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May 16, 2020

SBA Releases Loan Forgiveness Application and Instructions

Posted by COVID-19 Rapid Response Team

PPP loans

The much-anticipated PPP loan forgiveness application and instructions became available on May 15. This application provides borrowers with both the form on which they will need to submit the loan forgiveness application to their lender, along with desperately needed guidance in the form of attached instructions. The form itself contains four components:

  1. The Loan Forgiveness Calculation Form
  2. PPP Schedule A (Reduction of Loan Forgiveness Calculation)
  3. PPP Schedule A Worksheet (Individual Employee Details)
  4. The PPP Borrower Demographic Form (optional)

Here is a summary of the key highlights.

Biggest differences from original legislation:

  • They are giving people the choice to use an “Alternative Covered Period” for payroll purposes, but only if you’re a weekly or biweekly payer, not if you’re semi-monthly or monthly 
  • They want an “Employee Identifier” for each employee that consists of the last 4 digits of the employee’s SSN

Clarifications of gray areas:

  • The 75% rule is confirmed to be calculated against the forgiveness amount spent and not the loan proceeds amount
  • There is no longer a bright line on 75% of spent amount on labor to qualify for forgiveness. The borrower gets the smaller of:
    • Labor costs divided by .75 where labor makes up less than 75% of spend
    • Net forgiveness amount in the case where labor makes up 75% or more of spend
    • Total loan amount
  • They are clearly including accrued but not paid expenses
  • FTE is defined as 40 hours, with an option to just use 0.5 for part-timers
  • The salary reduction calculation now includes the word “average” into as anticipated, removing the issue of comparing 8 weeks of total pay against 13 weeks as originally written
  • They defined the order of events on the forgiveness reduction factors — subtract salary reduction dollars from gross forgiveness amount first, then multiply that result by the FTE quotient to get to the preliminary forgiveness amount
  • The safe harbors for the two reduction factors are separate from each other, meaning a borrower can get safe harbor for one factor but not the other — it is not necessary to meet both safe harbor tests in order to qualify
  • Documentation required to be submitted to the lender has been defined

There is now a much clearer path to forgiveness that borrowers, advisors and lenders can follow. Below, we discuss the key points every borrower should know about the costs included in the gross forgiveness calculation and the two factors that can reduce a borrower’s net forgiveness.

Eligible Payroll Costs

Borrowers are generally eligible for forgiveness for payroll costs incurred during the eight-week Covered Period (or an Alternative Payroll Covered Period). 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). Count payroll costs that were both paid and incurred only once.

For each individual employee, the total amount of cash compensation eligible for forgiveness may not exceed an annual salary of $100,000, as prorated for the Covered Period. For owner-employees or self-employed individuals/general partners, the amount is capped at $15,385 per individual.

The language in the CARES Act and subsequent Interim Final Guidance referenced amounts paid and incurred and there was significant uncertainty as to whether borrowers should use cash or accrual methods to determine payroll costs. Ultimately, the SBA and Treasury settled on a modified cash method that allows borrowers to account for the payroll amounts that would accrue between the final paycheck within the eight-week Covered Period and paychecks that occurred after the eight-week Covered Period.

However, it also appears to open a loophole for borrowers with semi-monthly or monthly payrolls that are not eligible to opt for an Alternative Payroll Covered Period. By including both costs paid during the Covered Period and costs incurred but not paid at the end of the Covered Period, the calculation opens the door for a borrower to get more than eight weeks of payroll forgiven.

As an example, a borrower that received funds on April 28 has their standard Covered Period expire on June 22. During this period, as a semi-monthly payroll company, they will actually pay their employees four times: April 30, May 15 and 31, and June 15. But they will also have incurred payroll costs for the period from June 16-22. As the calculation instructions are written, all those costs are eligible for forgiveness. This may change with subsequent guidance.

Borrowers with a bi-weekly (or more frequent) payroll schedule may elect to calculate eligible costs using the eight-week period that begins on the first day of their first pay period following their PPP loan disbursement date. Borrowers that elect to use this method must apply the Alternative Payroll Covered Period only where the application specifically allows it but must use the regular Covered Period elsewhere.

Certain borrowers have the option to start the eight-week period for payroll costs on first payroll date after receiving their loan disbursement. This will allow borrowers to more easily track payroll as it will give bi-weekly payors exactly four payroll runs and weekly payors exactly eight.

Eligible Nonpayroll Costs

Eligible nonpayroll costs include payments of interest on covered mortgage obligations incurred before February 15, 2020; covered rent obligations in force before February 15, 2020 (both real and personal property); and covered utility payments for electricity, gas, water, transportation, telephone, or internet access for which service began before February 15, 2020.

An eligible nonpayroll 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 that date is after the Covered Period. These nonpayroll costs cannot exceed 25% of the total forgiveness amount.

The 75% payroll cost requirement is based on the loan forgiveness amount and not the total amount of the borrower’s loan. This alleviates both the math problem behind converting from a 2.5-month application period to an eight-week forgiveness period and the concerns of borrowers whose businesses may be unable to maintain pre-COVID-19 payroll levels due to the shelter-in-place restrictions or other economic impacts.

Salary/Hourly Wage Reduction

The actual amount of loan forgiveness depends on whether the average salary or hourly wages of certain employees (those under $100,000 annualized) during the Covered Period or Alternative Payroll Covered Period was less than during the first quarter of 2020. If the average during the Covered Period was more than 25% lower for any employee, the reduction factor applies. If the borrower restores the salary/hourly wage levels as of June 30, 2020, the borrower will qualify for elimination of this reduction.

PPP Schedule A Worksheet must be completed (but not submitted) for all employees and must include: employee’s name, employee identifier (Last 4 digits SSN), cash compensation, average FTE, and, for employees who earned an annualized rate of pay of $100k and less during any single pay period in 2019, any salary/hourly wage reduction.

The reduction in loan forgiveness is calculated for each eligible employee, but borrowers may be able to eliminate this reduction by restoring the salary/hourly wages of that employee by June 30, 2020. However, the guidance language for this test is confusing: it uses the “average annual salary or hourly wage as of June 30, 2020” without defining the applicable time period for which to calculate the “average”. This suggests that a borrower could use the rate of pay on June 30 to find safe harbor, even if pay was restored to that level only on June 29. This is another area where additional clarifying guidance may be forthcoming.

It also means that many borrowers will hold off on submitting their applications for forgiveness until after June 30 — which covers about four million borrowers funded prior to May 6 — and suggests a massive wave of forgiveness applications hitting lenders’ portals in the first two weeks of July.

Additionally, although borrowers don’t need to submit Worksheet A, the application should not be based solely on summary payroll data without completing the detailed employee by employee information. Plan accordingly.

Full-Time Equivalency Reduction

In order to compare the reduction in average employees from one of two periods (February 15, 2019 to June 30, 2019 or January 1, 2020 to February 29, 2020) to the Covered Period or Alternative Payroll Covered Period, the PPP requires the borrower to calculate full-time equivalency (FTE) during both periods and determine a reduction quotient. Interestingly, the borrower may skip the detailed calculation and simply assign 1.0 to all employees who work 40 hours or more per week and 0.5 to any part-time employee.

Seasonal Employers(which have not been clearly defined)have the option to include either of the two elective periods or a consecutive twelve-week period between May 1, 2019, and September 15, 2019.

There is an FTE reduction exception for:

  • Any positions for which the borrower made a good-faith, written offer to rehire an employee during the Covered Period or the Alternative Covered Period that was subsequently rejected by the employee
  • Any employees who during the Covered Period or Alternative Payroll Covered Period:
  • Were fired for cause
  • Voluntarily resigned
  • Voluntarily requested and received a reduction in their hours

FTE Reduction Safe Harbor: Borrowers will not have loan forgiveness reduced based on this calculation if:

  1. The borrower reduced its FTEs between February 15, 2020, and April 26, 2020
  2. The borrower then restored its FTE employee levels by June 30, 2020, to its FTE employee levels in the borrower’s pay period that included February 15, 2020.

Borrowers can calculate each individual employee’s FTE to the tenth of a percentage or take the administratively easier approach to count any employee who works less than 40 hours a week as 0.5 FTE. Borrowers should consider both methods as one method may result in a greater reduction in loan forgiveness over the other.

Additionally, borrowers should pay attention to the changes in the FTE reduction exception and safe harbor as the requirements have been updated from prior interim guidance. Borrowers should also note that any layoffs that occurred after April 26, 2020, are not considered in the safe harbor calculation other than to the extent they impact the FTE count at June 30, 2020.

Required Documentation

The application guidance lists all documentation required to be submitted with the loan forgiveness application including payroll, FTE and nonpayroll information. It also lists the documentation that must be maintained but not submitted including the PPP Schedule A Worksheet and documentation that supports the FTE reduction exception and safe harbor. All documents must be retained for six years after the date the loan is forgiven or repaid in full and is subject to SBA access, including representatives of its Office of Inspector General, upon request.

The Final Word

The release of the loan forgiveness application allows PPP borrowers that received their funds to start planning for forgiveness with more certainty than they did prior to now. Many questions have been answered, but others remain as borrowers digest the guidance included in the application and seek to apply their individual factual circumstances. Consistent with Treasury’s commentary that it will review all loans over $2 million, the form includes a check box for borrowers (together with affiliates, if applicable) that received PPP loans in excess of $2 million.

One key takeaway is that care should be given to creating the supporting documentation and everything required to be submitted or maintained by the SBA.

For the latest regulatory updates and more information on keeping your business running through disruption, visit our COVID-19 Resource Center.

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