Late Friday evening, the SBA and US Department of the Treasury finally released the much anticipated Paycheck Protection Program Loan Forgiveness Application. The Application includes instructions for Borrowers as well as worksheets for calculating eligible forgiveness.
You can download a copy of the Application HERE.
The SBA has also issued a number of FAQs in recent weeks. You can find those HERE.
As we expected, the Application must be submitted to your Lender (or the Lender that is servicing your loan) who will then submit it to the SBA. Unfortunately, with one exception which will be described below, the covered period to expend PPP loan funds remains at 8 weeks from the loan disbursement date. It was rumored that this period might be extended or modified to allow more flexibility for Borrowers to use the funds once they were permitted to reopen their business. As of this writing, that is not the case which means many Borrowers who received these funds may not end up using them.
While the Application does not answer all the questions Borrowers may have regarding the program, it does provide clarification on a number of key points:
Alternative Payroll Coverage Period
One concern Borrowers had was losing payroll coverage if their pay periods overlapped the commencement and termination of the 8 week coverage period. Thankfully, the SBA provided some flexibility to coordinate the covered period with the Borrower’s payroll period.
For Payroll Costs only, Borrowers with a biweekly (or more frequent [i.e., not bi-monthly or monthly]) payroll schedule may elect to calculate eligible payroll costs using the eight-week (56-day) period that begins on the first day of their first pay period following their PPP Loan Disbursement Date. For example, if you received your PPP loan proceeds on April 20, and the first day of your first pay period following your PPP loan disbursement is April 26, you may use April 26 as the beginning of the 8 week period for calculating eligible payroll costs and June 20 as the last day.
IMPORTANT: This flexibility applies to eligible payroll costs only. All other eligible non payroll costs must be expended in the 8-week period calculated from loan disbursement.
At least 75% Payroll Costs Test
The Application clarifies that at least 75% of the potential forgiveness amount must be used for eligible payroll costs—not 75% of the PPP Loan amount. For example, if you received a PPP Loan for $100,000 but only spent $75,000 on forgivable costs, you will be eligible for forgiveness if at least 75% of the $75,000 ($56,250) was spent on payroll costs. We have heard from many of you that you may not be able to spend all of the PPP Loan funds on eligible forgivable expenses, so this clarification is good news.
Use of Cash Method or Accrual Method Permitted
The Application provides more detailed definitions of “eligible payroll costs” and “eligible non payroll costs” and makes it clear that these costs can be counted as paid or incurred and can also be prorated over the covered period. In doing so, the SBA effectively confirmed that you may use either the cash method or accrual method of accounting for forgiveness, provided that costs are not counted twice.
Leased Personal Property Now Included
Covered business lease payments include real or personal property. So in addition to real estate lease payments, the payments for any leased equipment will now be eligible for forgiveness.
FTE Reduction Exceptions
Consistent with previously issued FAQs and guidance, the Application confirms that the following FTE headcount reductions are not counted in the FTE reduction test and therefore do not reduce the Borrower’s loan forgiveness:
- Any positions for which the Borrower made a good-faith, written offer to rehire an employee during the covered period which was rejected by the employee; and
- Any employees who during the covered period (a) were fired for cause, (b) voluntarily resigned, or (c) voluntarily requested and received a reduction of their hours.
In order to take advantage of this Safe Harbor provision, you must satisfy both of the following conditions:
- You reduced your FTE employee levels in the period beginning February 15, 2020, and ending April 26, 2020; and
- You then restored your FTE employee levels by not later than June 30, 2020 to the FTE employee levels in your pay period that included February 15, 2020.
FTE (Full Time Equivalency) Employee Defined
The Application provides further clarification of this definition by stating an FTE is an individual who is paid for (not necessarily works) 40 or more hours per week. Those who are paid for less must be combined to total 1 FTE employee in the count (e.g., 1 employee paid for 35 hours and 1 paid for 5 hours, equals an FTE). Moreover, it appears that employees who work (and are paid for) less than 40 hours per week may be assigned an FTE of .50 (as opposed to 1.0 for someone who is paid for 40 hours per week). The Application provides that this calculation may be used at your election. We believe this should help most borrowers increase their calculated FTEs.
Additional Cap on Owner Compensation
The Application clarifies that your payroll costs may include costs paid to owner employees, self-employed individuals, or general partners, but with an additional limitation. These persons may not be paid more than the LOWER of the following:
- $100,000 annualized, or $15,385 during the applicable covered period; or
- The eight-week equivalent of their applicable compensation in 2019.
For example, if an employee owner was paid less than an annualized $100,000 in 2019, that employee owner is limited to that same amount in payroll cost that is eligible for forgiveness.
The Bottom Line
Most of you are diligently tracking your expenditure of PPP Loan Funds. We suggest you review the Application and instructions and make any adjustments to your use of the funds to ensure your use provides the greatest level of forgiveness possible.
Failure to satisfy any forgiveness rule or test, does not constitute, in and of itself, an improper use of PPP loan funds or subject you to any penalties. Instead, those funds, and any unused funds, will simply remain part of your outstanding PPP loan on a 2-year term, at 1% interest, deferred for 6 months, with no personal guarantee or pre-payment penalty. Therefore, you may use those funds for other, non-forgivable purposes, or simply pay them back to the lender.
IMPORTANT: As always, this situation continues to evolve and we expect there will be additional guidance and clarification on this program. We will continue to keep you updated as matters change. Please feel free to contact us with any questions.