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SBA Releases PPP Loan Forgiveness Application & Instructions

The SBA and the Treasury Department have released the eagerly awaited Paycheck Protection Program (PPP) loan forgiveness application and detailed instructions.  The SBA explained that the application and instructions “include several measures to reduce compliance burdens and simplify the process for borrower.”

The Application and Instructions do not answer all key questions, but a number of calculations and substantive questions are resolved.

Key PPP Loan Forgiveness Clarifications

  1. Definition of Loans in Excess of $ 2 million. Audit threshold for loans in excess of $2 million is based on original principal amount disbursed, including affiliate loans.
  2. Treatment of EIDL Advances. EIDL advances will be deducted from forgiveness amount remitted to lender.
  3. Timing of 8-Week Period for Loan Forgiveness. The Application allows the borrower to choose from one of two 8 week time periods for determining loan forgiveness.
    1. Covered Period: The 56-day period following the receipt of the first loan money, which is referred to as the “Covered Period.” OR
    2. Alternative Payroll Covered Period: to coincide with the payroll schedule of the borrower, if it is bi-weekly or more frequently. The Alternative Payroll Covered Period, if elected, will begin on the first day of the borrower’s first pay period following the date that they receive their first PPP loan dollars, and will end on the 56th day thereafter.

For example, if the borrower received their PPP loan proceeds on Monday, April 20, and the first day of its first pay period following its PPP loan disbursement is Sunday, April 26, the first day of the alternative payroll covered period is Sunday, April 26, and the last day of the alternative payroll period is Saturday, June 20 (8 weeks or 56 days).

 A borrower that elects to use the Alternative Payroll Covered Period must also account for other payroll related expenses (employee health insurance, retirement plan contributions, and state and local taxes assessed on employee compensation) during the same period of time. Non-Payroll Related expenses (rent, interest and utilities), however, must still be accounted for in the “Covered Period” (the first 56 days after the receipt of the first PPP loan amount.

Stay-Tuned on 8-Week Period Relief.    Treasury Secretary Mnuchin has indicated that congressional action is necessary to adjust the 8-week period timing and no changes are planned by the SBA. Congressional leaders from both parties have indicated that they support extending the 8-week period.    In fact, the Democratic-run House of Representatives has already voted to extend the eight-week period in the PPP to 24 weeks, part of a $3 trillion coronavirus relief bill lawmakers passed May 15th.  This bill, however, is unlikely to pass as proposed in the Senate.

  1. Treatment of Expenses Incurred and Paid. One PPP loan forgiveness area that caused confusion was the timing of expenses eligible for forgiveness and the language of “incurred and paid.”  The instructions contain considerable detail in this area for different expense types.

Payroll. Payroll costs (gross salaries and wages of employees up to a cap of $100,000 per year) do not have to be both “paid and incurred” in the exact eight week covered or alternate covered period (56 days).   In addition, payroll costs incurred during the 8-week period and paid on or before the next regular payroll date are eligible for forgiveness.

This means that each payroll paid during the 8-week period counts toward forgiveness, as do the payroll costs incurred during the last pay period of the 8-week period that are paid in the first regular payroll period after the 8-week period.

Note:  Borrowers are not allowed to count payroll costs twice—so costs that are both paid and incurred in the 56-day period only count once towards forgiveness.

Owner-employees, self-employed individuals and self-employed partners.  Owner-employees, self-employed individuals, and self-employed partners’ maximum compensation is 8/52 of 2019 compensation, capped at $15,385 per individual. This means that owners cannot increase their pay during the 8-week period above their 8-week average pay for 2019 and have that increase count toward forgiveness.

Employee Salary Increases and Bonuses.  The application and guidance does not include any limit on increasing employees’ wages; therefore, it appears that employee wage increases are allowed capped at $15,385 per individual for the 8-week period.

Non-Payroll Expenses.  Interest, rent and “utilities” that are incurred during the eight week repayment measurement period and before the next regular billing date, even if after the covered period, will also qualify to be forgiven.  Non-payroll costs that were paid and incurred will also only count once for loan forgiveness.  Prepayments are not permitted.

Health Insurance. Eligible costs that are paid or incurred during the 8- week Covered Period include self-insurance programs and employer-sponsored group health plans, reduced by employee contributions. It appears that accrued costs paid during the 8-week period will count toward forgiveness. (Additional guidance may clarify this treatment.)

Retirement Contributions.  The Instructions indicate that the total “amount paid by [the] Borrower for employer contributions to employee retirement plans” in the covered period or alternate covered period will be entered in the calculation worksheet,” but there is no indication as to whether the amount that is “paid by Borrower” can include contributions attributable to an entire year, or even 2019 and 2020 combined.   More guidance is needed to determine retirement treatment.  It is possible that funding a pension plan for all of 2019 or all of 2020 (or even both) will qualify for forgiveness based upon the present regulations, and that non-tax qualified “retirement plans” may be used for this as well.

  1. Health Insurance and Retirement Plan Contributions for Independent Contractors, Proprietors and Partners in Partnerships.  The application and Instructions appear to not permit independent contractors, proprietors, or individuals who are partners in a partnership to receive the benefit of forgiveness for the costs of their own health insurance and retirement plan contributions.  The newly issued Instructions provide that the “Payroll” will include total amounts paid by the Borrower for “employee health insurance…[and] employer contributions to employee retirement plans …”
  1. The 75% Rule Is Not “All Or Nothing.The loan application instructions make it clear that the borrower can first determine its payroll, health insurance and retirement plan expenses (the “Payroll Amount”) and then the sum of the other forgivable expenses (“rent, utilities, and interest”) cannot exceed 33 1/3% of the Payroll Amount.

For example, if the loan is $100,000, and only $70,000 is spent on payroll, health insurance and retirement plan expenses, then 33 1/3rd% of $70,000 is $23,333, and the maximum amount forgiven based on interest rent and utilities will be $23,333, so that the total loan forgiveness would be $93,333.

  1. Business rent or lease payments extends to lease agreements for real or personal property. Rent and interest paid on leases of non-real estate business assets, and interest paid on loans that are secured by non-real estate “mortgages,” will qualify for forgiveness, if they were in effect on February 15, 2020.  It appears that vehicle and equipment leases will be considered eligible rental and interest costs.
  1. FTEE Calculation. Average full-time equivalency (FTE) is the average numbers of hours paid per week divided by 40 (rounded to the nearest tenth), with the maximum for each employee capped at 1.0. Or borrower may elect 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.
  1. Loan Forgiveness Reductions.

The Application indicates how to apply the related calculations with respect to reduction of what is forgiven when there is a reduction in workforce or large salary reductions for non-highly compensated employees.

      • One clarification is that the amounts otherwise forgiven for rent, interest and utilities are also reduced if there is a reduction in the number of employees under the test.
      • Salary and hourly wage reduction applies only to employees whose salaries or hourly wages were reduced more than 25% during the covered or alternate covered period compared to the period January 1, 2020 through March 31, 2020. 
  1. Attempted Rehire Exclusion. The borrower’s forgiveness amount will not be reduced for headcount reductions related to:
        1. Individuals to whom the borrower has made a written offer in good faith to rehire an employee that the employee declined (as previously provided in FAQ 40),
        2. Employees whose employment was terminated for cause, or
        3. Employees who voluntarily resigned.
  1. FTEE and Salary & Wages Safe Harbor. Restoring employees to work and raising salaries and wages following a pay cut can mitigate reductions to loan forgiveness.  Where layoffs or salary reductions occurred between February 15, 2020, and April 26, 2020, the loan forgiveness amount will not be reduced if the reductions in personnel and salaries are undone prior to June 30, 2020. To accomplish this, the company must, by June 30, 2020, rehire employees such that its full time equivalent employee levels are at least where they were as of February 15, 2020, and reinstate all salaries and wages for employees making less than $100,000 during all pay periods in 2019 that were reduced by more than 25% back to the level of those salaries and wages as of February 15, 2020.

The application and instructions also include documentation that must be submitted with the loan application, borrower certifications and more.

The SBA indicated that it would soon issue further guidance and regulations to assist borrowers in completing their debt forgiveness application. This is good news for borrowers and advisors alike because while the application clarifies much of the calculation, there are still unanswered questions.

Treasury Department link to Loan Forgiveness Application, click here.

Many Questions Remain to be Addressed

We will continue to keep you updated as new guidance is released by the Treasury and SBA.  Additionally, we are pleased to host a webinar on Wednesday, May 27th, exploring the application and updated forgiveness guidance.  Look for an invitation soon.

Please visit the Warady & Davis LLP COVID-19 Resource Center for a wealth of information on stimulus assistance, new legislation and much more.  This information is updated regularly.  This is a rapidly evolving situation so please do not hesitate to reach out to us with any questions or concerns at 847-267-9600 or info@waradydavis.com.


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