On May 15, 2020, the United States Treasury Department issued its long awaited Paycheck Protection Program (“PPP”) Loan Forgiveness Application Instructions (“Forgiveness Application”), including a PPP Loan Forgiveness Calculation Form (with instructions) and a list of expected supporting documents to accompany the Forgiveness Application (3245-0407 SBA Form 3508 PPP Forgiveness Application.pdf).
The following is a summary of the material points from this guidance.
Eight-Week Period for Measuring Forgiveness – a Helpful Option Added
- The Borrower’s loan forgiveness is measured during the eight-week/56-day period following receipt of the PPP loan, with the first day being the date of receipt of the funds.
- The Forgiveness Application provides Borrowers who have bi-weekly or more frequent payroll periods the option to select a different eight-week period during which the forgiveness will be measured. The Borrower may elect to start the eight-week period on the first day of the first full pay period following the receipt of the loan (“Alternative Payroll Covered Period”).
- The Forgiveness Application allows a Borrower to include allowable payroll costs, which are incurred during the subject eight weeks (whether the Alternative Payroll Covered Period or not), but paid in the subsequent pay period, so there no need for a “special” short payroll period.
- Borrowers who elect this Alternative Payroll Covered Period must apply the Alternative Payroll Covered Period wherever there is a reference to “Covered Period” or “Alternative Payroll Covered Period,” except where the Forgiveness Application expressly indicates that it applies to the “Covered Period.” Even if the Alternative Covered Period is elected for “payroll costs,” the other allowable PPP uses – rent, utilities and interest – must be tracked during the 56 days following receipt of the PPP loan.
- Whether a Borrower selects the Alternative Payroll Covered Period or not, it is possible that a Borrower will have more than 56-days of forgivable payroll costs by including both “payroll costs incurred or paid” (see last line of page 1) in its Forgiveness Application. As many as 72 days of eligible payroll costs may be eligible for forgiveness. Based on the language in the Forgiveness Application, an anomaly exists in that the number of days of eligible payroll costs can be different for Borrowers depending on (i) whether a Borrower pays on weekly, bi-weekly or semi-monthly basis, and (ii) when the actual pay day occurs compared to when the PPP funds are received. Does this possible result contradict the intention of the SBA relating to the apparent eight-week limitation for payroll costs? Without more guidance from the SBA, payroll costs in excess of 56 days included in a Forgiveness Application is a possible result.
Support Documents Required to be Submitted and/or Retained
- Bank statements or payroll service provider reports documenting payments to employees.
- Payroll tax forms.
- State Unemployment Insurance forms.
- Cancelled checks, wires, bank transfers or ACH for health insurance and retirement plans.
- Payroll reports showing FTEs during the respective measurement periods.
- Lender statements and cancelled checks.
- Lease agreements and cancelled checks.
- The Borrower must also maintain and have available if asked (but not attach):
- Hiring, firing details during relevant periods.
- Specific employee by employee payroll records.
- All records of the Borrower for both the loan application and the Forgiveness Application must be retained for six years after last payment or date all of the loan is forgiven, whichever is later.
Non-Payroll Cost Permitted Uses – Rent, Utilities, Interest
- All of these eligible non-payroll costs must be paid during the Covered Period or incurred during the Covered Period (with no prepayment allowed) and paid on or before the next regular billing date, even if that date is after the Covered Period.
- After the CARES Act was adopted, the SBA added a limitation that forgiveness will be subject to the requirement that at least 75% of the amount forgiven must have been spent on eligible payroll costs. As a result, it is possible that amounts spent on allowable non-payroll costs may not be forgiven. That limitation is part of the forgiveness application as explained below.
- Allowable utilities include gas, electric, water, telephone, and internet. It also includes “transportation” but the meaning of that term remains unclear.
- Because these items are eligible for forgiveness if incurred during the eight weeks and paid on or before next regular billing date after the Covered Period, the need for prepayments has been alleviated.
Reduction and Cap on Forgiveness
- The total amount for which forgiveness is sought (i.e., the total spent on allowable uses as determined after applying the above criteria) is subject to reduction by two measures and potentially capped by a third.
- The reductions work as follows:
- First is a dollar-for-dollar reduction to the forgiveness amount equal to any reduction in excess of 25% of the gross wages or salary for any employee (other than employees compensated at a rate in excess of $100,000 per year).
- Second, the amount remaining after the first reduction is then subject to further reduction for any reduction in full time equivalent employees. This second reduction, if applicable, is determined by multiplying the remaining amount after the initial reduction by a ratio equal to the Borrower’s actual total average weekly fulltime equivalency (“FTE”), divided by the total average weekly fulltime equivalency (FTE) during the Borrower’s chosen period of either February 15, 2019 to June 30, 2019 OR January 1, 2020 to February 29, 2020.
- The third adjustment is a cap on total forgiveness equal to the total spent on eligible “payroll costs” (i.e., before the above reductions) divided by 75%.
- So, the total amount eligible for forgiveness is the lesser of (1) the amount after applying the above two reductions or (2) the amount after applying the cap.
- The Forgiveness Application makes it clear if you are a self-employed owner or a self-employed individual, the loan forgiveness rules prevent you from including in payroll costs more than the lesser of $15,385 for the full Covered Period or that amount you paid yourself for the equivalent period in 2019.
- FTE is based on 40 hours with an allowed simplified method for hourly employees who work 40 hours per week or more counting as one full-time employee and those that work less than 40 hours counting as half of a full-time employee. It may be simpler but if most of a Borrower’s non full-time employees are employed more than 20 hours per week, it will help the FTE ratio to go through the effort of calculating the actual hours, because rounding to 0.5 for part-time employee under those circumstances will reduce the ratio of actual full-time FTE’s to the base period chosen.
- There are exceptions to the FTE count reduction such as if an employee is fired for cause, voluntarily resigned, voluntarily requested and received a reduction in hours, or received a written offer to be re-hired and rejected the offer. Finally, there is no reduction if a Borrower refills a position with another employee.
- There is a safe harbor to avoid reduction to the loan forgiveness amount related to a reduction in FTEs, such that if a Borrower reduced its FTE employee level between the period of February 15, 2020 -and April 26, 2020, and then restored its FTE level to the FTE level of February 15, 2020, not later than June 30, 2020. There is no guidance yet as to how long that replenished FTE level, if fully replenished by June 30, 2020, has to be maintained to comply with the safe harbor.
- There is a complex separate safe harbor applicable to the reduction of wages/salaries greater than 25%, the explanation for which is located on pages 7 and 8 of the Forgiveness Application.
- If a Borrower receives a $10,000 grant under the SBA emergency loan program (EIDL), that grant will reduce amount of forgiveness which may be submitted to lender.
The Forgiveness Application requires the Borrower self-certify that:
- The amount of loan, when combined with loans to affiliates, was in excess of $2 million (the SBA has committed to Congress that all such loans will be “fully audited”).
- Non-payroll costs do not exceed 25% of the final amount of forgiveness requested.
- PPP loan proceeds were used solely for permitted uses.
- The payroll costs and non-payroll cost were verified as eligible.
- The lender has permission to share Borrower tax information with the SBA.
- The SBA can ask for additional information and failure to provide it can lead to the lender disapproving the loan forgiveness application.
- The information in the Forgiveness Application is true and correct in all material respects and a knowing false statement is punishable under law, with possible civil and or criminal penalties.
 The form and instructions contain many detailed provisions should be read in their entirety. This summary is not intended to cover all of the material terms and should not be relied upon as legal advice.
Tino M. Monaldo
Douglas M. Ventura
J. Stephen Herbert
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