterly declarations of wages of companies and individual employees and declarations of unemployment insurance income declared, or to be declared, to the State concerned. Borrowers must also provide income tax returns that are reported or will be reported to the IRS (typically, Form 941) and quarterly business and individual employee wage returns and Unemployment Insurance tax returns reported or which will be declared to the State concerned. to show the average number of FTE employees on the payroll per week. Borrowers will also be required to submit documents attesting to the existence of obligations and services by February 15, 2020, for which the PPP loan proceeds have been used, such as lenders’ amortization schedules, current leases, receipts or canceled checks and utility bills.

Initially, the loan forgiveness request required borrowers to keep, but not submit, supporting documents:

1. lists of individual employees in forgiveness worksheets;
2. employee offers of employment and written refusals, written records of rejection or refusals to accept reinstatement of reduction in hours, written records of terminations for cause and voluntary resignations, written requests by any employee for reduction work schedules, and written records of any inability to hire a person with similar qualifications for unfilled positions by December 31, 2020;
3. the certificate, if applicable, that the borrower could not operate between February 15, 2020 and the end of the Covered Period at the same level of commercial activity as before February 15, 2020 due to compliance with the requirements established or guidance issued between March 1, 2020 and December 31, 2020 by the Secretary of Health and Human Services, the Director of the Centers for Disease Control and Prevention, or the Occupational Safety and Health Administration, related to maintaining standards of sanitation, social distancing, or any other work or customer safety requirements related to COVID-19; and
4. the FTE reduction exception and the FTE reduction exception.

However, the Interim Final Rule released on June 22, 2020 requires lenders to collect and provide these documents to the SBA; this is the applicable documentation listed under “Documents that each borrower must keep but is not required to submit”. Also consider keeping a record of the borrower’s notification to the relevant state unemployment insurance office of any rejected rehire offers (must be notified within 30 days of rejection of the offer by employees) . For FTE Reduction Safe Harbor 1, documents should include copies of the applicable COVID-19 requirement or guidelines for each commercial site (such as closure orders from a local government that reference a requirement or of the federal COVID-19 guidelines described above) and any affected borrowers. financial or other records that document that the reduction in business activity during the period covered is a direct or indirect result of meeting the COVID-19 requirement or guidelines. For borrowers who submit a PPP 3508EZ loan forgiveness application form, the borrower should also keep the documents supporting the certifications required by this form.

Duration of record keeping and SBA access

All documents relating to the borrower’s PPP loan, including documentation submitted with its PPP loan application, documentation justifying the borrower’s certifications as to the need for the loan application and its eligibility for the PPP loan, the documentation necessary to support the borrower’s loan forgiveness request, and documentation demonstrating the borrower’s physical compliance with the PPP requirements should be kept on the borrower’s records for six years after the date the loan was made. is canceled or refunded in full. In addition, the borrower must allow authorized representatives of the SBA to access these files upon request.

Suggested next steps

Borrowers who maintain documents demonstrating the eligibility, necessity, use and basis of forgiveness should keep in mind the different sources of legal and regulatory guidance related to these four areas. For example, Treasury Frequently Asked Questions 17 and 31 Remind borrowers that questions of eligibility and necessity should be handled on the basis of “laws, rules and guidelines available at the time of relevant application”. In addition, the provisional final rule published on June 22, 2020 states: “If the SBA determines during its review that the borrower was not eligible for the PPP loan based on the provisions of the CARES law, rules or SBA guidelines available on at the time of the borrower’s loan application or on the terms of the borrower’s PPP loan application (for example, because the borrower did not have an adequate basis for certifications that he made in his PPP loan application), the loan will not be eligible for the discount. “A borrower who plans to use the proceeds of a PPP loan with the intention of later requesting a forgiveness should heed the ever-changing guidelines issued by the SBA, the Treasury Department and lenders.

Schwabe is closely following developments related to PPP and other legal implications of COVID-19.