The PPP Loan Forgiveness Application: What Borrowers Should Know

The Loan Forgiveness Application for the Paycheck Protection Program (PPP) is now available on the Small Business Administration (SBA) website. This application, which was released on May 15, 2020, modified and clarified guidance previously issued by statute, interim rules or frequently asked questions (FAQs).

Open questions remain, but we will summarize the major clarifications for eligible forgiveness below.

Eligible Forgiveness Amount

The Application limits the forgiveness to the lesser of:

• PPP Loan;
• Forgiveness Calculation (as defined in Application); or
• Payroll from Forgiveness Calculation/75 percent.

Please note that accrued interest does not appear to be forgivable. While this is consistent with the statute, it is inconsistent with an interim rule which indicated that the full principal amount of the loans and any accrued interest may qualify for loan forgiveness.

Eligibility for Forgiveness

A borrower’s eligibility for loan forgiveness will be evaluated in accordance with the PPP regulations and guidance issued by SBA through the date of the Application. SBA may direct a lender to disapprove the borrower’s loan forgiveness application if SBA determines that the borrower was ineligible for the PPP loan.

$2 Million Certification

The borrower is required to check a box if the borrower, together with its affiliates (to the extent required under SBA’s interim final rule on affiliates (85 FR 20817) and not waived under 15 U.S.C. 636(a)(36)(D)(iv)), received PPP loans with an original principal amount in excess of $2 million.

As discussed in FAQ 46, the SBA will review any PPP loans in excess of $2 million. This inclusion on the Application is to satisfy SBA’s intent. It also clarifies that borrowers need to make sure they have thoroughly explored the affiliation rules.

Covered Period

For payroll calculations, the Covered Period is eight weeks beginning on the first day of PPP loan disbursement or Alternative Payroll Covered Period, if applicable. The Alternative Payroll Covered Period begins on the first date of the pay period following loan disbursement. For example, if the PPP loan is funded on April 27^th and the next pay period begins on May 1^st, the eight-week covered period can begin on April 27^th or May 1^st, at the election of the Borrower. However, the election must remain consistent throughout the application when given an option.

Borrowers can elect to use the Alternative Payroll Covered Period if they pay employees bi-weekly or more frequently. Borrowers that pay semi-monthly only or less frequently would not qualify. Bi-weekly=26 pay periods; Semi-monthly = 24 pay periods). It is unclear whether the Alternative Payroll Covered Period is available to borrowers who have multiple pay periods, some of which are less frequent than bi-weekly.

For non-payroll calculations, the Covered Period has not changed.

Incurred and Paid

The Application has modified this definition to include amounts paid during the Covered Period (or Alternative Payroll Covered Period) or incurred during the Covered Period (or Alternative Payroll Covered Period) and paid on or before the next regular billing date, even if the billing date is after the Covered Period (or Alternative Payroll Covered Period). 

The Application allows borrowers to include amounts accrued prior to the Covered Period (or Alternative Payroll Covered Period) and paid during the Covered Period (or Alternative Payroll Covered Period). The Application does not allow borrowers to prepay any mortgage interest but is silent as to prepayments on payroll and other non-payroll costs. The Application does not contain guidance for payments made before the Covered Period (or Alternative Payroll Covered Period) related to eligible expenses incurred inside the Covered Period (or Alternative Payroll Covered Period), such as rent, which is typically paid in advance.

Payroll

Eligible payroll costs include costs paid or incurred during the Covered Period (or Alternative Payroll Covered Period) and paid on or before the next regular payroll date.

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. 

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 Covered Period ($15,385). For any owner-employee or self-employed individual/general partner, the eligible cash compensation is further limited to eight weeks’ worth of 2019 compensation. Therefore, if that specified person earned less than $100,000 in 2019, the eligible amount is decreased to the 2019 prorated amount.

For other items of payroll including health insurance, retirement and state/local taxes, the amount eligible for forgiveness includes amounts paid during the Covered Period (or Alternative Payroll Covered Period) that may cover a longer period. For example, an employer’s annual 401k match could be paid during the Covered Period and be eligible for forgiveness. The Application does not contain guidance on inclusion of vision, dental, short-term/long-term disability, and life insurance expenses in employer-paid health benefit costs.

Non-payroll Costs

Non-payroll costs eligible for forgiveness consist of:

1. Covered mortgage obligations: payments of interest (not including any prepayment or payment of principal) on any business mortgage obligation on real or personal property;
2. Covered rent obligations: business rent or lease payments pursuant to lease agreements for real or personal property; and
3. Covered utility payments: Business payments for a service for the distribution of electricity, gas, water, transportation, telephone, or internet access.

Eligible non-payroll costs must relate to obligations existing prior to February 15, 2020. Eligible costs cannot exceed 25% of the total forgiveness amount.    

Under the new guidance, it appears you can prepay rent and utilities during the Covered Period, or pay interest, rent and utilities in arrears, as long as the total of non-payroll costs remain at or below 25% of the requested forgiveness amount. 

Full Time Equivalent Employees (FTEE)

The FTEE calculation is based on a 40-hour work week. The SBA did not follow the 30-hour week as prescribed by the AICPA.

For each employee, divide the average number of hours paid per week during the Covered Period (or Alternative Payroll Covered Period by 40 and round the total to the nearest tenth. The maximum for each employee is capped at 1.0. 

A simplified method that assigns a 1.0 for employees who work 40 hours or more per week and 0.5 for employees who work fewer hours may be used at the election of the Borrower.

Reductions and Safe Harbors

General FTEE Reduction Exception

The Application requires an exception to the Borrower for:

1. Any positions for which the Borrower made a good-faith, written offer to rehire an employee during the Covered Period or the Alternative Payroll Covered Period which was rejected by the employee; and
2. Any employees who during the Covered Period or the Alternative Payroll Covered Period (a) were fired for cause, (b) voluntarily resigned, or (c) voluntarily requested and received a reduction of their hours.

You can include the FTEEs from this exception if the positions was not filled by a new employee.

Salary/Hourly Wage Reduction

The Salary/Hourly Wage reduction test is applied to employees who earned an annualized rate of less than or equal to $100,000 for all pay periods in 2019 or were not employed by the Borrower at any point in 2019. The Application pivoted to include employees hired in 2020 in the reduction test, which was not contained in the statute.

For the population listed above, the Borrower must measure, on an individual employee basis, the average annual salary or hourly wage during Covered Period or Alternative Payroll Covered Period as compared to the average annual salary or hourly wage between January 1, 2020 and March 31, 2020. There is a reduction in eligible forgiveness related to the amount by which the salary/wage reduction related to each eligible employee during the Covered Period (or Alternative Payroll Covered Period) as compared to the January 1, 2020 to March 31, 2020 period exceeds 25%.

If the resulting reduction is less than 25%, there is no salary/wage reduction exposure for this employee, and the calculation moves on to the next employee.

Salary/Hourly Wage Reduction Safe Harbor

Borrowers will be exempt from Salary/Hourly Wage Reductions to eligible forgiveness by employee if the Borrower i) reduces average annual salary/hourly wages for the employee between February 15, 2020 and April 26, 2020, and ii) restores average annual salary/hourly wages for the employee to February 15, 2020 levels as of June 30, 2020.

FTEE Reduction

The Borrower must compute the following fraction to calculate potential FTEE Reductions:

Total Average Weekly FTEE during the Covered Period (or Alternative Payroll Covered Period) / Total Average Weekly FTEE during the chosen reference period.

The chosen reference period is, at the Borrower’s election, either (i) February 15, 2019 to June 30, 2019; (ii) January 1, 2020 to February 29, 2020; or (iii) in the case of seasonal employers, either of the preceding periods or a consecutive twelve-week period between May 1, 2019 and September 15, 2019.

Calculation of FTEEs must be consistent throughout the Application.

FTEE Reduction Safe Harbor

The Borrower can achieve safe harbor from FTEE Reductions if both of the following conditions are met: i) the Borrower reduced its FTEE employee levels in the period beginning February 15, 2020 and ending April 26, 2020; and ii) the Borrower then restored its FTEE levels to its FTEE levels in the Borrower’s pay period that included February 15, 2020 as of June 30, 2020.

For assistance with the PPP Loan Forgiveness Application or if you have questions, contact us. We are here to help.

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