On Friday, May 15, 2020, the U.S. Small Business Administration (“SBA”) in consultation with the Department of Treasury, released the Paycheck Protection Program (“PPP”) Loan Forgiveness Application (“application”) and detailed instructions. The application can be found on SBA’s website as well as on the Department of Treasury’s website. To apply for forgiveness of your PPP loan, a borrower must complete the application as directed in the instructions and submit it to their lender. The application can also be completed electronically through the lender.
The application contains the following components:
- PPP Loan Forgiveness Calculation Form;
- PPP Schedule A;
- PPP Schedule A Worksheet; and
- PPP Borrower Demographic Information Form (optional).
All Borrowers are required to submit the PPP Loan Forgiveness Calculation Form and Schedule A to their lender.
While the application answers a number of questions and also includes many borrower-favorable rules which may reduce the time and effort it takes to calculate the PPP loan forgiveness amount, there are still a number of outstanding issues that need to be addressed. As such, we anticipate SBA will issue regulations and narrative-based guidance in the coming days to further assist borrowers as they complete their applications, similar to previously issued interim final rules and frequently asked questions.
The application and instructions include the following noteworthy provisions:
The top half of the PPP Loan Forgiveness Calculation Form requires a borrower to provide general information about their PPP loan, number of employees, payroll schedule and whether they received an Economic Injury Disaster Loan (“EIDL”) advance.
- The application requires the borrower to indicate the total number of employees at the time of their PPP loan application and the total number of employees at the time of their forgiveness application. These employee counts appear to be for informational purposes only, as these numbers are not subsequently used in any loan forgiveness calculations.
- The application requires the borrower to enter the application number and dollar amount of any EIDL advance it received. If applicable, SBA will deduct EIDL advance amounts (up to $10,000) from the forgiveness amount remitted to the lender. This is consistent with prior guidance issued by SBA.
- If the borrower, together with its affiliates, received PPP loans in excess of $2 million, there is a box that the borrower needs to check to presumably make it easier for the lender or SBA to flag the application for review, in accordance with PPP guidelines issued by SBA and Treasury.
The application lists an expiration date of October 31, 2020, suggesting that October 31 is the deadline for all borrowers to submit forgiveness applications to their lenders.
The application allows for the use of an alternative 8-week covered period to better align with a borrower’s payroll schedule.
Alternative Payroll Covered Period: For administrative convenience, a borrower with a biweekly (or more frequent) payroll schedule may elect to calculate eligible payroll costs using the eight-week (56-day) period that begins on the first day of their first pay period following their PPP Loan Disbursement Date (the “Alternative Payroll Covered Period”). For example, if the borrower received its PPP loan proceeds on Monday, April 20, and the first day of its first pay period following its PPP loan disbursement is Sunday, April 26, the first day of the Alternative Payroll Covered Period is April 26 and the last day of the Alternative Payroll Covered Period is Saturday, June 20. A borrowers who elecs to use the Alternative Payroll Covered Period must apply the Alternative Payroll Covered Period wherever there is a reference in this application to “the Covered Period or the Alternative Payroll Covered Period.” However, a borrower must apply the Covered Period (not the Alternative Payroll Covered Period) wherever there is a reference in this application to “the Covered Period” only.
Payroll Costs – Incurred and Paid
The application takes a disjunctive approach to “incurred and paid,” meaning incurred or paid. You may recall that Section 1106(b) of the CARES Act provides that “an eligible recipient shall be eligible for forgiveness of indebtedness on a covered loan in an amount equal to the sum of the following costs incurred and payments made during the covered period.” There was considerable confusion over whether payroll costs had to be both incurred and paid within the covered period to qualify for forgiveness. The application’s instructions clarify this as follows:
A borrower is generally eligible for forgiveness for the payroll costs paid and payroll costs incurred during the eight-week (56-day) Covered Period (or Alternative Payroll Covered Period) (“payroll costs”). Payroll costs are considered paid on the day that paychecks are distributed or the borrower originates an ACH credit transaction. Payroll costs are considered incurred on the day that the employee’s pay is earned. Payroll costs incurred but not paid during the borrower’s last pay period of the Covered Period (or Alternative Payroll Covered Period) are eligible for forgiveness if paid on or before the next regular payroll date. Otherwise, payroll costs must be paid during the Covered Period (or Alternative Payroll Covered Period).
This language seems to include (i) payroll incurred before the Covered Period or Alternative Payroll Covered Period but that is paid during the “covered period” and (ii) payroll incurred at the end of the “covered period” but not paid until after the Covered Period or Alternative Payroll Covered Period ends. We believe that it is the SBA’s intention to allow for a certain amount of flexibility; however, there should be no more than 8-weeks (56 days) of payroll included. We also believe that all days should be included in the 56-day count, including weekends and holidays.
The “Certifications” on the second page of the application indicate that the dollar amount for which forgiveness is requested “does not exceed eight-weeks worth of 2019 compensation for owner-employee, self-employed individual/general partner, capped at $15,385 per individual.”
This limits the ability to pay owners amounts in excess of 2019 compensation, including any hazard pay or bonus pay. Previously, there was no specific guidance that owner-employee compensation would be included in the forgiveness amount; however, the instructions still do not clarify whether this must be in the form of payroll (as opposed to distributions). We do believe that any form of “owner” compensation (payroll or income distributions) should be includible, considering that Line 9 of Schedule A directs the borrower to “enter any amounts paid to owners (owner-employees, a self-employed individual or general partners).” This also implies that hazard pay, bonus pay, and amounts in excess of 2019 compensation can be paid to other persons, such as employees.
SBA is also indicating some flexibility regarding eligible non-payroll costs such mortgage interest, rent and utilities as follows:
An eligible, non-payroll cost must be paid during the Covered Period or incurred during the Covered Period and paid on or before the next regular billing date, even if the billing date is after the Covered Period. Eligible non-payroll costs cannot exceed 25% of the total forgiveness amount.
This is a favorable change from prior expectations and allows borrowers a certain degree of flexibility regarding non-payroll costs incurred during the covered period but not paid until after the 8-week period ends; however, we do not believe that there should be more than 8-weeks of prorated costs included for loan forgiveness purposes.
Additionally, the instructions clarify that “covered utility payments” include business payments for a service for the distribution of electricity, gas, water, transportation, telephone, or internet access for which service began before February 15, 2020. There is no clarification whether covered rent obligations are eligible for loan forgiveness if the rent is paid to a related party (i.e., rent paid to another entity that shares common ownership with the borrower). The instructions also confirm that non-payroll costs cannot exceed 25% of the total forgiveness amount.
Forgiveness Amount Calculation
The application provides the following (simplified) formula for calculating the loan forgiveness amount:
- Add payroll costs and non-payroll costs (business mortgage interest, rent or lease and utility payments) for the covered period;
- Subtract Salary/Hourly Wage Reduction in excess of 25% for certain employees (calculated on Schedule A) from the sum of the payroll and non-payroll costs;
- Multiply the difference of (1)-(2) by the FTE Reduction Quotient (calculated on Schedule A) to arrive at the Modified Total.
The borrower then compares the Modified Total to the PPP Loan Amount and the Payroll Cost divided by 75% (“Potential Forgiveness Amounts”) and the forgiveness amount granted to the borrower is the smallest of the three Potential Forgiveness Amounts.
Based upon this calculation, there is no reduction in forgiveness if the borrower fails to spend at least 75% of the PPP loan on payroll costs, as was inferred from prior SBA guidance. It was previously believed that this “75% payroll cost requirement” was going to be the first requirement for reducing forgiveness, followed by the FTE reduction, then salary/hourly wage reduction. The application definitively clarifies that this is not the case.
Salary/Hourly Wage Reduction
This calculation is completed on the Schedule A Worksheet and will be used to determine whether the borrower’s loan forgiveness amount must be reduced due to a statutory requirement concerning reductions in employee salary and wages. The actual amount of loan forgiveness for the borrower may decrease depending on whether the salary or hourly wages of certain employees during the Covered Period or the Alternative Payroll Covered Period was less than during the comparison period of January 1, 2020 to March 31, 2020. If the borrower restored salary/hourly wage levels, the borrower may be eligible for elimination of the Salary/Hourly Wage Reduction amount.
The calculation requires an employee-by-employee comparison of the average annual salaries/hourly wages during the Covered Period (or Alternative Payroll Covered Period) to the average annual salaries/hourly wages for each employee during the first three months of 2020, and then reduces forgiveness as follows:
- For salaried employees, by an amount equal to the annualized reduction in excess of 25% multiplied by 8/52.
- For hourly employees, by an amount equal to the hourly wage reduction in excess of 25% multiplied by the average number of hours worked per week in the first quarter of 2020 multiplied by 8.
The application includes a new Salary/Hourly Wage Reduction Safe Harbor as well that has not been referred to in any prior guidance. This calculation takes a snapshot approach in the sense it compares an employee’s average annual salary or hourly wage as of June 30, 2020 to their annual salary or or hourly wage as of February 15, 2020. If the amount on June 30 is equal to or greater than the amount on February 15, then the Safe Harbor has been met and there is no salary hourly wage reduction to calculate for that employee. There is no stated requirement that any compensation be paid or incurred prior to June 30, nor is there any requirement that compensation be paid or incurred after June 30, though we expect substance over form will be applied on any subsequent audits.
The application follows the formulation in the statute by excluding any employee that made more than $100,000 on an annualized basis during “any single pay period” in 2019. Thus, if paid weekly, the wage reduction rule does not apply to any employee who received more than $1,923 per pay period in 2019, or more than $3,846 per pay period in 2019 if paid on a bi-weekly basis. The “any single pay period” requirement, when applied literally, could mean that commission-based employees with an exceptional pay period which exceeds $1,923 could be excluded, even if they do not normally exceed $100,000 on an annual basis.
The Schedule A Worksheet requires the borrower to list the last four digits of each employee’s Social Security number. Even though the Schedule A Worksheet is not one of the documents required to be submitted to the lender, we believe this requirement is intended to prevent fraud because the worksheet must be maintained in the borrower’s files and produced to the SBA upon request.
FTE Headcount Reduction
This calculation is completed on the Schedule A Worksheet and will be used to determine whether the borrower’s loan forgiveness amount must be reduced due to a statutory requirement concerning reductions in full-time equivalent (“FTE”) employees. The actual loan forgiveness amount that the borrower will receive may be less, depending on whether the borrower’s average weekly number of FTE employees during the Covered Period or the Alternative Payroll Covered Period was less than during the borrower’s chosen reference period: February 15 to June 30, 2019 or January 1 to February 29, 2020. Seasonal employers may choose either February 15 to June 30, 2019 or any consecutive 12-week period from May 1 to September 15, 2019 (see Schedule A, Line 11).
The borrower is exempt from such a reduction if the FTE Reduction Safe Harbor applies.
The FTE calculation is different than expected. The application allows for two methods to determine the average weekly number of FTEs:
- Base method – For each employee, divide the average number of hours paid per week by 40 and round to the nearest tenth. The maximum for any individual employee is capped at 1.0. For example, a borrower has three employees that work 40, 50 and 10 hours, respectively. The borrower has 2.3 FTEs (40/40 + 50/40-capped at 1.0 + 10/40-rounded to nearest tenth). Based on prior guidance, it was assumed that SBA would use 30-hour work weeks to determine FTEs.
- Simplified method – Each employee who works 40 hours or more per week is assigned 1.0 and employees who work fewer hours are assigned 0.5, at the election of the borrower. Using the same example as above, there are now 2.5 FTEs (1.0 + 1.0 + 0.5). The simplified method is new guidance as of the release of the application.
Although borrowers have a choice between the two methods, they are required to use the same method consistently throughout this computation.
The application addresses the FTE Reduction Safe Harbor, which has been discussed in prior SBA guidance. Specifically, a borrower who reduced their FTE levels during the period February 15 to April 26, 2020, will be exempt from a reduction in loan forgiveness based on FTE reduction, if the borrower subsequently restores their FTE levels to the levels in the pay period that included February 15, 2020, by no later than June 30, 2020. The Safe Harbor is not applicable if the average number of FTEs between February 15 to April 26, 2020 is higher than the average number of FTEs in the payroll period inclusive of February 15, 2020 (i.e. there were no FTE reductions in the qualifying period). There is no stated requirement that any compensation be paid or incurred prior to June 30, nor is there any requirement that the employee be retained for any period of time after June 30, though we expect substance over form will be applied on any subsequent audits.
The instructions to the Schedule A Worksheet also address FTE Reduction Exceptions. Any FTE reductions during the Covered Period or Alternate Payroll Covered Period due to the following reasons will not reduce loan forgiveness: (1) the borrower made a good-faith, written offer to rehire the employee and the employee rejected the offer; or (2) any of the following: (i) the employee was fired for cause, (ii) the employee voluntarily resigned, or (iii) the employee voluntarily requested and received a reduction in their hours. This is a favorable rule for borrowers and can be viewed as an expansion of the exception stated in FAQ #40 for employees who were laid-off and refused to return to work.
Similar to the PPP loan application, the authorized representative of the borrower has to make a number of representations and certifications on the second page of the forgiveness application. The borrower must certify, among other things, that (i) it verified the amount of payroll and non-payroll costs, (ii) the loan was used for authorized purposes, and (iii) the information and supporting documents are true and complete in all material respects. In addition, the borrower has to acknowledge that SBA may require additional information to evaluate eligibility and forgiveness of the PPP loan; and a borrower’s failure to provide the information can result in SBA’s determination that the borrower was ineligible for the PPP loan or that it is not entitled to loan forgiveness.
There is an extensive list of documentation requirements on page 10 of the application, including the list of tax and financial documents that must be submitted by the borrower in addition to to the PPP Loan Forgiveness Calculation Form and PPP Schedule A. This includes documentation verifying payroll costs, FTE employees and non-payroll costs.
In addition the borrower must maintain (but not submit) the following documents relating to the borrower’s PPP loan, including: PPP Schedule A Worksheet (or it’s equivalent) and supporting documentation, as well as documentation submitted with its PPP loan application; documentation supporting the borrower’s certifications as to the necessity of the loan request and its eligibility for a PPP loan; documentation necessary to support the borrower’s loan forgiveness application; and documentation demonstrating the borrower’s material compliance with PPP requirements. The borrower must retain all this documentation for six-years after the date the loan is forgiven or repaid in full and permit SBA and its authorized representatives to access the documents upon request. The six-year documentation retention period is new guidance.
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