PPP Loan Forgiveness Application Released
On May 15th, The U.S. Department of Treasury’s Small Business Administration (SBA) finally released the Paycheck Protection Program (PPP) loan forgiveness application, which can be found HERE.
The application will include two critical supporting schedules: Schedule A and the worksheet to Schedule A. PPP loan borrowers will submit this application to their lenders to request forgiveness of part or all of their PPP loan.
The SBA identified in its press release that it would be issuing additional regulations and guidance to assist borrowers in completing the application and provide guidance to lenders on their responsibilities in the forgiveness process. The application itself answered early questions on how forgiveness will work:
- Clarifying the requirement that 75% of PPP be used for payroll costs. The application confirms that the requirement that a borrower spend 75% of its PPP loan on eligible payroll costs could result in a reduction in the forgiveness amount, but such failure will not be a breach of the loan requirements or result in none of the loan being forgivable. It also provides that the 75% test applies only to the forgiveness request and is not an absolute requirement that a borrower spend 75% of the total loan amount on payroll costs during the eight-week period. In addition, the application makes the 75% test an alternative to the tests for FTE reductions and reductions in compensation of employees making less than $100,000 per year, not as an additional reduction. Per the application, a borrower’s forgiveness amount is the lesser of: (1) eligible costs reduced by the CARES Act’s FTE and compensation reduction tests, (2) the borrower’s full PPP loan amount or (3) an amount equal to the eligible payroll costs incurred or paid by the borrower during the covered period divided by 0.75.
- Eligible costs include costs paid or incurred during covered period. Costs eligible for forgiveness include eligible costs paid or incurred during the borrower’s covered period, whether or not actually paid during the covered period. Using payroll costs as an example, the application indicates that the full amount of a borrower’s initial payroll paid during the covered period is an eligible cost, even if it included compensation attributable to work performed prior to the covered period. In addition, all employee compensation earned during the covered period will also be an eligible cost whether or not actually paid during the covered period—as long as the compensation is paid to the employee on or before the first payroll date following the covered period. The same concept applies to non-payroll costs.
- Certain borrowers can use actual payroll periods for determining eligible payroll costs. A borrower can elect to calculate payroll costs using an alternate period for administrative convenience that aligns with actual pay periods if the borrower’s payroll is bi-weekly or more frequent. In that case, a borrower would use the eight-week period that starts on its first payroll date following disbursement of its loan. The alternate period would also apply to the FTE comparison and compensation reduction calculations for purposes of determining any reductions in forgiveness based on those tests. However, the alternate period would not apply to non-payroll costs, which would still be measured for the eight-week period following disbursement of the loan.
- An FTE is an employee working on average 40 or more hours. The CARES Act requires that a borrower’s forgiveness amount be reduced to the extent that its average monthly full-time equivalent employees (FTEs) during the covered period is less than the average monthly FTEs during either: (a) the period from February 15, 2019 to June 30, 2019 or (b) the period from January 1, 2020 to February 29, 2020, at the borrower’s election, but it did not define “FTE”. The application states that a 1.0 FTE is any employee working 40 hours or more per week on average during the applicable period and any worker working less than 40 hours during an applicable period will be considered less than 1.0 FTE (rounded to the nearest 10th). The application also permits a borrower to simplify its FTE calculation by providing that employees who work 40 hours or more per week count as 1.0 FTEs and employees who work less than 40 hours per week count as 0.5 FTEs.
- Certain employees are excluded from the FTE reduction calculation. As suggested by previous SBA guidance, the form provides exclusions that will not reduce forgiveness for: (1) positions for which the borrower made a written good faith offer to rehire an employee during the covered period which the employee does not accept, (2) employees fired for cause during the covered period, (3) employees who voluntarily resign during the covered period and (4) employees who voluntarily request and receive a reduction in hours during the covered period, as long as the applicable position was not filled during the covered period. The application also restates the CARES Act safe harbor which provides that for FTE reductions between February 15, 2020 and April 26, 2020, forgiveness will not be reduced if by June 30, 2020, a borrower has restored its FTE levels to the levels in the pay period that included February 15, 2020.
- Any compensation reductions are based on the employee’s compensation rate. When calculating potential forgiveness reduction due to a borrower reducing the compensation level of employees making less than $100,000 per year during 2019, the application provides that the borrower compares each such employee’s average annual salary or hourly wage, as applicable, between January 1, 2020 and March 31, 2020 to the employee’s average annual salary during the covered period. If the latter is not at least 75% of the former, then there will be a reduction in forgiveness. The reduction amount is the difference between the actual compensation an employee received during the covered period and the compensation the employee would have received during the covered period if the employee’s average annual salary or hourly wage, as applicable, were 75% of what it was during the first quarter of 2020. The application also includes the CARES Act safe harbor for this test, that if an employee’s average annual salary or hourly wage as of June 30, 2020 is equal to or greater than that employee’s average annual salary or hourly wage as of February 15, 2020, then this test will not result in a reduction of forgiveness.
- The application defines the formula for applying the FTE and compensation reduction tests. To determine potential forgiveness reduction for the FTE and compensation reduction tests, the application provides that all eligible payroll and non-payroll costs are added together, then that amount is reduced by the wage reduction test amount (if any) and then any reduction due to the FTE test is applied.
- “Covered rent obligation” includes real and personal property leases. In defining non-payroll costs eligible for forgiveness, the CARES Act refers to “covered rent obligation” and defines it as “rent obligated under a leasing agreement in force before February 15, 2020.” The application clarifies that this includes such leases for both real property and personal property.
- The application establishes documentation requirements. The application also specifies the documents a borrower will be required to submit with the application and the documents a borrower must maintain, but will not be required to submit (see page 10 of the application). Such documents are also required to be maintained by the borrower for six years after the loan is forgiven or repaid in full. It also makes clear that the SBA may request and/or inspect additional documentation in connection with reviewing forgiveness or whether a borrower was eligible for a PPP loan at all.
- SBA may direct lenders to disapprove forgiveness. While the application does not provide much additional insight concerning the eligibility audits for loans in excess of $2,000,000, it includes the statement that “SBA may direct a lender to disapprove the Borrower’s loan forgiveness application if SBA determines that the Borrower was ineligible for the PPP loan.”
Borrowers preparing an application should review the form carefully as the instructions are detailed and the above bullet points are not intended to replace the form, but to summarize some of the key aspects. There are also some areas that are not entirely clear at this point, such as the requirements concerning “restoration” of FTE employee levels and employee compensation by June 30, 2020, including what will and will not qualify as such. Borrowers should be on the lookout for the additional guidance the SBA will issue, which will hopefully provide further clarity on issues such as this.
As we have seen throughout the PPP loan process, policy and guidance are slow coming, but decisions still need to be made quickly. We at BiggsKofford have correctly anticipated and interpreted the Treasury and SBA’s guidance at each step. The forgiveness aspect of this process appears to be no different in that respect. Visit our COVID-19 Resource page HERE for more information or advice along the way.