PPP Forgiveness Application

The SBA released the Paycheck Protection Program Loan Forgiveness Application on May 15. Read below for a detailed analysis of the application.

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Wages – 8 Week Period

Eligible payroll costs include payroll costs paid and incurred during the Covered Period, which is the 8-week period commencing on the date the business owner receives the PPP funds from a financial institution. Payroll costs are considered incurred on the day the employee’s pay is earned. 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. Borrowers who pay their employees bi-weekly or more frequently also have the option to elect an Alternative Payroll Covered Period. This period begins with the first day of the employee’s pay period, following the date the loan proceeds are received. In other words, if a borrower receives its loan proceeds on April 20 and the first day of the next payroll period begins on April 26, the borrower may begin the calculation of eligible wages as of April 26. For wage purposes only, the 56-day Covered Period starts then. This alternative calculation does not apply to eligible non-payroll costs. Wages are considered paid on the day paychecks are distributed or the day the borrower originates an ACH transaction. The maximum payroll for any one individual during the 8-week period is $15,385.

Alternative Payroll Covered Period

For borrowers with biweekly or more frequent payroll periods, an allowance has been made to start the covered period on the first day of the payroll period following receipt of the funds. For borrowers who are allowed to make this election, this will make the calculation process a bit easier as you won’t have partial payroll periods. Unfortunately, this leads us to believe you’d have to stick to the traditional Covered Period for semi-monthly borrowers, which will still create payroll period crossover at the beginning and end of the covered period.

Eligible payroll costs

This confirms our thoughts that payroll costs would likely be calculated on an “accrual” basis. As long as the borrower sticks to their routine payroll payment schedule, the payroll costs don’t have to be paid within the period. We do believe this provision also speaks (somewhat silently) to payroll costs other than salary/hourly wages as it states that outside of these payments, payroll costs must be paid during the covered period. That said, we think bonuses, etc. would likely need to be paid within the period. The application and guidance do not include any limit on increasing employees’ wages; therefore, it appears that employee wage increases are allowed.

Covered mortgage obligations

This confirms that mortgage interest will be allowed on “real or personal property”. Based on this, it appears any long-term debt interest would qualify.

Covered rent obligation

Rent or lease payments for “real or personal property” would qualify. Feels like this would just about qualify all lease/rent arrangements for inclusion. There is no mention of related party leases.

Signature

Similar to the application, the only signature is for the authorized representative of the borrower.

The FTE quotient limitation will be based on “average weekly FTEs”

This wouldn’t align with borrowers that utilize something other than a weekly payroll. In those cases, a calculation would need to be devised to determine average weekly FTEs.

Prohibits increases in owner-employee or self-employed individual / general partner compensation during the 8-week period

Owner compensation cannot be increased from 2019 levels and is also capped at $15,385. There is presently no guidance related to wages for relatives, spouses, or children of owners. It appears that these wage costs will count toward forgiveness. (There may be additional guidance issued in the future that could clarify this further)

For the salary/hourly wage reduction

The application states the calculation will be based on “average annual salary or hourly wage for each employee”. The salary calculation seems very straightforward. The way I read the hourly wage (combined with the calculation on page 8), you’d use the actual “wage rate”, not total hourly wages. If this is the case, this would be a benefit for those companies who had hourly employees working substantial overtime, etc. (i.e. – construction) prior to the pandemic but not during the covered period. However, this would get “corrected” on page 8 if you’ve decreased the hourly wage as its applied to average pre-pandemic hours. The salary/hourly wage reduction comparative period will be January 1, 2020 through March 31, 2020 – this does not apply to the Safe Harbor (see below).

Employee’s Name

Borrowers will be required to list each employee on the Schedule A Worksheet. This is interesting as based on the reading on Page 1 of what’s required to be submitted to the lender, the Schedule A Worksheet is not included. Therefore, this may not actually be a requirement.

Cash Compensation

Specifically lists those items included in cash compensation: gross salary, gross wages, gross tips, gross commissions, paid leave (with exceptions) and dismissal/separation pay. There is gray area here on how some items might apply – i.e. housing/car allowances, etc. My take is if its taxed as a wage to the employee, it would be included.

Defines Average FTE

Full-time equivalent refers to employees working at least 40 hours or a group of employees accumulating 40 hours. The guidance creates a simplified method to accumulate FTEs: each employee working at least 40 hours shall be counted as one FTE, and those working under 40 hours counted as 0.5 FTE.

Creates safe harbor for certain FTE reductions outside the control of the borrower

Employees who, during the 8-week period or Alternative Payroll Covered Period, are fired for cause, voluntarily resign or whose hours were reduced as a result of requesting and receiving reduced hours and are not replaced shall be counted as an FTE as if they were employed fully during the 8-week period. This eliminates loan forgiveness penalties for FTE reductions that are somewhat outside the control of the borrower. Additionally, guidance in FAQ #40 continues to be relevant for a laid off employee who is offered to be rehired but declines that offer. This FTE can be included in the count as fully employed with no loan forgiveness penalty.

June 30 FTE Reduction safe harbor

The guidance confirms that penalties for reduced FTEs and pay rate reductions in excess of 25% for those earning less than $100K during the 8-week period are eliminated if those FTEs and payrate reductions are restored by June 30, 2020.

Payroll

Lays out the documents that will be required. Consists of bank statements, THIRD PARTY payroll reports, tax forms that overlap the covered period, payment receipts/cancelled checks for health/retirement contributions. One interesting note here is that it does not list internal payroll reports – assume in this instance the bank statements would be leveraged. That could be quite the task for any entities that issue individual checks to employees instead of ACH, etc. It also seems borrowers might be required to complete drafts of the tax forms to be filed that include the covered period.

NonPayroll

To include cancelled checks, mortgage statements, current lease agreements, utility invoices, etc.

Other

The PPP Schedule A Worksheet is required to be completed and maintained but not submitted. Also states all documentation related to PPP loans must be maintained for 6 years after the loan is forgiven or repaid.