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PPP Loan Forgiveness Details Revealed by SBA - May 22, 2020

The Small Business Administration recently released the application for the Paycheck Protection Program (“PPP”) loan forgiveness which describes how some of the tests and definitions would be applied under the CARES Act. 

Businesses who were successful in their PPP applications and wish to get forgiveness for the loan should pay close attention to these rules.

Covered Period

The CARES Act allowed certain expenses to be forgiven if paid for within an eight-week period beginning on the date a borrower first received their PPP funds. However, SBA’s loan forgiveness application allows borrowers with a biweekly or more frequent payroll schedule to use an alternate eight-week period only for payroll expenses. This period begins on the first day of a borrower’s first pay period following the date it receives funds. This alternate period allows a borrower to align the eight-week period with its payroll. 

Eligible Payroll Costs

A borrower is eligible for forgiveness for the payroll costs paid and incurred during the eight-week period. Payroll is considered paid on the day the checks 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 covered period are eligible for forgiveness if paid on or before the next regular payroll date. This seems to suggest that a borrower may be able to receive forgiveness beyond the eight-week period depending on the timing of the payroll and when the eight-week period began. 

Nonpayroll Costs Eligible for Forgiveness

In addition to covered mortgage and rent obligations, the application specifically lists covered utility payments to include electricity, gas, water, transportation, telephone, or internet access for which service began before February 15, 2020. 

A borrower is eligible for forgiveness of the nonpayroll costs paid during the covered period or incurred during the eight-week period and paid on or before the next regular billing date, even if the billing date is after the eight-week period. Eligible nonpayroll costs cannot exceed 25% of the total forgiveness amount.

High-Paid Wage Earner Cap

Employers are only able to receive $15,385 in forgiveness over the eight-week period for each employee who earns more than $100,000 annually. There was some question as to whether the CARES Act intended for the $100,000 cap to be $100,000 during the eight-week period or pro-rated but the instructions have resolved any further dispute.

FTE Calculation

The instructions specify that the average FTE per employee is calculated by dividing the average number of hours paid per week by 40 and rounding the total to the nearest tenth. The maximum for each employee is capped at 1.0. A borrower may elect to assign a 1.0 for all employees who work 40 hours or more per week and 0.5 for employees who work fewer hours. This gives borrowers a more flexible approach - allowing them to choose the calculation method, depending on which method will be most beneficial to them.

FTE Reduction in Forgiveness Exception 

If a borrower has fewer FTEs during its eight-week period than it had during a specified reference period prior to COVID-19, the forgivable portion of the PPP loan is reduced by the fraction of the eight-week FTE number over the reference period FTE number. If a borrower qualifies for the safe harbor exemption, there is no reduction under this rule. The safe harbor is met if:

  1. the borrower reduced its FTE employee levels in the period beginning February 15, 2020, and ending April 26, 2020; and
  2. the borrower then restored its FTE employee levels by no later than June 30, 2020, to its FTE employee levels in the borrower’s pay period that included February 15, 2020. 

While the CARES Act included this exception, the application helps give further detail into how it will be used.

Salary/Hourly Wage Reduction in Forgiveness

The forgivable portion of the PPP loan is also reduced if any employee’s salary during the eight-week covered period was reduced by more than 25% as compared to that employee’s salary during the period from January 1, 2020, to March 31, 2020. The instructions ask borrowers to make this determination by entering either an annual salary or hourly wage. Additionally, employers can avoid the reduction by restoring employees’ salary or hourly wage amounts prior to June 30, 2020, using the same safe harbor as described above.

The Big Picture

Besides these additional clarifications, the application has also laid out the documentation that is required to be submitted to the bank and also what documentation the borrower must keep internally by for audit purposes. 

PPP borrowers with questions about completing the loan forgiveness application should consult with their legal and accounting advisors. With millions of dollars on the line, there is no room for errors.

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