On May 15, 2020, the Small Business Administration (“SBA”) released its loan forgiveness application for the Paycheck Protection Program, or “PPP.” In addition to instructing borrowers how to apply for forgiveness of their PPP loans, the application provides new guidance on loan forgiveness. The SBA also announced in a press release that it will soon issue regulations and guidance to further assist borrowers and lenders.
The PPP is a lending program created by the CARES Act, signed into law on March 27, and administered by the SBA. One of the main benefits of the PPP program is that borrowers are entitled to forgiveness of PPP loans that are used for eligible costs during the eight-week period after receiving the PPP proceeds. However, the total amount that may be forgiven is subject to certain restrictions. For example, the amount forgiven will be reduced if the Borrower has reduced its number of full-time equivalent employees (“FTEs”) or its salary or wage rates. Additionally, at least 75% of the total forgiveness must be attributable to payroll costs.
We provided an overview of the CARES ACT on March 27, and provided updates on April 3, April 17, and most recently on April 29. Please click here to see all of Prince Lobel’s client alerts relating to COVID-19.
The 11-page application consists of the PPP Loan Forgiveness Calculation Form, a signature page with required certifications, Schedule A (which calculates the FTE and salary/wage based reductions), Schedule A Worksheet (which helps Borrowers to complete Schedule A), a list of required documentation for submission and retention, and the optional PPP Borrower Demographic Information Form.
The application instructs employers to determine the forgivable amount of PPP loans as follows:
1. Calculate Total Eligible Costs: Add up the eligible payroll and nonpayroll costs incurred or paid during the eight-week (56-day) Covered Period (or “Alternative Payroll Covered Period” as defined below).
2. Apply Forgiveness Reduction Calculations:
(a) Subtract the salary or wage reduction (as determined in Schedule A) from the amounts determined under step 1 and then multiply that by the FTE Reduction Quotient (also determined in Schedule A). This accounts for the loan forgiveness reductions based on FTE/salary reductions.
(b) Separately, divide just the total eligible payroll costs used in step 1 by 0.75. This accounts for the requirement that payroll costs must be at least 75% of the total loan forgiveness.
- Note – Schedule A reveals a number of clarifications of how to identify FTEs, including the following.
- An FTE is defined as an employee who works a 40-hour work week. The SBA had not previously stated how many hours would qualify an employee as an FTE; observers had been assuming a 30-hour work week would suffice, based on analogous IRS regulations.
- The amount of the Borrower’s loan forgiveness will not be reduced due to reductions in the number of FTEs as to (1) any employees to whom the Borrower makes a good-faith written offer to rehire during the Covered Period (or Alternative Payroll Covered Period), which the employee rejects, and (2) any employees that were (a) fired for cause, (b) voluntarily resigned or (c) voluntarily requested and received a reduction of hours (which could include employees requesting leave or fewer hours for childcare or medical purposes).
- Note that the borrower must document in writing its offer to rehire and the employee’s rejection. Please consult one of Prince Lobel’s attorneys if you need advice on this.
- There is some ambiguity as to whether these exceptions apply to employees that made more than $100,000 in 2019. Table 2 in the Schedule A Worksheet does not include a row for “FTE Reduction Exceptions.” It is unclear whether SBA intentionally omitted this from the form.
- Determine Total Loan Forgiveness: The lesser of the amounts determined under 2(a) and 2(b) is the total loan forgiveness amount.There is currently no due date to submit the application, but we do not expect that borrowers will apply (and lenders may not be ready to accept applications) before June 30th. That is the last day under certain criteria to rehire or reinstate salary and wages to avoid a loan forgiveness reduction. Also, as previously noted, SBA intends to issue further guidance, which suggests that it may be prudent to wait before receiving such guidance before submitting the application.Other Clarifications and Changes
- The SBA has responded to many questions about the difference between the dates payroll is paid and the start of the eight-week period. The application introduces the concept of Alternative Payroll Covered Period, which is the eight-week (56-day) period beginning on the first payday following receipt of the PPP loan proceeds. Payroll costs may be considered paid on the day that paychecks are distributed or alternatively incurred on the day that the employee’s pay is earned. Payroll costs incurred, but not paid during the Covered Period (or Alternative Payroll Covered Period), are eligible for forgiveness, so long as they are paid on or before the next regular payday. While the application doesn’t say so expressly, it seems sensible not to include payroll costs incurred but paid after the Covered Period (or Alternative Covered Period) if the Borrower has not been consistently reporting its payroll costs on its application using the incurred method as discussed below in Example 1(c) and 1(d). Borrowers may elect to use this period just for determining eligible payroll costs instead of the Covered Period (which of course begins the date that borrowers receive their PPP proceeds) as to avoid requiring a special payroll.
- Similarly, the SBA has responded to many questions about the costs eligible for forgiveness. The application states that costs are eligible for forgiveness when either paid or incurred during the Covered Period (or Alternative Payroll Covered Period). Again it can be inferred that the Borrower may choose how those costs are to be included on its application. We recommend that borrowers indicate on their applications whether the eligible costs are determined on a paid or incurred basis and that all borrowers use only one of the methods consistently throughout the calculations, so as to prevent double counting or including costs beyond eight weeks’ of expenses.
- Example 1: Borrower received its PPP proceeds on 4/27. It is on a bi-weekly payroll cycle. Its next regular payday is scheduled for 5/1, which covers the wages earned by its employees during the pay period of 4/12 – 4/25 as follows:
|Pay Period Start Date||Pay Period End Date||Pay Date|
- Example 1(a): If the Borrower elects to use the paid basis with respect to the Covered Period (which means the 56-day period from 4/27 – 6/21), then the Borrower can include as part of its payroll costs paychecks issued on 5/1, 5/15, 5/29, and 6/12
- Example 1(b): Same scenario, except now the Borrower elects to use the paid basis with respect to the Alternative Payroll Covered Period (which means the 56-day period from 5/1 – 6/25). This means the Borrower can include as part of its payroll costs paychecks issued on 5/1, 5/15, 5/29, and 6/12.
- Example 1(c): Same scenario, except now the Borrower elects to use the incurred basis with respect to the Covered Period (4/27 – 6/21). The 5/1 paycheck covers a pay period (4/12 – 4/25) that took place before 4/27, so it was not a payment incurred during the Covered Period. Thus, the first paycheck the Borrower can include as part of its payroll costs is the 5/15 paycheck, followed by the 5/29, 6/12, as well as the 6/26 paycheck. Even though the 6/26 paycheck was paid after the Covered Period, it is still eligible for forgiveness because this paycheck covers the pay period of 6/7 to 6/20, during the Covered Period.
- Example 1(d): Same scenario, except now the Borrower elects to use the incurred basis with respect to the Alternative Payroll Covered Period (5/1 – 6/25). The 5/1 paycheck covers a pay period (4/12 – 4/25) that took place before 5/1, so it was not a payment incurred during the Covered Period. Thus, the first paycheck the Borrower can include as part of its payroll costs is the pro-rated portion of 5/15 paycheck that covers only the pay period from 5/1 to 5/9. The Borrower can also include the entire 5/29, 6/12, and 6/26 paychecks, and a pro-rated portion of the 7/10 paycheck that covers only the pay period from 6/21 to 6/25. Due to the administrative difficulty of using the incurred basis with respect to the Alternative Payroll Covered Period, we recommend Borrowers use the paid basis if electing to use the Alternative Payroll Covered Period.
- Payroll costs per owner-employee or self-employed individual/general partner cannot exceed $15,385 (eight-week equivalent of $100,000 per year), which is the general limit, and they also cannot exceed eight weeks’ worth of 2019 compensation, whichever is lower. Note that the application does not define “owner-employee” so it is unclear whether this includes employees that own a small minority interest in the business.
- Utilities are now defined as electricity, gas, water, transportation, telephone, and internet access.
- The CARES Act includes as an allowable use of the PPP proceeds “interest on any other debt obligations.” However, there is no mention of this in the application. It may be inferred that the use of PPP proceeds to pay for loan interest is not eligible for forgiveness.
- Finally, the application requires borrowers to make a number of certifications. Many of these certifications are about the truth of the information that the borrower provided and the accuracy of the calculations made on the application. Borrowers should double-check all aspects of the application before submitting it. These certifications are as follows:
- The loan forgiveness amount was used to pay for eligible costs, includes all applicable reductions, does not include nonpayroll costs in excess of 25% of the amount requested, and does not include the compensation of any owner-employee or self-employed individual/general partner over eight weeks’ worth of his or her 2019 compensation or $15,385, whichever is lower.
- The PPP proceeds were not used for unauthorized purposes. If they were, the borrower understands that the federal government may pursue recovery of the PPP proceeds and/or civil or criminal fraud charges.
- The borrower has accurately verified payments for eligible payroll and nonpayroll costs for which it is seeking forgiveness.
- The borrower has submitted the required documentation verifying the eligible payroll and nonpayroll costs.
- The information the borrower provided, including all supporting documents, is true and correct in all material respects. The borrower understands that making a false statement could result in fines or jail time.
- The tax documents the borrower submitted are consistent with the tax documents submitted to the IRS.
- The borrower understands that the SBA may require additional information and failure to provide that information may result in ineligibility for forgiveness.
Some lenders may request additional certifications.
The information provided here does not constitute legal advice and the answers to these questions are not a substitute for reading the specific provisions of the law. The CARES Act and the requirements pertaining to the PPP program will continue to be updated by the SBA and our team of attorneys will do our best to keep you updated.
Eligible applicants interested in applying for the program should reach out the authors of this Alert: Bob Maloney (firstname.lastname@example.org; 617-456-8008); John Bradley (email@example.com; 617-456-8076); John Chu (firstname.lastname@example.org; 617-456-8007) or any other attorney in Prince Lobel’s Corporate Practice Group