On Friday May 15th, the Small Business Administration (SBA), in consultation with the Department of the Treasury, released the Paycheck Protection Program (PPP) Loan Forgiveness Application, along with detailed instructions.
As with the original PPP Application, it is highly likely that this form will be updated moving forward. That being the case, the information below is accurate as of May 15th, and could change based on further guidance or modifications to the form.
Read below for the clarifications from this form, along with questions that remain unanswered.
Q1: Is there any flexibility for a business if their pay periods do not correspond appropriately to the ‘covered period’ (the 8-week period immediately following the loan disbursement date)?
A: Yes, Borrowers 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.
Q2: Must the payroll costs be both paid and incurred during the covered period? What about ‘nonpayroll’ costs?
A: The application suggests that payroll expenses can be paid or incurred during the Covered Period but does not necessarily require both. Payroll costs are considered paid on the day that paychecks are distributed, or the Borrower originates an ACH credit transaction. It appears that paid payroll costs can be included, even if it relates to amounts earned prior to the covered period.
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.
Note that the application states a similar exception for ‘nonpayroll costs.’ Per the instructions, 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 the billing date is after the Covered Period.
Further guidance will need to be issued clarifying how far back these expenses can go.
Q3: Will 75% of the loan proceeds need to be used for payroll costs in order to apply for forgiveness, or will there by a ‘prorated’ forgiveness based on the actual expenses paid?
A: Yes, the forgiven portion will be prorated- it is not an ‘all of nothing’ scenario. For example, if a business received a $150,000 loan, but only spent $75,000 on payroll costs, they would still be eligible for up to $100,000 loan forgiveness ($75,000 for payroll and $25,000 for the other categories.) Conversely, if this same business spent $0 on payroll, they would not be entitled to any forgiveness amount, regardless of the amount spent on the ‘nonpayroll’ costs.
Q4: How will full-time equivalency (FTE) employees be calculated?
A: The FTE calculation will be based on a 40-hour work week. For each employee, use the average number of hours paid per week, divide by 40, and round the total to the nearest tenth. The maximum for each employee is capped at 1.0. A simplified method that assigns a 1.0 for employees who work 40 hours or more per week and 0.5 for employees who work fewer hours may be used at the election of the Borrower.
Q5: Will the Borrower be penalized for employees who do not want to return to work?
A: Any FTE reductions for the following cases do not reduce the Borrower’s loan forgiveness:
- any positions for which the Borrower made a good-faith, written offer to rehire an employee during the Covered Period which was rejected by the employee
- any employees who during the Covered Period were fired for cause, voluntarily resigned, or voluntarily requested and received a reduction of their hours.
Q6: What are the guidelines for Safe Harbor regarding FTE Reductions and Salary/Hourly Wage Reductions?
A: The Borrower is exempt from the reduction in loan forgiveness based on FTE employees if both of the following conditions are met: (1) the Borrower reduced its FTE employee levels in the period beginning February 15, 2020, and ending April 26, 2020; and (2) the Borrower then restored its FTE employee levels by not later than June 30, 2020 to its FTE employee levels in the Borrower’s pay period that included February 15, 2020.
A similar guideline applies for reductions related to salary/hourly wages – if the Borrower reduced salary/hourly wages between February 15, 2020 and April 26, 2020, but then restored these amounts as of June 30, 2020, (restored to the level in effect as of February 15, 2020) the Safe Harbor requirement will have been met.
Note that both Safe Harbor guidelines relate to reductions in the period of February 15, 2020 and ending April 26, 2020. In the unlikely event that reductions in FTE or salary levels were not reduced until after April 26, it appears the Safe Harbor provisions do not apply.
Q7: If the Borrower fails to maintain the necessary FTE requirements, does this only impact the portion of the loan forgiveness related to payroll cost?
A: No, any reduction in loan forgiveness resulting from the FTE Reduction Quotient applies to the total forgiveness balance. For example, assume the Borrower paid $75,000 in eligible payroll costs and $25,000 in eligible ‘nonpayroll’ costs. If they had an FTE Reduction Quotient of 95%, the amount of the loan eligible for forgiveness would be reduced to $95,000 (95% of [75,000 + 25,000]).
Questions that Remain Unanswered
1. If annual expenses are paid during the covered period, do these need to be prorated?
For example, the Borrower may make an annual contribution to the retirement plan. It is currently unclear if the Borrower can make this contribution during the covered period and receive a full credit or will this need to be prorated to 8/52 weeks. The same holds true for annual employee bonuses and other payroll-related amounts.
2. What is the timeline in applying for forgiveness?
The lenders have 60 days to make a determination on loan forgiveness once the application has been received from the Borrower, but what is the Borrower’s deadline to submit this application once the covered period ends?
3. Will the original terms of the law be modified?
There is currently much speculation about possible modifications to the original law. For example, extending the covered period beyond 8 weeks, modifying the 75% payroll cost restriction, or allowing the deductibility of PPP expenses for tax purposes. It remains to be seen if any significant changes will be made once the final regulations are released.