On the evening of May 15, the Small Business Association (SBA) released its Loan Forgiveness Application for the Paycheck Protection Program (PPP) loan. The application provides some answers to questions that borrowers have been asking, but still leaves many questions open. We will monitor changes to this application, which will most likely occur. In the meantime, some helpful interpretations of the requirements for PPP loan forgiveness include:
- A sliding scale of forgiveness, which was not clear in the statute or previous guidance, now appears to be included. Previously, it appeared possible that the SBA would not forgive any portion of a PPP loan if 75% of the entire loan amount was not expended on payroll costs. The application appears to alleviate this concern, instead solely applying the 75% rule to the calculation of the maximum loan forgiveness amount. The calculation listed in the application does not expressly state this, but the borrower must sign a certification stating that no more than 25% of the “loan forgiveness amount requested” has been spent on non-payroll costs. Clarification is needed regarding the requirement in Interim Final Rule 3 that states “[a]t least 75 percent of the PPP loan proceeds shall be used for payroll costs” and how this works with this newly issued guidance within the loan forgiveness application.
- Clarification related to interest being included within the forgiveness amount is needed. Within the CARES Act and Interim Final Rule, interest on the forgivable portion is included; however, the application does not mention this.
- The introduction of an Alternative Payroll Covered Period (the "alternative period") for payroll costs (for borrowers with a bi-weekly or more frequent payroll) that can be used at the borrower’s election. With this election, borrowers may treat the first day of the eight-week period as beginning on the first day of the pay period following the PPP loan disbursement. Additionally, payroll costs incurred but not paid during the borrower’s last pay period—either under the normal eight-week period or the alternative period—are eligible if paid on or before the next regular payroll date, hence borrowers do not need to make special changes to payroll disbursements. Payroll costs are considered paid on the day the paycheck is distributed or the origination date of the ACH credit transaction.
- Non-payroll forgivable PPP loan expenses include covered mortgage interest payments, covered rent obligations, and covered utility payments. The application states that those expenses paid during the covered period (eight weeks from loan origination) are qualifying expenses. Furthermore, eligible expenses include amounts incurred during the eight-week covered period but paid after the eight-week covered period, as long as payment is made by the next regular due date. Note that if a borrower elects to use the alternative payroll period described above, the alternative period is not used for eligible non-payroll expenses—the period applicable to those expenses continues to be the eight week period beginning on the loan disbursement date.
- We now know that 40 hours per week is the standard being used to determine whether an employee is a full-time employee. An employee that works more than 40 hours per week is still considered a single full-time equivalent (FTE). The SBA has provided a simplified method to calculate FTE by allowing all employees who work less than 40 hours per week to be treated as 0.5 FTE.
- One item in need of further clarification relates to compensation for any owner-employee or self-employed individual/general partner. The application states that compensation for such persons cannot exceed eight weeks of 2019 compensation. This is interesting since the calculation method for the loan amount used the trailing 12 months, not 2019 compensation.
- The application of the rules governing loan forgiveness reductions have been altered. Several factors can reduce the amount of PPP loan forgiveness, the sequence of which would have a significant impact on the amount of forgiveness. In discussions with accountants, we note that the order now provided is favorable to borrowers. The sequence in which the factors must be applied is as follows: first, salary/wage reduction; second, FTE quotient reduction; and third, 75% payroll requirement.
- Borrowers have also been provided with relief regarding how FTE reductions affect forgiveness. The application states that FTE reductions do not reduce loan forgiveness with respect to: (a) a position that is not filled after the borrower made a good faith written attempt to rehire an employee and that employee rejects the offer, (b) any employee who is fired for cause and not replaced, (c) any employee who voluntarily resigns and is not replaced, or (d) any employee who voluntarily requests a reduction in hours.
- Borrowers who, along with their affiliates, received PPP loans in excess of $2 million in the aggregate are required to check a box. Borrowers may want to revisit the affiliation waiver rules to confirm if it needs to check this box or is exempt from doing so.
The SBA Task Force will continue to take a deeper dive into the newly released application and provide updates as needed. For further information, please contact any member of Taft’s SBA Task Force.
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