New SBA Loan Forgiveness Application Clears Up Some (Not All) PPP Confusion

On Friday, May 15, 2020, the Small Business Administration released its Paycheck Protection Program (PPP) Loan Forgiveness Application (see link). This new form clears up several, but not all, vague or confusing issues we have discussed previously with regard to the guidance on the PPP Loans. A week later on May 22nd, the SBA issued its interim rules on loan forgiveness to supplement the Loan Forgiveness Application.

Options for when eight-week covered period begins

For payroll costs only, the PPP Loan Forgiveness Application provides the option of marking the beginning of your eight-week (56 days) covered period either on the first day the loan was disbursed (“covered period”) or on the first day of the first pay period following disbursement of the PPP loan (“alternative covered period”). The eight-week covered period for non-payroll costs still begins on the day the loan was disbursed, so it is possible you may have two covered periods if you choose the alternative covered period for payroll costs. Additionally, it appears that the eight-week period can extend past June 30, which is not necessarily consistent with the guidance in the CARES Act.  Hopefully, this will be clarified in future guidance from the SBA. 

When forgiveness-eligible costs are incurred or paid

The CARES Act and PPP Loan guidance included the confusing instruction that payroll and non-payroll costs must be incurred and paid during the covered period to be considered eligible for forgiveness. The Loan Forgiveness Application clarifies that payroll and non-payroll costs incurred but not paid during the covered or alternative covered period are still eligible for loan forgiveness if they are paid on or before the next regular payroll or billing date. Additionally, the form and supplemental guidance clarifies that payroll costs incurred or payroll paid during the covered period qualify for forgiveness. The guidance makes clear you cannot double count payroll or non-payroll costs. Expenses can be paid after the covered period and still be included in the forgiveness calculation as long as they are paid before the next billing date. Expenses that were incurred before the covered period and paid during the covered period can be included in the forgiveness calculation. One thing that is not spelled out is whether you can include more than eight weeks of payroll by including paid compensation and incurred compensation. We believe you probably can, but there were no clear examples in the guidance.

New Limitation on Owner’s Compensation or Partner/Member Forgiveness

The Loan Forgiveness Application form and supplemental guidance introduced a new limitation on owner’s compensation that qualified for forgiveness. Compensation to owner/employees and partner/members cannot exceed the annualized amount paid in 2019 to be eligible for forgiveness. The amount that can be included in the forgiveness calculation is limited to 8/52 of 2019 compensation. Therefore, you cannot increase the compensation rate of owners above the prior year level in order to increase the amount eligible for forgiveness.

Accounting for wage/salary reduction

The Loan Forgiveness Application specifies that forgiveness will be reduced if annualized salaries or hourly wages for employees were reduced more than 25% during the covered/alternative covered period when compared to the annualized salaries or hourly wages paid between 1/1/2020 and 3/31/2020. If, however, salaries or hourly wages that were reduced by more than 25% between 2/15/2020 and 4/26/2020 are restored to pre-2/15/2020 levels prior to 6/30/2020, the Application provides a “safe harbor” calculation to eliminate the forgiveness reduction.

Instructions for how to calculate FTEs

For the first time, the SBA has defined exactly how it wants businesses to calculate their full-time equivalent (FTE) employees. Unlike other frequently used methods that use a 30-hour work week, the SBA stipulates that FTEs should be calculated using a 40-hour work week. If, however, FTEs that were reduced between 2/15/2020 and 4/26/2020 are restored to pre-2/15/2020 levels prior to 6/30/2020, the Loan Forgiveness Application provides a “safe harbor” calculation to eliminate the forgiveness reduction.

Exceptions to loan reduction related to FTEs

The Loan Forgiveness Application confirms that the following will NOT reduce a borrower’s loan forgiveness:

  • The borrower makes a good faith written offer to rehire an employee during the covered/alternative covered period that the employee rejects
  • Any employee fired for cause, voluntarily resigns, or voluntarily requests and receives reduced hours during the covered/alternative covered period
  • Any open roles resulting from the scenarios described above remained unfilled by new employees
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WBL is here to help. We will be updating our loan forgiveness calculator sometime this week. The SBA has also indicated that more clarification will be forthcoming. There are discussions underway about extending the eight-week covered period or changing the requirement that 75% of the PPP Loan must be used to cover payroll costs to be eligible for forgiveness, but these changes would require congressional action. Stay tuned. Our team continues to monitor the local, national and international news as well as detailed communications from government organizations. We share updates and recommendations with you as quickly as we can. Please contact us if we can be of help.

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