PPP Loan Forgiveness New Guidance

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Some of the provisions below have been modified by the Paycheck Protection Program Flexibility Act (PPPFA) which was signed into law on June 5, 2020. Click here for our article on PPPFA.

SBA Issues Extensive Guidance on PPP Loan Forgiveness

Note: The information presented in this post and in linked articles is informational in nature.  It should not be relied on by anyone for any purpose without consultation with a competent advisor that is fully aware of your business and tax situation.

By: Chris Anderson, Shareholder

The SBA released Paycheck Protection Program (PPP) loan forgiveness documents and instructions late on May 15, 2020.  The guidance is very comprehensive, particularly regarding the count of full-time equivalent (FTE) employees, and it specifies the documentation required to be submitted to lenders and what information borrowers must keep in the event of an SBA inquiry.

Executive Summary

  • The PPP Loan Forgiveness Application consists of 4 forms (one of which asks for demographic information and is optional) to support the calculations of eligible expenses, employee counts, and forgiveness reduction calculations.
  • Borrowers (including affiliates) that received PPP loans in excess of $2 million must mark a box on page 1 of the loan forgiveness application. The SBA previously announced that such loans would be subject to a review process.
  • The SBA has allowed borrowers to use an Alternative Payroll Covered Period in place of the 8-week Covered Period that begins on the date of the PPP loan disbursement. This Alternative Period begins on the first day of the first payroll period after PPP loan disbursement.  Payroll and certain other costs paid during the applicable 8-week period qualify for loan forgiveness.  Note that the Alternative Payroll Covered Period does not apply to non-payroll costs.
  • 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. The same is true for eligible non-payroll costs incurred during the Covered Period but not paid until the next billing date after the Covered Period ends.
  • The FTE employee count requires employers to use a 40-hour week instead of the previously thought 30-hour standard.
  • Borrowers are permitted to ignore certain specified reductions in employee counts for purposes of the average FTE employee calculation.
  • Documentation to prove payroll and non-payroll costs must be submitted to the lender with the forgiveness application. Other documentation regarding such things as PPP loan eligibility must be kept by the borrower.  All records must be kept for 6 years from the date of loan forgiveness or loan repayment in full.

You can access the application by clicking here.

While this new SBA guidance is comprehensive, we anticipate that the SBA will issue clarifications and supplemental information about these matters.  We will keep you informed of any developments.  Please contact your Maloney + Novotny team member with questions.

Topics Covered:
Topic 1: Loan Forgiveness Application
Topic 2: Eight-Week Covered Period Guidance
Topic 3: Average FTE Issues
Topic 4: Loan Forgiveness Limited by Certain Salary/Hourly Wage Reductions
Topic 5: Documentation Required to be Submitted to the Lender
Topic 6: Documents to be Maintained by Borrower but not Submitted

 


Loan Forgiveness Application

The application consists of 4 components:

  • PPP Loan Forgiveness Calculation Form, which serves as a summary of the calculations in the other parts of the application. It also contains certifications/acknowledgements that borrowers must make regarding (1) the accuracy of the eligible payroll and non-payroll costs for which forgiveness is being requested, including providing the required documentation of such expenses to the lender; (2) that the federal government may pursue recovery of loan amounts and/or civil or criminal fraud charges if the funds were knowingly used for unauthorized purposes; (3) that the documents submitted to the lender are consistent (or will be consistent) with information submitted to the IRS and state taxing authorities, among other matters; and (4) that the SBA may request additional information to evaluate the borrower’s eligibility for the PPP loan and forgiveness.
  • PPP Schedule A, which summarizes cash compensation, average FTE counts, non-payroll costs eligible for forgiveness including employer payments for employee health insurance, retirement plans, and state unemployment taxes, and the FTE reduction calculation which generates the “FTE Reduction Quotient” (more details below).
  • PPP Schedule A Worksheet, on which the employer must list each employee, his/her compensation, the average FTE factor for that employee, and any salary/wage reduction factor (more information below). The Worksheet contains a separate section for those employees whose annualized compensation exceeds $100,000 so that compensation is appropriately capped for the 8-week period.  The final section of the Worksheet assists the borrower with determining whether or not the FTE Reduction Safe Harbor has been met (see discussion below).
  • PPP Borrower Demographic Information Form, which is an optional part of the forgiveness application on which the SBA requests veteran status, gender, race, and ethnicity information for “Principals” (defined below).

Note that only the PPP Loan Forgiveness Calculation Form and the PPP Schedule A are required to be submitted to lenders.  The borrower must keep the PPP Schedule A Worksheet and provide it to the SBA if asked.

You can access the application by clicking here.

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Eight-Week Covered Period Guidance

As specified in the CARES Act, the borrower can request loan forgiveness for eligible payroll and non-payroll “costs incurred and payments made during the covered period” (CARES Act Section 1106(b)).  There was significant confusion with respect to this provision, and the instructions for the PPP Loan Forgiveness Calculation Form clear up many of the ambiguities.

The instructions state that a borrower can use the “Covered Period” or the “Alternative Payroll Covered Period” for determining payroll costs for the forgiveness calculation.  The Covered Period is the 8-week (or 56-day) period that begins on the PPP loan disbursement date.  For administrative convenience, the SBA has provided that borrowers may elect to use the Alternative Payroll Covered Period to calculate eligible payroll costs using the 8-week (or 56-day) period that begins on the first day of the first payroll period following the PPP loan disbursement date.  The instructions provide the following example:

“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.”

Other noteworthy guidance about the Covered Period include the following:

  • 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.

M+N Example:  Assume the borrower pays its employees on a semi-monthly basis using the 15th and the end of each month as pay dates.  Also assume that the borrower received its PPP loan disbursement on April 28, 2020, and it elects to use the Alternative Payroll Covered Period.  The borrower therefore begins it 8-week forgiveness period on May 1, 2020, and the period ends June 25, 2020.  The borrower’s last pay date in that period is June 15, 2020, but under the guidance above, the borrower would be able to count payroll for the period of June 16 to June 25 so long as the employees were paid for those days on June 30.

  • Amounts paid to owner-employees, a self-employed individual, or general partners are capped at $15,385 (which is the 8-week equivalent of $100,000 per year) or their applicable compensation in 2019, whichever is lower.
  • Eligible non-payroll costs consist of (1) interest paid on mortgage obligations for real or personal property incurred before February 15, 2020 (no prepayments or payments of principal count in the calculation); (2) rent or lease payment for real or personal property in force before February 15, 2020; and (3) utility payments for electricity, gas, water, transportation, telephone, or internet access for which service began before February 15, 2020.
  • Eligible non-payroll costs 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.
  • As previously specified by the SBA, eligible non-payroll costs cannot exceed 25% of the total forgiveness amount.

back to Topics Covered


Average FTE Issues

The instructions for the PPP Schedule A Worksheet deviate from the expected use of a full-time equivalency of 30 hours and instead require the use of 40 hours.  After entering each employee and his/her compensation on the Worksheet, the borrower must enter an average FTE factor by dividing the employee’s hours by 40.  The resulting factor cannot exceed 1.0 and must be rounded to the nearest tenth (0.1).  A borrower is permitted to use a simplified method that assigns a factor of 1.0 for employees who work 40 hours or more per week and a factor of 0.5 for employees who work fewer hours.

M+N Comment:  For those borrowers that have several part-time employees with varying hours of less than 40 per week, we recommend doing the calculation both ways (regular method and simplified method) to determine the maximum FTE total.

The average FTE employee count during the Covered Period or Alternative Payroll Covered Period is measured against the chosen reference period.  This reference period, at the borrower’s election, is (1) February 15, 2019 to June 30, 2019; (2) January 1, 2020 to February 29, 2020; or (3) in the case of a seasonal employer, either of the preceding periods or a consecutive 12-week period between May 1, 2019 and September 15, 2019.

A borrower is permitted to ignore FTE reductions in its forgiveness calculation for the following situations, but only if the position was not filled by a new employee:

  • Any position for which the borrower made a good faith written offer to rehire an employee during the Covered Period or Alternative Payroll Covered Period which was rejected by the employee; and
  • Any employee who, during the Covered Period or Alternative Payroll Covered Period was fired for cause, voluntarily resigned, or voluntarily requested and received a reduction of their hours.

M+N Comment:  Presumably, a full-time (40 hours) employee who voluntarily requests to reduce his/her schedule to 32 hours would still have an FTE factor of 1.0 instead of 0.8 (32/40) under the above provision.  It would be helpful for the SBA to comment further on this provision and provide examples to ensure that we are interpreting this provision correctly.

A safe harbor exempts certain borrower from the loan forgiveness reduction based on FTE employee levels if both of the following conditions are met:

  • The borrower reduced its FTE employee levels during the period of February 15, 2020 through April 26, 2020; and
  • By not later than June 30, 2020, the borrower then restored its FTE employee levels to its FTE employee levels in the borrower’s pay period that included February 15, 2020.

M+N Comment:  Presumably, restoring employee FTE counts is permitted by June 30, 2020 even if the borrower’s 8-week forgiveness period ends prior to June 30, 2020.

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Loan Forgiveness Limited by Certain Salary/Hourly Wage Reductions

Section 1106(d)(3) of the CARES Act provides that the amount of PPP loan forgiveness is reduced by the amount of any reduction in total salary or wages of any employee during the Covered Period that is in excess of 25% of the total salary or wages of the employee during the period from January 1, 2020 to March 31, 2020.

The instructions for the PPP Schedule A Worksheet provide a table to be completed for each employee who received more than a 25% reduction in compensation to determine how much (if any) the borrower’s loan forgiveness amount must be reduced.  Similar to the safe harbor for the restoration of FTE employees, a borrower may be eligible for the elimination of the salary/wage reduction amount if such reduction was restored.

The table requires the borrower to input the following information for the safe harbor calculation:  (1) the employee’s annual salary or hourly wage as of February 15, 2020; (2) the average annual salary or hourly wage between February 15, 2020 and April 26, 2020; and (3) if applicable, the average annual salary or hourly wages as of June 30, 2020.  If the amount in #2 above is equal to or greater than the amount in #1, there is no reduction in the loan forgiveness amount.  Similarly, if #3 is used and the amount in #3 is equal to or greater than #1, there is no reduction in the loan forgiveness amount.  If neither of those is true, the borrower’s loan forgiveness amount will be reduced by the amount of the reduction in the employee’s salary or wages that exceeds 75% of the average salary or wages of the employee from January 1, 2020 to March 31, 2020.

back to Topics Covered


Documentation Required to be Submitted to the Lender

The instructions to the PPP Loan Forgiveness Application state that the borrower must submit the following documentation to the lender:

  • Payroll: Documentation verifying the eligible cash compensation and non-cash benefit payments for the Covered Period or Alternative Payroll Covered Period consisting of each of the following:
    1. Bank account statements or third-party payroll service provider reports detailing the amount of cash compensation provided to employees;
    2. Federal and state payroll tax forms (or reports from third-party payroll service providers) for the periods that overlap with the Covered Period or Alternative Payroll Covered Period, such as federal Forms 941 and state withholding and unemployment tax filings; and
    3. Receipts, cancelled checks or account statements documenting the amount of employer contributions to employee health insurance and retirement plans.
  • FTE: Documents including payroll tax filings (e.g., federal Form 941) showing, at the election of the borrower:
    1. Average FTE employees on payroll per month employed by the borrower between February 15, 2019 and June 30, 2019;
    2. Average FTE employees on payroll per month employed by the borrower between January 1, 2020 and February 29, 2020; or
    3. In the case of a seasonal employer, the average number of FTE employees on payroll per month employed by the borrower between February 15, 2019 and June 30, 2019; between January 1, 2020 and February 29, 2020; or any consecutive 12-week period between May 1, 2019 and September 15, 2019.
  • Non-Payroll: Documentation verifying the existence of obligations or services prior to February 15, 2020 and eligible payments during the Covered Period.
    1. Mortgage interest payments: copy of lender amortization schedule and receipts or cancelled checks; or lender account statements from February 2020 and the months of the Covered Period through one month after the end of the Covered Period verifying interest amounts and eligible payments.
    2. Rent or lease payments: copy of current lease agreement and receipts or cancelled checks verifying payments from the Covered Period; or lessor account statements from February, 2020 and from the Covered Period through one month after the end of the Covered Period verifying eligible payments.
    3. Utility payments: copy of invoices from February 2020 and those paid during the Covered Period and receipts, cancelled checks, or account statements verifying those eligible payments.

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Documents to be Maintained by Borrower but not Submitted

The borrower must maintain the following documentation in its files for 6 years after the date the loan is forgiven or repaid in full:

  • Documentation supporting the listing of each individual employee on the PPP Schedule A Worksheet Tables 1 and 2 including the salary/hourly wage reduction calculation (if necessary).
  • Documentation regarding any employee job offers and refusals, firings for cause, voluntary resignations, and written requests by any employee for reductions in work schedule.
  • Documentation regarding the PPP Schedule A Worksheet “FTE Reduction Safe Harbor.”
  • All records relating to the PPP loan including:
    1. Documentation submitted with the PPP loan application;
    2. Documentation supporting the Borrower’s certification as to the necessity of the loan request and eligibility for a PPP loan;
    3. Documentation necessary to support the borrower’s loan forgiveness application; and
    4. Documentation demonstrating the borrower’s material compliance with PPP requirements.

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