Newly Released Paycheck Protection Program: Loan Forgiveness Application

On May 15, 2020, the U.S. Small Business Administration (SBA) released the application and instructions for loan forgiveness under the Paycheck Protection Program (PPP). The application and instructions provide additional clarity to borrowers regarding the process and calculations applicable to loan forgiveness.

The loan forgiveness application answers several questions, but it also provides useful shortcuts for borrowers. Here a few highlights:

Payroll Covered Period

The eight-week (or 56-day) covered period (Covered Period), which is the 8-week (or 56-day) period beginning on the disbursement date of the PPP loan (for example, if the borrower received the PPP loan on April 20, 2020, the first day of the Covered Period is April 20, 2020, and the last day of the Covered Period is June 14, 2020)

Alternate Payroll Covered Period

• For administrative convenience, the application allows borrowers with a biweekly (or more frequent) payroll schedule to calculate eligible payroll costs using the 8-week (or 56-day) period beginning on the first day of their first pay period following the loan disbursement date (Alternative Payroll Covered Period) (for example, if the borrower received the PPP loan on April 20, 2020, and the first day of its first payroll period following the disbursement date is April 26, 2020, the first day of the Alternative Payroll Covered Period is April 26, 2020 and the last day of the Alternative Payroll Covered Period is June 20, 2020)
• If a borrower elects to use the Alternative Payroll Covered Period, it must apply this period wherever the application references “the Covered Period or the Alternative Payroll Covered Period” (if the application only references Covered Period, the borrower must apply the Covered Period (i.e., the 8-week (or 56-day) period beginning on the disbursement date of the PPP loan))

Accounting for Expenses

The loan application adjusts the requirement that spending be “paid and incurred” during the eight-week covered period or alternate payroll covered period.

Payroll costs

• Borrowers are eligible for loan forgiveness for the payroll costs paid and the payroll costs incurred during the Covered Period or the Alternative Payroll Covered Period
• 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
• Payroll costs that are incurred, but not paid, during the borrower’s last pay period of the Covered Period or the Alternative Payroll Covered Period are eligible for loan forgiveness if paid on or before the next regular payroll date
• For each individual employee, the total amount of cash compensation eligible for loan forgiveness may not exceed an annual salary of $100,000, as prorated for the covered period (or $15,385, the 8-week equivalent of $100,000)

Business mortgage interest payments

Payment of interest (but not including any payment or prepayment of principal) on any business mortgage obligation on real or personal property so long as the mortgage was in place on Feb. 15, 2020

Business rent or lease payments

Business rent or lease payments pursuant to lease agreements for real or personal property so long as the lease agreement was in place on Feb. 15, 2020

Business utility payments

Business payments for services for electricity, gas, water, transportation, telephone, or internet access so long as the service was in place on Feb. 15, 2020

Note: Eligible non-payroll costs must be paid during the Covered Period or incurred during the Covered Period and paid on or before the next regular billing date, even if the billing date is after the Covered Period. Eligible non-payroll costs cannot exceed 25 percent of the total loan forgiveness amount.

How Does a Borrower Calculate a Full-Time Equivalent?

The Schedule A worksheet requires that a borrower calculate average FTE for all employees. The instructions to the Schedule A worksheet inform that a borrower must, for each employee, enter the average number of hours paid per week, divide by 40 and round the total to the nearest tenth. No one may be counted as more than 1 FTE. A borrower may, if it elects to do so, use a simplified method and simply ascribe a 1.0 for each employee who works 40 hours or more per week and a 0.5 for each employee who works less than 40 hours per week.

75% Payroll Threshold

A key issue that has been asked surrounds the topic spending at least 75% of your loan amount on payroll to get forgiveness.

The loan forgiveness application says your total forgiveness just needs to include at least 75% payroll costs. The actual formula does this by limiting forgiveness to the amount calculated as your total payroll costs divided by .75.

For example, suppose the bank gave you $25,000 instead of $20,000 because of confusion in the early periods of applying for the loan. Further suppose that your payroll costs for the covered period are only $15,000. But $15,000 equals 60% of $25,000 and that was the confusion. The loan forgiveness application clarifies that with $15,000 of payroll costs, that means up to $20,000 of forgiveness. Because $15,000/.75 equals $20,000. In this case, it does not destroy forgiveness if you incorrectly received $25,000.

You will get forgiveness of $20,000 if you spend at least $15,000 on payroll and $5,000 on rent, interest, and utilities. You will be allowed to keep the remaining $5,000 as a loan to be repaid at 1% interest over two years from the date received.

The PPP Loan Forgiveness application does give a better understanding of the documentation needed to apply for PPP loan forgiveness and what the procedure will require, but the long-awaited SBA guidance on forgiveness still leaves unanswered questions that some borrowers will have as they prepare their applications. We are following this closely and will keep you updated as clarification comes out.

Questions?

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