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SBA Issues Loan Forgiveness Application for Paycheck Protection Program

    Client Alerts
  • May 20, 2020

Late on the evening of Friday, May 15, the Small Business Administration (SBA) released the loan forgiveness application (available here) that borrowers of a Paycheck Protection Program (PPP) loan must use to determine the forgivability of that loan.

As noted in our previous alert on general aspects of PPP forgivability (available here), additional clarity regarding the details of the forgiveness determination has been sorely absent, making planning by borrowers difficult. While various questions still linger, the loan forgiveness application is helpful in answering some ambiguities in the laws, regulations, and guidance provided so far. Furthermore, we expect that additional guidance in the form of an interim final rule will be forthcoming. Since the application provides that it will be governed by the rules and guidance published up until the date of submission, we encourage borrowers to stay abreast of future pronouncements.

Highlights from the loan forgiveness application include:

Adjustments for Full-Time Equivalency (FTE) and Salary/Hourly Wage Reductions and Corresponding Safe Harbors

The “Instructions for PPP Schedule A Worksheet,” found on page 7 of the application provide detailed instructions for the FTE employee headcount and wage reductions calculations that may reduce forgivability.

  • FTE employees are to be calculated by determining the average number of hours paid per week (computed with a maximum of 40 hours per employee), dividing that by 40, and rounding (up or down) the total to the nearest tenth. That this calculation is based on hours “paid,” and not hours “worked,” is critical for some borrowers that may have paid employees who did not actually work during the covered period. Borrowers should consult with their payroll providers to be sure that the records provided when applying for forgiveness reflect the number of hours for which the employees were paid.
  • The application also provides a “simplified” alternative method for calculating the number of FTE employees. Borrowers should compare the first method against the simplified method for counting FTE employees to see which total is more beneficial for their individual situation. 
  • While it was previously unknown whether salary/hourly wage reductions that may reduce forgiveness would be based on aggregate wages/compensation, the instructions make it clear this will be calculated on an individual employee basis. However, when examining such reductions, borrowers only need to review the compensation of employees that (a) had annualized compensation of less than $100,000 in every single pay period in 2019 (i.e., those that are included in Table 1, but not those employees in Table 2 of the Schedule A Worksheet) and (b) whose pay was reduced by more than 25% of their annualized pay during the first quarter of 2020.
  • Previously, it was also unclear whether the safe harbors contained in Section 1106(d) of the CARES Act (whereby employers could “restore” headcount and salary/wage reductions that occurred between February 15, 2020 and April 26, 2020 by June 30, 2020) would be an all-or-nothing or proportional safe harbor. The loan forgiveness application makes it clear that such safe harbors are in fact all-or-nothing tests where the reductions are ignored only if (a) the FTE employee count as of February 15 is restored in full by June 30 and/or (b) for an individual employee, such employee’s average annual salary or hourly wage as of June 30, 2020 is greater than or equal to such employee’s compensation as of February 15, 2020. 
  • On May 3, 2020, the U.S. Treasury Department and SBA published PPP FAQ #40 (available here), excluding from the CARES Act’s loan forgiveness reduction calculation any laid-off employees whom the borrower offered to rehire (for the same salary/wages and same number of hours) but who rejected such offer of reemployment. The loan forgiveness application recognizes this “FTE Reduction Exemption,” but also expands it. Now, a borrower may disregard, and forgivability will not be reduced, for any employees who during the covered period or the alternative payroll covered period (explained below) were fired for cause, voluntarily resigned, or voluntarily requested and received a reduction of their hours.

Alternative Payroll Covered Period

Prior to the publication of the loan forgiveness application, the rules provided that all PPP funds must be spent during the eight-week “covered period” that begins when the first PPP proceeds are deposited in a borrower’s account. However, in the loan forgiveness application, SBA has provided that “for administrative convenience, 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”).” Borrowers should note that the alternative payroll covered period only applies for payroll costs, and it does not apply to other potentially forgivable costs related to mortgage interest, rent, and utilities.

Importantly, while there has been some talk in Congress of lengthening the eight-week covered period to be as long as 24 weeks to help businesses that are closed due to stay-at-home orders (particularly restaurants), the loan forgiveness application does not provide any such extension. Such a change would need to occur through an act of Congress and until such change in the law occurs, the covered period is still eight weeks, although borrowers have some flexibility on when that may begin thanks to the new alternative payroll covered period.

Costs Paid and/or Incurred During the Covered Period

Uncertainty regarding the accounting treatment of eligible expenses during the covered period has lingered due to the wording of the CARES Act, which provides that PPP funds may be forgiven in an amount equal to certain “costs incurred and payments made” during the covered period. This implied that to be eligible for forgiveness, loan proceeds must be used to pay expenses that were both incurred and paid in the covered period, but they could not be used for costs that were paid during the covered period but incurred outside of it, or vice versa. The loan forgiveness application has adopted a hybrid approach to this question, with the rules differing for payroll costs versus forgivable non-payroll costs and allowing forgivability for certain expenses actually paid after the covered period (or incurred prior to it). For detailed instructions, please see page 2 of the application under the heading “Summary of Costs Eligible for Forgiveness.”

Other Notable Points

  • The instructions to lines 2-4 of the main application provide that borrowers are not required to report payments for non-payroll costs that they do not want to be included in the forgiveness amount. This is helpful if borrowers need to reduce their non-payroll expenses relative to payroll expenses to satisfy the requirement that at least 75% of the PPP proceeds be spent on payroll costs.
  • Similarly, lines 10 and 11 of the main application provide that if less than 75% of the loan proceeds are used on payroll costs, the forgivable amount is reduced to a figure so that the amount actually spent on payroll costs is equal to exactly 75% of the forgivable amount. This appears to lay to rest previous speculation that all forgivability may be lost if less than 75% of the loan proceeds were used for payroll costs. However, borrowers should review the loan documentation from their bank that they signed because spending less than 75% of the proceeds on payroll costs may constitute an event of default and trigger repayment obligations to the bank, notwithstanding the forgiveness application.
  • Mortgage interest and rent payments can include both real and personal property, so payments for items such as copiers and vehicles may be included in addition to those for real property. 
  • The instructions to line 9 on Schedule A direct borrowers to “[e]nter any amounts paid to owners (owner-employees, a self-employed individual, or general partners). This amount is capped at $15,385 (the eight-week equivalent of $100,000 per year) for each individual or the eight-week equivalent of their applicable compensation in 2019, whichever is lower.”
    • Since this instruction does not require that the amounts be paid as “compensation,” presumably, guaranteed payments to partners would be included.
    • Also, it is notable that such owner payments are limited to the lower of $15,385 or the eight-week equivalent of their applicable compensation in 2019. This prevents an owner from increasing their compensation during the covered period to maximize forgiveness by limiting the amount included in the forgivable amount to 8/52 of the owner’s compensation for 2019.
  • Page 10 of the application lists certain documents that borrowers are required to submit or retain in connection with the application for forgiveness. The records required to be retained must be kept in a borrower’s files for six years after the date the loan is forgiven or repaid in full, and the borrower must permit authorized representatives of SBA, including representatives of its Office of Inspector General, to access such files upon request. Borrowers should note this potentially burdensome record-keeping obligation going forward and ensure proper record maintenance practices are in place.

The situation for each PPP borrower will be unique and discrete issues will come to light as a borrower’s loan forgiveness application is put together. Therefore, we suggest that individual borrowers, regardless of how long they have had PPP funds, complete the application to the extent possible to help forecast the level of forgivability. Working with accountants, payroll providers, and other financial advisors will be key to gathering the data required to complete the application and getting a clear picture of how the rules will affect forgivability.

We have a team of people at Parker Poe who are tracking all of this constantly. For more information, please contact us or your regular Parker Poe contact. You can also find our other COVID-19 related alerts here.