Highlights of the SBA PPP Loan Forgiveness Application

By Bill Claffey, Esq., Partner, Tax Services
May 18, 2020

On May 15th, the Small Business Administration released the PPP Loan Forgiveness Application which will be reviewed by lenders for purposes of determining appropriate loan forgiveness.  Below are some of the highlights and clarifications:

  • Introduction of an “Alternative Covered Period”.  The standard Covered Period is 56 days beginning with Loan Disbursement Date.  At the election of the Borrower, an Alternative Covered Period may be utilized which uses an 8-week period that begins  on the first day of their first pay period following the Loan Disbursement Date. 
    • Note: per the instructions, the Alternative Covered Period may be utilized by Borrowers with bi-weekly (or more frequent) payroll schedules.  This appears to exclude Borrowers that schedule payroll twice / month.  We expect additional guidance on the availability of this option. 
    • Note: the Alternative Covered Period is only used when required in the Loan Forgiveness Application (generally payroll type costs).  This could require Borrowers that elect the Alternative Covered Period to maintain two Covered Periods.
  • Clarification of the cash vs accrual concept
    • Payroll costs – the Loan Forgiveness Application provides the Borrowers are eligible for forgiveness for “payroll costs paid” and “payroll costs incurred”. 
      • Payroll costs are considered paid the day payroll checks are distributed or the Borrower originates an ACH credit transaction. 
      • Payroll costs are considered incurred on the day the employee’s pay is earned. 
      • Payroll costs incurred but not paid during the Borrower’s last pay period of the Covered Period (or Alternative Covered Period) are eligible for forgiveness if paid on or before the next regular payroll date.  
    • Non-payroll costs – eligible non-payroll costs must be paid during the Covered Period (note that the Alternative Covered Period is not available here) 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).
  • All compensation including owner replacement compensation is capped at $15,385 during either the Covered Period or Alternative Covered Period.  The Application does not appear to disallow additional compensation or bonuses to employees provided such amounts does not increase compensation above $15,385, however, Borrowers should consider the good faith requirement that PPP loans are to be used maintain ongoing operations and retain employees. 
  • Full-time equivalents – the Loan Forgiveness Application utilizes a 40-hour work week to define full-time equivalent employees.  This is a shift from prior SBA guidance (unrelated to PPP Loans) that utilized a 30-hour work week.  Employees that work 40-hour work weeks are included as 1.0 FTE; employees that work less than 40-hour work weeks are included at fractional amounts rounded to the nearest tenth.  Note that this FTE calculation on the Application is performed on an employee-by-employee basis.  The Loan Forgiveness Application also provides for a simplified method whereby all fractional employees are included as .5 FTE.  The FTE quotient cannot exceed 1.0. 
  • FTE- the Loan Forgiveness Application provides an important expansion to the FTE quotient calculation.  FTE is not reduced for the following instances:
    • Previously terminated employee receives a good faith offer of employment which is rejected.
    • Employee was terminated “for cause”.
    • Employee voluntarily resigned.
    • Employee voluntarily requested a reduction of hours.
  • FTE SAFE HARBOR – the Loan Forgiveness Application clarifies the FTE Safe Harbor provisions with the CARES ACT.  If average FTE between 2/15/20 through 4/26/20 is less than the FTE’s on 2/15/20, and the Borrower restores FTE count to 2/15/20 amounts by 6/30/20, then the FTE reduction calculation does not apply.  If average FTE between 2/15/20 through 4/26/20 is equal to or greater than FTE on 2/15/20, then the SAFE HARBOR cannot be used.  If you have not reduced the number of employees or the average paid hours of your employees between January 1, 2020 and the end of the Covered Period, the FTE safe harbor is met.  This appears to be an all or nothing concept. 
  • Wage Reduction – the Loan Forgiveness Application confirms that this calculation is performed on an employee by employee basis. 
    • Wage reduction only applies to employees that did not (in any single pay period in 2019) earn $100,000 annualized.  Therefore, if an employee’s salary is $60,000, however received a bonus increasing the single bi-weekly pay stub to $4,000, reduction to such employee’s wage would not be included in Loan Forgiveness reduction related to wage reduction since that pay stub annualizes to $104,000.
    • Calculation – for applicable employees:
      • Step 1: Annualize Q1-2020 compensation, multiply * 75%
      • Step 2: Annualize compensation paid to employee during 8-week period (Covered Period or Alternative Covered Period)
      • Step 3: If annualized 8-week compensation is greater than Step 1 amount, then wage reduction is not applicable.  If the amount is less, use 8/52 of this amount for PPP Loan Forgiveness Reduction related to wage reduction. 
  • Wage Reduction Safe Harbor – similar to the FTE Safe Harbor there are measurements between 2/15/20, 2/15/20 through 4/26/20, and 6/30/20.  If annualized compensation between 2/15/20 through 4/26/20 is less than employee’s annualized compensation on 2/15/20, and the Borrower restores the employee’s annualized compensation by 6/30/20, then the wage reduction calculation does not apply.  If annualized compensation between 2/15/20 through 4/26/20 is equal to or greater than annualized compensation on 2/15/20, then the SAFE HARBOR cannot be used.