The SBA Issues PPP Loan Forgiveness Application with Additional Guidance

By Michael Warner and Jason Patterson - Franczek P.C.

May 19, 2020

On May 15, 2020, the Small Business Administration (“SBA”) issued its loan forgiveness application for businesses who received loans under the Paycheck Protection Program (“PPP”). In addition to providing instructions for calculating forgiveness amounts, the application provides some guidance on some issues loan recipients have been struggling with over the past few months. Many questions remain, however, the SBA stated it will continue to provide additional guidance in the coming weeks. Here are notable highlights from the application:

Alternative Payroll Covered Period: Loan forgiveness is calculated based on eligible costs spent during an 8-week covered period. The application provides borrowers the option to elect an “Alternative Payroll Covered Period” which begins on the first day of the pay period following disbursement of the loan. Previously, the 8-week “Covered Period” started the day following the disbursement of the loan. Employers may select either covered period but may find the Alternative Payroll Covered Period easier administratively to calculate.

Timing of Payroll Costs: Loan recipients previously expressed confusion regarding whether payroll costs had to be both “incurred” and “paid” during the covered period to be forgivable. The instructions make clear that they do not. Under the instructions, a payroll cost is incurred the day the employee’s pay is earned, while the cost is paid the day checks are distributed or employees receive an ACH credit transaction. The instructions clarify that payroll costs that are incurred but not paid during the last pay period of the covered period are eligible for loan forgiveness so long as they are paid on or before the next regular payroll date. Note* Employers who pay employees in arrears, may have to modify their pay dates to ensure these amounts remain forgivable.

Eligible Non-Payroll Costs: The application clarifies the following regarding eligible non-payroll cost:
•    Eligible non-payroll costs must be paid or incurred during the covered period and paid on or before the next regular billing cycle, even if the billing date is after the covered period.  
•    Covered rent or lease payments are extended to include both real and personal property subject to a lease agreement in force before February 15, 2020.
•    Non-payroll costs that were both paid and incurred during the covered period should only be counted once.
•    Despite requests from industry groups for increased flexibility, consistent with prior SBA guidance, non-payroll costs cannot exceed 25% of the forgivable loan amount.

Average Full-time Equivalents for Loan Forgiveness Reduction Formula: Loan forgiveness is reduced, in part, by a percentage of the reduction in average full-time equivalent employees (FTE) that occurs during the 8-week covered period. The instructions provide a worksheet to guide the employer through the reduction formula. The instructions also clarify how employers may count their average FTEs for purposes of the reduction formula. For each employee, the employer can take 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. As an alternative, employers may simply assign a 1.0 for employees who work 40 hours or more per week, and 0.5 for employees who work fewer hours per week. In addition, the instructions guide employers through determining whether they qualify for a safe harbor provision which provides that employers who reduced staffing levels between February 15, 2020 and April 26, 2020 can still receive loan forgiveness if by June 30, 2020, the employer restores staffing levels to where they were as of February 15.   

FTE Reduction Exceptions: The application incorporates recent guidance from the SBA which provided that reductions in FTE during the covered period will not result in loan forgiveness reduction if during the covered period, the employer made a good-faith, written offer to rehire an employee who was either terminated for cause or voluntarily resigned or requested reductions in hours during the covered period, which was rejected by the employee.

Salary/Hourly Wage Reduction: Loan forgiveness is also reduced if an employer reduces wages by more than 25% during the Covered Period as compared to the period of January 1, 2020 through March 31, 2020. The instructions provide a detailed worksheet to assist employers in determining whether wages decreased by more than 25% during the covered period. In addition, the CARES Act includes a safe harbor provision which provides that employers who reduce wages by more than 25% during the covered period can still receive full loan forgiveness if they restore wages by June 30, 2020. The worksheet guides employers through determining whether they meet the safe harbor provision.

Supporting Documentation: The instructions identify various documents employers can provide to verify eligible expenditures:

•    Payroll Cost/FTE

o    Bank account statements or third-party payroll service provider reports documenting the amount of cash compensation paid to employees;
o    Payroll tax filings;
o    State quarterly business and individual employee wage reporting and unemployment insurance tax filings.

•    Non-payroll Costs

o    Copy of lender amortization schedule and receipts or canceled checks verifying mortgage interest payments;
o    Copy of current lease agreements and receipts or canceled checks verifying eligible payments;
o    Copy of utility invoices and receipts, canceled checks or account statements verifying payments.

Supporting Documentation Retention: The instructions provide that for a period of 6 years after the loan is forgiven or repaid in full, employers must maintain all records relating to its PPP loan, including documentation submitted with its PPP loan application, documentation supporting certifications as to the necessity of the loan request and its eligibility for a PPP loan, documentation necessary to support the employer’s loan forgiveness application, and documentation demonstrating the employer’s material compliance with PPP requirements. In addition, employers must permit authorized representatives of the SBA, including its Office of Inspector General, to access such files upon request.

We anticipate further guidance from the SBA on the loan forgiveness application and process. We will continue to provide updates as they become available.