Your guide to the PPP loan forgiveness application and instructions
Originally posted: May 21, 2020 - Updated: May 26, 2020
While loan forgiveness is a key selling point of the Paycheck Protection Program (PPP), administered by the Small Business Administration (SBA), we now have clarity on the process for seeking loan forgiveness, almost two months after the program’s launch.
To recap: On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief, and Economic Securities (CARES) Act, a $2.3 trillion relief package designed to help individuals and businesses weather the economic damage caused by the COVID-19 pandemic. The PPP was the feature attraction - a new loan program under Section 7(a) of the Small Business Act designed to put nearly $349 billion into the hands of small business owners to pay employee wages and other critical expenses during the pandemic. In late April, Congress passed a bill approving another $310 billion for the PPP. PPP loans were extended based upon 2½ months of payroll, health insurance and retirement plan expenses. Generally, PPP loans are forgiven based on the same expenses plus certain interest, rent and utility expenditures that are made in the first eight weeks (the “covered period”) following the date that the first loan proceeds are received.
On May 15, the SBA and Department of Treasury released the PPP loan forgiveness application and related instructions. On May 22, the SBA issued two new interim rules to further aid borrowers and lenders with the forgiveness process and their responsibilities. The first focused on the requirements for having PPP loans forgiven – and the other rule provided direction on lenders’ duties during the forgiveness period, along with the SBA process for reviewing loans.
Please note that while the application and instructions are not without issues, they do clear up many calculations and substantive questions. Business owners and their advisors have spent significant time determining how these rules can help them survive, and what gray areas or loopholes might help to make up for the borrower unfriendly aspects of the program.
Key takeaways: PPP loan forgiveness application and instructions
Payroll paid after the eighth week
The application form does not contain an express recertification of necessity as of the date of the forgiveness application. The CARES Act, and the regulations and FAQs issued by the SBA, indicate only payroll that was actually paid during the eight weeks for services rendered by employees, plus applicable PTO used during that eight weeks, were going to be forgiven.
Payroll expenses do not have to be both “paid and incurred” in the exact eight-week period (56 days) that begins on the day that the first loan proceeds are received.
Borrowers will have flexibility to include expenses paid or incurred during the applicable period. This will enable borrowers to include payroll costs with paycheck distribution or origination of an ACH during the period and/or earned by employees but not yet paid (because the pay date falls after the last payday in the applicable covered period), in each case without duplication. It also clarifies earlier questions about whether borrowers might consider accelerating payroll dates to fall within the applicable covered period. The concept of “incurred” or “paid” also appears applicable to other permissible uses of funds, such as utilities and mortgage interest/rent payments.
The application allows the borrower to choose to use the 56-day period following the receipt of the first loan money, which is referred to as the “Covered Period,” or to select the “Alternative Payroll Covered Period,” to coincide with the payroll schedule of the borrower, if it is bi-weekly or more frequently.
If elected, the Alternative Payroll Covered Period 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. This assumes that all borrowers pay their employees in full on the last day of each pay period.
Employers who pay their employees after the last day of the pay period may still lose the forgiveness of payroll that is paid in arrears beyond the last day of the last pay period that is within the 56 days and should therefore adjust their procedures accordingly. Employers who pay monthly should adjust their procedures to pay every two weeks so that they can qualify to use the Alternative Payroll Covered Period.
Borrowers who use the Alternative Payroll Covered Period must also account for employee health insurance, retirement plan contributions, and state and local taxes assessed on employee compensation during the same period of time, but will keep track of rent, interest and utilities for the “Covered Period” (the first 56 days after the receipt of the first PPP loan amount), subject to the rule described in Section 3 below.
Defines full-time equivalent (FTE) and creates a simplified method to accumulate FTEs
Full-time equivalent refers to employees working at least 40 hours or a group of employees accumulating 40 hours. The guidance simplifies how to accumulate FTEs: each employee working at least 40 hours shall be counted as 1 FTE, and those working under 40 hours counted as 0.5 FTE.
Clarifies $100K payroll costs cap
This cap applies to all cash compensation and is to be applied to the eight-week period so that no employee should have forgivable cash compensation in excess of $15,385. There is no need to apply the cap on a weekly basis.
June 30 confirmed as the date to eliminate reduced FTE penalties – under certain conditions
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.
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 the Treasury's 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.
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 capped at $15,385.
Rent and interest on non-real estate secured loans and leases
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,” which are normally referred to as “Security Agreements,” will qualify for forgiveness, if they are based upon loans and leases that were in effect on February 15, 2020.
Interest, rent and utilities paid in arrears
Interest, rent and “utilities” that are incurred during the eight-week repayment measurement period and paid shortly thereafter in the normal course of business will also qualify to be forgiven. No prepayments are allowed.
75% / 25% rule clarity
Despite some press suggesting that there might be a relaxing of the 75/25 split, the application requires that borrowers confirm that at least 75% of the forgiveness amount is for payroll costs.
The rule is explicit that borrowers can first determine 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.
The instructions confirm that “eligible nonpayroll costs cannot exceed 25% of the total forgiveness amount.”
Reduced workforce and compensation reduction ratios
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.
The eight-week period: When does it start?
The eight-week forgiveness period begins when the first PPP monies are received. A business that borrowed $135,000 on May 2, and gets another $60,000 on May 13, will have to track the expenses for the eight weeks beginning May 2. The Instructions do not indicate what occurs if the second or third tranche of a loan is received after the eight-week period ends.
Current SBA guidance indicates that entities taxed as partnerships that did not receive loan amounts based upon the compensation paid to partners, and also seasonal businesses that did not receive an extra loan amount based upon the later released seasonal business rules, can now apply for additional PPP loan amounts. There is no guidance on what might be forgiven if the additional loan amount received after the eight-week period has expired.
Not great news about health insurance and retirement plan contributions for independent contractors, proprietors and partners in partnerships
The application and instructions confirm an apparent intent 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. This came as a shock to businesses operated as partnerships for tax purposes, that had hoped they would be treated the same as those taxed as S corporations or C corporations.
Finally - don’t forget PPP housekeeping is necessary as there are now specific documentation requirements
The guidance requires a borrower to submit detailed documentation to support loan forgiveness application and requires retention of that documentation for six years from when the loan is forgiven or repaid in full.
The application requires the borrower to maintain certain documentation related to its PPP loan for at least six years after the loan is forgiven or repaid in full, including documentation supporting the necessity certification and eligibility.
Need assistance planning and applying for PPP loan forgiveness? Please contact your Herbein Advisor or click below.