May 19, 2020 - Coronavirus, Small Business

PPP Loan Forgiveness Application is Finally Here

During these uncertain economic times, the Small Business Administration (SBA) loans under the Paycheck Protection Program (PPP) have been a critical lifeline for many small businesses trying to weather the COVID-19 pandemic.  The PPP, which we have written about previously, is part of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”).  One of the most beneficial aspects of these loans for Borrowers is that the entire loan amount may be forgiven if the proceeds are spent on payroll and other qualifying expenses during the eight-week period after loan disbursement (i.e., the Covered Period).

As small businesses are beginning to use their loan proceeds, many are now wondering how they can ensure the specific use of their loan later qualifies for full forgiveness.  We are still waiting on SBA and the Treasury Department to issue more detailed guidance in this regard.  In the meantime, however, the new Loan Forgiveness Application provides Borrowers with an idea of what the forgiveness application process will look like, as well as the level and type of documentation that Borrowers should be sure to have readily available.

While we encourage Borrowers to closely review the application for themselves, below are a few points we found worth highlighting:

  • The application confirms that the eight-week Covered Period of the PPP loan begins on the first day the PPP loan was disbursed. To illustrate this point, the application explains that “if the Borrower received its PPP loan proceeds on Monday, April 20, the first day of the Covered Period is April 20 and the last day of the Covered Period is Sunday, June 14.”  However, the application also clarifies that Borrowers with biweekly or more frequent payroll schedules may choose to calculate eligible pay roll costs using the eight‑week period beginning on the first day of the first pay period following the PPP Loan Disbursement Date.  This is referred to as the “Alternative Payroll Covered Period.”
  • The application attaches a “PPP Schedule A Worksheet”, which provides Borrowers with a step-by-step method for calculating eligible payroll costs. Of note, the instructions for this worksheet explain that for each employee, the total amount of cash compensation eligible for forgiveness may not exceed $15,385 (which is the prorated amount of an annual salary of $100,000 during the Covered Period).
  • Regarding eligible payroll costs, the application clarifies that payroll costs paid and payroll costs incurred during the Covered Period or Alternative Payroll Covered Period are eligible for forgiveness. The day that paychecks are distributed or the Borrower originates an ACH credit transaction is the day payroll is considered paid, while the day the employee’s pay is earned is the day payroll is considered incurred.  Payroll costs that are incurred but not paid during the Borrower’s last pay period of the Covered Period or Alternative Payroll Covered Period are still eligible for forgiveness if the Borrower pays those incurred costs on or before the next regular payroll date.
  • One way a Borrower’s forgiveness amount can be reduced is if the Borrower’s average number of full-time equivalent (FTE) employees during the Covered Period (or the Alternative Payroll Covered Period) is lower than its average number of FTE employees between February 15, 2019, and June 30, 2019, OR between January 1, 2020, and February 29, 2020.[1] The CARES Act provides that the calculation looks at the average number of FTE employees per month as calculated by the average number of FTE employees for each pay period falling within a month.  However, the application provides that the actual loan forgiveness amount that the Borrower will receive may be reduced if the Borrower’s average weekly FTE employees during the Covered Period (or the Alternative Payroll Covered Period) was less than during the Borrower’s total average weekly FTE employees during the chosen reference period.  Therefore, there may be a discrepancy between the statute and application.[2]
    • That said, the application does provide some much-welcomed clarity in what constitutes a FTE employee. While not a definition, per se, the application does provide methodologies for calculating the average number of FTE employees by giving each of the Borrower’s employees a numerical value based upon the average number of hours paid per week.  Borrowers can choose a simplified method for calculating FTEs, which assigns a value of 1.0 for each employee who works 40 hours or more per week and 0.5 for each employee who works fewer than 40 hours per week.
  • The application also explains that the Borrower need not enter mortgage interest, rent, or utility payments made that the Borrower does not want to include in the forgiveness amount. Additionally, for eligible non-payroll costs to be forgiven, they must have been paid during the Covered Period or incurred during the Covered Period and paid on or before the next regular billing date (even if that billing date is after the Covered Period).  As a reminder, these eligible non-payroll costs cannot exceed 25% of the total forgiveness amount.
  • Borrowers are required to submit certain documentation with the forgiveness application, such as:
    • Bank account statements (or third-party payroll service provider reports) documenting the amount of cash compensation paid to employees;
    • Payroll tax forms (or equivalent third-party payroll service provider reports) and state employee wage reporting for the Covered Period (or Alternative Payroll Covered Period);
    • Payment receipts, cancelled checks, or account statements documenting employer contributions to employee health insurance and retirement plans that are included in the forgiveness amount;
    • Documentation showing average number of FTE employees on payroll per month between February 15, 2019, and June 30, 2019, OR between January 1, 2020, and February 29, 2020.[3] Whichever time period the Borrower selects must be the same time period selected for the forgiveness reduction calculation; and
    • For nonpayroll expenses, documentation verifying the existence of the obligations/services prior to February 15, 2020, as well as documentation related to eligible payments made during the Covered Period.
  • Borrowers are also required to maintain certain additional supporting documentation related to eligibility, compliance, and forgiveness for six years after the date the loan is forgiven and repaid in full.

We are monitoring the situation closely and will be sure to post about any further guidance issued by the Government in the near future.

[1] The Borrower will have the option to choose which of these two time periods it wishes to be compared to the Covered Period.  Seasonal employers will also be able to compare their Covered Period to either of the preceding periods or a consecutive twelve-week period between May 1, 2019, and September 15, 2019.

[2] Regardless of this discrepancy, under both the CARES Act and the Loan Forgiveness Application, the Borrower is exempt from the reduction in loan forgiveness based on the number of FTE employees if both of the following conditions are met:  (1) the Borrower reduced its FTE employee levels in the period beginning February 15, 2020, and ending April 26, 2020; and (2) the Borrower then restored its FTE employee levels by no later than June 30, 2020, to its FTE employee levels in the Borrower’s pay period that included February 15, 2020.

[3] Seasonal employers may also provide documentation for any consecutive twelve-week period between May 1, 2019, and September 15, 2019.