Important Highlights from the PPP Forgiveness Application

Important Highlights from the PPP Forgiveness Application

The SBA released the first draft of the Forgiveness Application and related Instructions on Friday evening (5/15/2020).  The application and instructions can be found HERE.

Most of the Forgiveness Application and Instructions follow the same calculations and interpretations that we have been providing our clients to maximize their forgiveness planning. However, this new application provides some new clarifications and changes to the forgiveness process.

Here are some important changes to note:

Owner Compensation Limit:

For the first time, the Forgiveness Application indicates that Owner Compensation will be limited to an amount equivalent to 8-weeks of 2019 compensation. We knew owner compensation would be limited to $15,385, which is 8-weeks of $100,000. But the application now adds this additional limitation. Example: If an owner’s 2019 W-2 was only $60,000, the 8-week limit would be $9,231 (60,000 / 52 X 8), rather than the $15,385 limitation on all other employees.  If an owner’s 2019 W-2 was $100,000 or more, then the limit will be $15,385.


Cash AND Accrual Accounting Allowed:

Prior to release of this application there was much debate about whether the law allowed for cash-method or accrual-method calculations of eligible expenses. The application instructions indicate we can actually use BOTH.  Borrowers may use cash-method (for payments actually made) on the front-end of the 8-week period, and then accrue expenses at the end of the 8-week period (as long as the bill is paid by the normal due date).  Example: Let’s say a company received their PPP loan on April 10th. The company’s 8-week period runs from April 10 through June 4.  Now, let’s say the company typically pays $500 per month in utilities. They pay the March utility bill on April 14. They pay the April utility bill on May 14. But they don’t receive the May or June bills in time to pay them before June 4 (end of the 8-week period). The rules now allow the company to include both payments made PLUS they can accrue the May utility bill and 4-days of June’s bill. This will result in the company receiving $1,567 of eligible utilities expense. ($500 for each March, April and May. Plus 4 days prorated for June).


Additional Payrolls Included:

The same Cash AND Accrual method of accounting works for Payroll as well. This means eligible Payroll Costs include any payroll that was paid at the beginning of the 8-week period (even for wages earned before the PPP loan date). Then, you get to accrue payroll at the end to include all wages earned through the last day of your 8-week period (even if the payroll is actually paid sometime later).  This will naturally allow most companies to include more than 8-weeks worth of payroll in their 8-week window.


Choose Your 8-Week Payroll Period:

But, there’s more good news! The SBA instructions made it even better for employers with pay cycles of 2-weeks or less. Employers that pay weekly or bi-weekly may choose an “Alternative Payroll Covered Period” that aligns with their normal payroll cycle.  This will allow an employer with a bi-weekly pay cycle to effectively maximize their Payroll Costs and claim a full 10-weeks of payroll, in an 8-week period.  Here’s the example:  Assume an employer received their PPP loan on April 6, has a bi-weekly payroll cycle that ended on Sunday April 12, and they cut paychecks to employees on the following Friday. This company could choose an “Alternative Payroll Covered Period” to begin on Monday, April 13 through Sunday, June 7. They would get to claim the entire payroll that was paid on Friday April 17 (which was for 2-weeks of payroll incurred before the 8-week period). Plus they may claim a full 8-weeks of payroll ending on June 7th, even accruing the last payroll that is paid on Friday, June 12 (after the 8-week period).  Note: While these expanded rules will allow additional eligible payroll costs for most employees making less than $100,000 per year, the total amount that can be claimed for any one employee is still capped at $15,385.


Full-Time Equivalent (FTE) is defined as 40 hours:

Prior to these instructions, we didn’t know what the SBA would define as “full-time”. Some had assumed they would follow the Department of Labor definition of 30 hours. But these instructions indicate that 40-hours is considered “full-time”.  Anyone that worked more than 40 hours per week is still considered 1.0.  Less than 40 hours should be calculated as an FTE down to 1 decimal point. The instructions also allow use of a “simplified method”, where all employees with less than 40 hours can be counted as 0.5 FTE. If the FTE calculation becomes a problem, a company may want to calculate FTE’s using both methods and use the better answer.


New FTE Safe-Harbors:

There appears to be 2 different exclusions from the FTE calculations: 1) If you have not reduced the number of employees or hours paid between 1/1/2020 and the end of the Covered Period, then you automatically get 100% FTE ratio. 2) If you reduced your employees between 2/15/20 and 4/26/20, but then you restore your FTE’s by 6/30/20 to the same levels as on 2/15/20 – you can also use 100% FTE ratio.  Finally, if neither safe harbor applies, then you can use the FTE calculation methods described in the law.  When calculating FTE’s during the Covered Period, you can also add employees that you bring back by 6/30/2020, add any employee that quits or reduces hours voluntarily, and add any employee that was laid-off and then turned down the offer to return to work.


Wage Reduction Safe Harbor:

There is a similar “safe harbor” for the Salary / Hourly Wage Reduction.  If an employee’s wages or hours were cut during the Covered Period (even more than 25%), but by 6/30 you restore them to the same or greater wage that they were earning on 2/15, then you can skip the wage reduction calculation for that employee.


These are a few of the added clarifications and rules that may impact your forgiveness planning during the 8-week period.  We expect there will be more clarifications and added instructions that will continue to refine the rules. As always, we’ll keep you informed as quickly as possible when the rules are released.

We are also gearing up to assist with the preparation of these Forgiveness Applications when the rules are finalized, and your 8-week window is complete. You can count on BiggsKofford to help you complete and submit your Forgiveness Application when the time comes.

In the meantime, if you have any questions about these ever-changing rules, please give us a call.

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