SBA AND TREASURY RELEASE PPP LOAN FORGIVENESS APPLICATION
On May 15, 2020, the Small Business Administration (SBA) and Department of Treasury released the Paycheck Protection Program (PPP) Loan Forgiveness Application and Instructions (Application). The Application is available here: https://www.sba.gov/document/sba-form--paycheck-protection-program-loan-forgiveness-application.
While the Application provides much-needed guidance on how to apply for loan forgiveness and calculate loan forgiveness amounts, the SBA has stated that it will also soon issue regulations and guidance to further assist borrowers and to provide lenders with guidance on their responsibilities. We recommend that borrowers calculate their potential loan forgiveness amount now based on the Application. If a PPP loan is not forgiven, in whole or in part, the unforgiven amount of the loan bears interest at 1% per annum, with no loan payments for the first six months and matures in two years.
The Application includes step-by-step instructions for calculating loan forgiveness amounts. Highlighted below are some of the key elements of the loan forgiveness amount calculation and documentation requirements.
Alternative Time Period for Calculating Payroll Costs
To be eligible for forgiveness, qualified payroll and non-payroll costs must be “incurred or paid” during an eight-week period (Covered Period). The standard Covered Period begins on the date the PPP loan was disbursed. The alternative Covered Period is available for borrowers with a bi-weekly (or more frequent) payroll. Those borrowers can elect to use a Covered Period that begins on the first day of their first pay period following their PPP loan disbursement.
The alternative Covered Period only applies to payroll costs. Non-payroll costs must still be incurred or paid during the standard Covered Period.
Summary of Costs Eligible for Forgiveness
Costs eligible for loan forgiveness include eligible payroll costs and eligible non-payroll costs (Qualified Costs).
- Eligible payroll costs. Borrowers are generally eligible for forgiveness for the payroll costs paid and payroll costs incurred during the applicable Covered Period (“payroll costs”). Payroll costs are considered paid on the day that paychecks are distributed, or the borrower originates an ACH credit transaction. Payroll costs are considered incurred on the day that the employee’s pay is earned. Payroll costs incurred but not paid during the borrower’s last pay period of the applicable Covered Period are eligible for forgiveness if paid on or before the next regular payroll date. Otherwise, payroll costs must be paid during the applicable Covered Period. For each individual employee, the total amount of cash compensation eligible for forgiveness may not exceed an annual salary of $100,000, as prorated for the applicable Covered Period. Payroll costs that were both paid and incurred are counted only once.
- Eligible nonpayroll costs. Nonpayroll costs eligible for forgiveness consist of:
- mortgage obligations: payments of interest (not including any prepayment or payment of principal) on any business mortgage obligation on real or personal property incurred before February 15, 2020 (“business mortgage interest payments”);
- covered rent obligations: business rent or lease payments pursuant to lease agreements for real or personal property in force before February 15, 2020 (“business rent or lease payments”); and
- covered utility payments: business payments for a service for the distribution of electricity, gas, water, transportation, telephone, or internet access for which service began before February 15, 2020 (“business utility payments”).
An eligible nonpayroll cost must be paid during the applicable Covered Period or incurred during the applicable Covered Period and paid on or before the next regular billing date, even if the billing date is after the applicable Covered Period. Eligible nonpayroll costs cannot exceed 25% of the total forgiveness amount. Nonpayroll costs that were both paid and incurred are counted only once.
Calculation of the Loan Forgiveness Amount
The Application provides that the loan forgiveness amount is the smallest of the following amounts:
- (Qualified Costs – Total Wage Reductions) multiplied by the FTE Reduction Quotient
- The total PPP loan amount
- The total payroll costs incurred or paid during the Covered Period divided by .75
The amount of Total Wage Reductions is from PPP Schedule A, line 3. The FTE Reduction Quotient is from PPP Schedule A, line 13.
FTE Reduction Exceptions
The borrower’s loan forgiveness amount is not reduced for:
- Any positions for which the Borrower made a good-faith, written offer to rehire an employee during the applicable Covered Period which was rejected by the employee; and
- Any employees who during the applicable Covered Period
- Were fired for cause;
- Voluntarily resigned; or
- Voluntarily requested and received a reduction of their hours
FTE Reduction Safe Harbor
A safe harbor under applicable law and regulation exempts certain borrowers from loan forgiveness reduction based on FTE employee levels. Specifically, the borrower is exempt from loan forgiveness reduction if both of the following conditions are met:
- The borrower reduced its FTE employee levels in the period beginning February 15, 2020 and ending April 26, 2020; and
- The borrower then restored its FTE employee levels by not later than June 30, 2020 to its FTE employee levels in the borrower’s pay period that included February 15, 2020
Documents That Must Be Submitted with the Application
- Payroll: Documentation verifying the eligible cash compensation and non-cash benefit payments from the applicable Covered Period Covered Period consisting of each of the following:
- Bank account statements or third-party payroll service provider reports documenting the amount of cash compensation paid to employees.
- Tax forms (or equivalent third-party payroll service provider reports) for the periods that overlap with the applicable Covered Period:
- Payroll tax filings reported, or that will be reported, to the IRS (typically, Form 941)
- State quarterly business and individual employee wage reporting and unemployment insurance tax filings reported, or that will be reported, to the relevant state.
- Payment receipts, cancelled checks, or account statements documenting the amount of any employer contributions to employee health insurance and retirement plans that the borrower included in the forgiveness amount.
- FTE: Documentation showing (at the election of the borrower):
- the average number of FTE employees on payroll per month employed by the Borrower between February 15, 2019 and June 30, 2019;
- the average number of FTE employees on payroll per month employed by the Borrower between January 1, 2020 and February 29, 2020;
- in the case of a seasonal employer, the average number of FTE employees on payroll per month employed by the Borrower between February 15, 2019 and June 30, 2019; between January 1, 2020 and February 29, 2020; or any consecutive twelve-week period between May 1, 2019 and September 15, 2019. The selected time period must be the same time period selected for purposes of completing PPP Schedule A, line 11, of the Application. Documents may include payroll tax filings reported, or that will be reported, to the IRS (typically, Form 941) and state quarterly business and individual employee wage reporting and unemployment insurance tax filings reported, or that will be reported, to the relevant state. Documents submitted may cover periods longer than the specific time period.
- Nonpayroll: Documentation verifying existence of the obligations/services prior to February 15, 2020 and eligible payments from the applicable Covered Period.
- Business mortgage interest payments: Copy of the lender amortization schedule and receipts or cancelled checks verifying eligible payments from the standard Covered Period; or lender account statements from February 2020 and the months of the standard Covered Period through one month after the end of the standard Covered Period verifying interest amounts and eligible payments.
- Business rent or lease payments: Copy of the current lease agreement and receipts or cancelled checks verifying eligible payments from the standard Covered Period; or lessor account statements from February 2020 and from the Covered Period through one month after the end of the standard Covered Period verifying eligible payments.
- Business utility payments: Copy of invoices from February 2020 and those paid during the standard Covered Period and receipts, cancelled checks, or account statements verifying those eligible payments.