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.
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.
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 qualify if paid or incurred during the recipient’s covered period (or alternative period if so elected).
Here are definitions of paid and incurred:
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 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:
The new forgiveness application states that personal property loan interest and rents qualify, but transportation utilities still need to be defined.
New guidance for payroll costs and FTE headcount and salary and hourly wage reduction limitations:
Following are updates related to identification of employees paid, headcount, wage reduction, and more.
The table instructions require that the applicant separately list each employee when the forgiveness application is submitted.
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.
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.
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:
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.
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:
Located on page 10 of the application, the updated guidance provides:
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.