SBA Releases Paycheck Protection Program Loan Forgiveness Application

For those who received Paycheck Protection Program loans, the Small Business Administration (SBA) released a draft PPP loan forgiveness application to help provide some clarity on long-outstanding questions about the program.

While the Paycheck Protection Program loan forgiveness application, which was released May 15, 2020, isn’t considered formal guidance, it’s anticipated that there will be additional, more detailed guidance on pending questions in the coming weeks.

Following are five of the most critical updates reflected in the PPP forgiveness application.

1.            Alternative Payroll Covered Period

This change allows certain borrowers to evaluate and calculate their eligible payroll costs using an alternate eight-week period starting on the date of their first payroll after the loan was received.

2.            Interpretation of Paid and Incurred

The expenses paid and incurred language in the Coronavirus, Aid, Relief, and Economic Security (CARES) Act will be interpreted as paid or incurred—with additional requirements for amounts incurred during your eight-weeks but paid after the covered period ends.

Payroll Costs

Payroll costs qualify if paid or incurred during the recipient’s covered period (or alternative period if so elected).

Here are definitions of paid and incurred:

  • Paid. This is the date checks are distributed or the ACH credit transaction is originated.
  • Incurred. This is the date an employee’s pay is earned—but it must be paid on or before the next regular payroll date to be included in qualifying costs.

You aren’t permitted to double count paid and incurred payroll costs, and the amount must still be 75% or more of the forgiveness amount (not the original loan).

Non-Payroll Costs

Non-payroll costs qualify if paid or incurred during an eight-week covered period, and there’s no option for an alternative period.

The forgiveness application provides that non-payroll costs must either be paid 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.

You aren’t permitted to double count paid and incurred expenses, and non-payroll costs can’t exceed 25% of the forgiveness amount.

There weren’t any changes to qualifying categories. These still include:

  • Interest on a mortgage obligation incurred in the ordinary course of business (principal excluded) with origination prior to February 15, 2020
  • Rent on written lease agreements with terms beginning prior to February 15, 2020
  • Payments on utilities (electricity, gas, water, transportation, telephone, or internet) with service started prior to February 15, 2020

The new forgiveness application states that personal property loan interest and rents qualify, but transportation utilities still need to be defined.

Order of Various Forgiveness Restrictions

  • Full-time equivalent (FTE) headcount and salary and hourly wage reductions. These occur together and are calculated on new PPP Schedule A.
  • 75% of proceeds must be used on payroll costs. This occurs as a separate potential cap on forgiveness and doesn’t interact with headcount and wage reduction restrictions.

3.            Schedule A and Adjustments for FTE and Wage Reductions

New guidance for payroll costs and FTE headcount and salary and hourly wage reduction limitations:

  • Confirms that group health insurance and retirement payments exclude amounts paid by employees (employer-portion only counts)
  • Confirms $100,000 annualized pay limitation is applied in aggregate over eight-week period (no employee may count for more than $15,385 of compensation during the covered period)
  • Clarifies additional options for seasonal employers to select a reference period for their FTE headcount-based limitation
  • Appears to limit partnership owner-compensation equivalents to amounts paid to general partners, which is also subject to the $100,000 annualized pay limitation—this continues to be vague with additional guidance needed on partnership–owner compensation

4.            Schedule A (Supplemental) Worksheet

Following are updates related to identification of employees paid, headcount, wage reduction, and more.

Reporting

The table instructions require that the applicant separately list each employee when the forgiveness application is submitted.

40-Hour Standard Workweek

FTE is defined as a 40-hour workweek. A simplified method may be elected where all employees who work less than a 40-hour workweek count as 0.5 of an employee.

Wage Reduction Calculation

The reduction on forgiveness related to a more than 25% pay cut for employees will be evaluated based upon only reductions in pay rate, not reductions in hours worked.

For the calculation, you compare the eight-week covered period (or the alternative period if elected at the beginning) to the period between January 1, 2020, and March 31, 2020.

The test for reduction is based upon average annual salary or hourly wage. It doesn’t take into consideration gross payments made during the eight-week period as originally contemplated by CARES Act.

For any workers receiving a more than 25% pay rate cut, the hourly worker calculation makes an assumption that weekly hours worked during the eight-week covered period will be the same as what they actually worked during January 1, 2020–March 31, 2020.

Safe Harbor

The application also adds a new safe harbor to avoid this reduction in forgiveness if all employee pay rates—average annual salary or hourly wage—are restored by June 30, 2020.

For an FTE reduction safe harbor, you must meet both of the following conditions:

  • Borrower reduced FTE employee levels between February 15, 2020, and April 26, 2020
  • Borrower restored FTE employee levels no later than June 30, 2020 to those in the pay period that included the date February 15, 2020  

More Generous FTE Headcount Calculations

The forgiveness application confirms that if borrower made a good-faith, written offer to rehire an employee, which was then rejected by the employee, that this employee will count toward the FTE’s employed during the eight-week period.

New Categories

The forgiveness application also added new categories of former employees who will qualify toward the eight-week count—only if not replaced by a new employee—as follows:

  • Employees fired for cause
  • Employees who voluntarily resigned
  • Employees who voluntarily requested and received a reduction of hours

5.            Documentation Requirements

Located on page 10 of the application, the updated guidance provides:

  • List of documents that must be submitted with the application, which is consistent with prior guidance; but note the potential for specific documentation from February 2020 through one month after the end of the covered period for non-payroll costs
  • List of documents to be maintained by the borrower, but not initially submitted with the forgiveness request
  • Six-year statute of limitations for the SBA’s review of documentation, from the date the loan is forgiven or repaid in full

We’re Here to Help

For any questions related to your loan forgiveness calculations or additional documents, please contact your Moss Adams professional. You can also visit our COVID-19 Implications resource page dedicated to Financial Strategies.

Note on COVID-19

During this unparalleled time, we’re closely monitoring the COVID-19 situation as it evolves so we can provide up-to-date guidance and support to help you combat uncertainty. For regulatory updates, strategies to help cope with subsequent risk, and possible steps to bolster your workforce and organization, please see the following resources: