LOAN FORGIVENESS

1. What has changed with the passage of the Paycheck Protection Program Flexibility Act?

The Paycheck Protection Program Flexibility Act (or PPPFA) became Law on Friday, June 5.  The legislation modifies the original requirements with hopes of making loan forgiveness more flexible and, therefore, more attainable. And, so far, it appears that may be the case.

The major issue about the provisions for loan forgiveness were that the stipulations weren’t achievable within the 8-week covered period for some businesses.  Businesses that had to lay off employees were uncertain whether they could bring staffing levels back up in time to be able to spend the then-required 75% of the loan on payroll costs.  In addition, they weren’t sure if they could bring their employee count and salary levels up to what they were during the lookback periods in order to maximize their loan forgiveness.  The lack of flexibility was particularly challenging for those in the restaurant, service, hospitality, and retail industries, where mandated stay-at-home orders have prevented businesses from operating at the same capacity that they had during the lookback periods.

The Paycheck Protection Program Flexibility Act modifies the following elements of the Paycheck Protection Program (PPP).

• Covered Period: The legislation changes the original 8-week covered period to 24 weeks or December 31, whichever is sooner.  This change provides small businesses a larger window of time to obtain loan forgiveness.
• Expense Ratio (75%-25%): Originally, in order to get maximum forgiveness, 75% of the loan had to be spent on payroll and 25% could be spent on rent, mortgage interest, and utilities.  The legislation changes the 75%-25% breakdown to 60% payroll and 40% non-payroll expenses (rent, mortgage interest, and utilities).
• Forgiveness Reductions: The legislation allows businesses that were unable to maintain their full-time equivalent employee (FTE) count to receive full loan forgiveness if borrowers were not able to return to the same level of business activity as before February 15 due to Covid-19.  In the original rules, having fewer FTEs during the covered period as compared to the lookback periods would reduce loan forgiveness.
• Tax Deferral: The legislation allows small businesses with PPP loans to defer payroll taxes through the end of 2020.
• Deadline to Apply for Loan Forgiveness: The legislation extends the deadline to apply for loan forgiveness to 10 months from the last day of the covered period, and PPP loan interest and principal payments will be deferred until the decision on loan forgiveness is made by the lender.
• Loan Term: The legislation changed the 2-year loan term to a 5-year term, still at 1% interest for new loans acquired after the passage of the Act.

 

2. How does loan forgiveness work?

Your loan will be forgiven conditioned on the following taking place over the covered period, which begins on the day of loan funding.  Please note, the covered period may be 8 weeks as in the original rules or 24 weeks (or until December 31, whichever is sooner), which was introduced by the Paycheck Flexibility Program Flexibility Act:

• 60% or more of the loan proceeds must be spent on compensation to employees.
• No more than 40% can be spent on non-compensation qualified expenses (rent, utilities and mortgage interest).
• Number of Staff: With some exceptions, your loan forgiveness will be reduced if your average total full time equivalent (FTE) employees is less than the average was during one of two look-back periods: either 2/15/19-6/30/19 or 1/1/20-2/29/20.  Please note: The Paycheck Protection Program Flexibility Act exempts borrowers from the FTE loan forgiveness reduction if borrowers are unable to return to the same level of business activity as before February 15 due to COVID-19.
• Level of Payroll: Your loan forgiveness will also be reduced if compensation decreased by more than 25% for any employee who made less than $100,000 annualized in 2019 between the 8-week period and 1/1/20-3/31/20.
• Re-Hiring: You have until December 31, 2020 to restore your full-time employment and salary levels for any changes made between February 15, 2020 and April 26, 2020.

 

Note: Remember that “total salary or wages” would include overtime, tips, allowances, commissions, bonuses, shift premiums, and so on, that were paid.

 

3. Is there any flexibility with the 8-week covered period?

The instructions included in the Loan Forgiveness Application indicate that you are permitted to choose an “Alternative Payroll Covered Period” (ACP). The Covered Period (CP) had been previously designated as the 8-week period beginning on the date of loan funding. Now, borrowers will have the option to select instead that the first day of the ACP be the date of the first pay period following the loan disbursement date. This would allow for more symmetry to match the payrolls within the 8-week period. (This does not apply to non-payroll related expenses.)

In addition, the Paycheck Protection Program Flexibility Act makes a 24-week covered period an option, and borrowers may apply for forgiveness as soon as loan funds are exhausted without waiting the entire 24 weeks.However, please note that recent guidance states that if a borrower applies for loan forgiveness before the end of the covered period and has reduced any employees’ salaries or wages by more than the 25% allowed for full forgiveness, the borrower must account for the excess salary reduction for the full 8-week or 24-week covered period, whichever one applies to its loan. Under this guidance, PPP borrowers that apply early for loan forgiveness forfeit a safe-harbor provision allowing them to restore salaries or wages by December 31, 2020 – an extension of the initial June 30, 2020 deadline per the Act – and avoid reductions in the loan forgiveness they receive.

 

4. When can employer borrowers make application for forgiveness?

As soon as they have exhausted the loan funds, even if that is before the end of the covered period.

 

5. When do you recommend that they should apply?

We recommend that most borrowers take their time and wait to apply.  There are bound to be additional changes, and the banks are figuring out their processes.  You have 10 months after your covered period to apply for forgiveness, which allows time for the gray areas to be clarified.

We’ve heard from some business owners who have the thought process that they meet all requirements now, and they don’t know if will later, so they want to apply now.  Remember, you can pick ending date of your covered period and use it even if you apply later.  The end date to your CP doesn’t need to coincide with the date you submit your forgiveness application.

UPDATE: Now that additional guidance has been released, we have now advised our clients to apply and assisted them with the application process.

 

6. What reports can BFG provide to payroll clients to help with tracking loan forgiveness?

For our Payroll Clients, we now have a report to pull compensation data and employee FTE counts out of our Payroll system. We will be able to then calculate your compensation regularly during the covered period in relation to the primary forgiveness factors.

The first two will compare the current weekly totals to the appropriate look-back periods for:

1. full time equivalent employees,
2. compensation for each employee

 

Additionally, we will track your total compensation against the total loan to verify it represents 60% or more.

 

7. How do I apply for loan forgiveness?

Borrowers may apply for loan forgiveness once loan funds are exhausted even if it is before the end of the covered period, though they can wait up to 10 months after the end of their covered period.

The SBA now has two versions of the forgiveness application available: the full form and the “EZ” form, which can be used if borrowers meet certain specific criteria.  The forms also have associated instructions.

• Long Form: https://home.treasury.gov/system/files/136/3245-0407-SBA-Form-3508-PPP-Forgiveness-Application.pdf
  • Instructions: https://home.treasury.gov/system/files/136/PPP-Loan-Forgiveness-Application-Instructions_1_0.pdf
• EZ Form: https://home.treasury.gov/system/files/136/PPP-Forgiveness-Application-3508EZ.pdf
  • Instructions: https://home.treasury.gov/system/files/136/PPP-Loan-Forgiveness-Application-Form-EZ-Instructions.pdf

 

Full Form

The full form is 5 pages, including worksheets.  This form should be completed by anyone who is not eligible to complete the EZ form.

 

EZ Form

The EZ form is 2 pages and is available to be used by borrowers who answer “Yes” to at least one of the following:

• The Borrower is a self-employed individual, independent contractor, or sole proprietor who had no employees at the time of the PPP loan application and did not include any employee salaries in the computation of average monthly payroll in the Borrower Application Form (SBA Form 2483).
• The Borrower did not reduce annual salary or hourly wages of any employee by more than 25 percent during the Covered Period or the Alternative Payroll Covered Period compared to the period between January 1, 2020 and March 31, 2020; AND The Borrower did not reduce the number of employees or the average paid hours of employees between January 1, 2020 and the end of the Covered Period. (Ignore reductions that arose from an inability to rehire individuals who were employees on February 15, 2020 if the Borrower was unable to hire similarly qualified employees for unfilled positions on or before December 31, 2020. Also ignore reductions in an employee’s hours that the Borrower offered to restore and the employee refused.
• The Borrower did not reduce annual salary or hourly wages of any employee by more than 25 percent during the Covered Period or the Alternative Payroll Covered Period compared to the period between January 1, 2020 and March 31, 2020; AND The Borrower was unable to operate during the Covered Period at the same level of business activity as before February 15, 2020, due to compliance with requirements established or guidance issued between March 1, 2020 and December 31, 2020 by the Secretary of Health and Human Services, the Director of the Centers for Disease Control and Prevention, or the Occupational Safety and Health Administration, related to the maintenance of standards of sanitation, social distancing, or any other work or customer safety requirement related to COVID-19.

 

Less than $150,000 Loan Form

If passed, a new proposal, called the Paycheck Protection Small Business Forgiveness Act, includes a provision that loans of $150,000 or less could be forgiven. But borrowers would have to maintain certain loan requirements. At least 60 percent of the money must be used toward payroll, and keeping current employees staffed. Borrowers would also have to submit a form to the lender, stating that they have followed the requirements of the loan.

 

8. The phrase “costs incurred and payments made” is unclear.  What does it mean?

Payroll (and non-payroll) related expenses that may have been incurred prior to the Covered Period (CP) and paid within the CP will be eligible. Payroll (and non-payroll) related expenses incurred within the CP but paid after the CP will be eligible, as long as they are paid no later than the next regular payroll date.

 

9. How are “full time equivalent employees” (FTEs) computed?

Per the Loan Forgiveness Application, Full Time Equivalent Employee (FTE) has now been defined as follows:

• Employees who average 40 or more hours per week count as 1.0,
• For employees who work on average less than 40 hours per week, you can either:
  • Divide the total hours by 40, or
  • Count each part time employee (less than 40 hours) as .5 FTEs (Simplified Method).

 

Note:  For employers who have been using the ACA definition with 30 hours instead of 40 for both your look back periods and the Covered Period (CP), we don’t expect that your results will look significantly different in terms of a percentage comparison between the CP and the look backs.

Now that FTE has been defined, recalculate your FTE counts for both the CP (or Alternative Payroll Covered Period or “ACP”) and for the look back periods. We recommend caution on using the Simplified Method of assigning .5 to all employees who average less than 40 hours per week if you have substantial part-time hours. Doing so could skew your actual counts depending on whether your average part-time worker earns over 20 hours per week versus less than 20 hours per week.

 

10. What if the FTE number you estimated on your original loan application is based on a whole different formula?

It’s irrelevant because the PPP Loan Forgiveness Applications (PLFA) doesn’t refer back to the loan application.

 

11. What happens if I ask my employees to come back to work, and they refuse?  How does that affect my loan forgiveness?

With the passage of the PPPFA, business owners can now qualify for forgiveness with a reduced FTE headcount if they were either

• Unable to rehire former employees or hire similarly-qualified employees on or before December 31, 2020.
• Unable to return to the same level of business activity as of February 15, 2020, due to compliance with requirements established or guidance issued by the Secretary of Health and Human Services, the Director of the Centers for Disease Control and Prevention, or the Occupational Safety and Health Administration during the period beginning on March 1, 2020, and ending December 31, 2020, related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID–19.

 

The new exemption pertaining to individuals who refuse an offer to be rehired is very similar, but not identical, to an exemption that was provided in the First Loan Forgiveness Rule; therefore, the SBA and Treasury have determined that this new statutory exemption should supersede the previous exemption relating to reductions in FTE employees. However, a related exemption in the First Loan Forgiveness Rule for borrowers that have reduced the hours of an employee and offered to restore the reduction in hours, but the employee declined the offer, is not addressed in the Flexibility Act and is being retained.

In order to implement these exemptions, the First Loan Forgiveness Rule has been revised to read:

1. Will a borrower’s loan forgiveness amount be reduced if the borrower reduced the hours of an employee, then offered to restore the reduction in hours, but the employee declined the offer?
   No. In calculating the loan forgiveness amount, a borrower may exclude any reduction in full-time equivalent employee headcount that is attributable to an individual employee if:
   1. The borrower made a good faith, written offer to restore the reduced hours of such employee;
   2. The offer was for the same salary or wages and same number of hours as earned by such employee in the last pay period prior to the reduction in hours;
   3. The offer was rejected by such employee;
   4. The borrower has maintained records documenting the offer and its rejection.

 

12. How should you document FTE exceptions, such as people who refused to return to work or were terminated for cause?

For the rehiring exemption, the rule requires a written offer was made.  Make sure to save copies of all correspondence related to your offer and the employee’s response.

In addition and in particular if you suspect the individual is refusing your job offer to stay on unemployment, it’s important to report job refusal to the Texas Workforce Commission ([email protected] or 1-800-252-3642; more information is located at: https://www.twc.texas.gov/reporting-fraud).  You’ll also want to report new hires and rehires to the TWC because doing so assists TWC in detecting and preventing fraud within the Unemployment Insurance (UI) system. Using the new hire information, TWC can identify UI claimants who have returned to work to ensure earnings are reported.

 

13. How should you document reduced business activity exemption?

For the business activity exemption, you will want to save any reports/statement indicating that your level of business activity has gone down.  For industries affected by social distancing, you may want to save a copy of local and state orders/mandates in your file.

 

14. Are we allowed to give raises or bonuses during the Covered Period?

Yes, and doing so may help you spend 60% of the loan on payroll expenses if you would otherwise have trouble doing so.  You might consider changing the timing of your annual bonuses (if you normally bonus at yearend) or think about providing bonuses as an incentive for employees to come back work.  If you are trying to maximize forgiveness, be aware of the rules regarding employees making over/under $100,000.

 

15. I have a payroll date that falls just outside of my 8-week period.  What can I do?

The SBA has clarified that payroll (and non-payroll) related expenses that may have been incurred prior to the 8-week Covered Period (CP) and paid within the CP will be eligible. Payroll (and non-payroll) related expenses incurred within the CP but paid after the CP will be eligible, as long as they are paid no later than the next regular payroll date.

Even so, we believe that it would be acceptable to adjust the timing of your pay date so that it falls within the 8-week period.

And remember, with the Paycheck Protection Flexibility Act, you may also opt to use a 24-week covered period.

 

16. Am I able to convert 1099 workers to employees?

This strategy may work based on the situation and is not specifically addressed in the CARES Act or SBA guidance.  You should consider why they were a 1099 contractor and if there is a valid reason to convert them to an employee.

That said, if it is possible and plausible for these individuals to become W-2 employees, and you can hire them within the Covered Period, they would certainly count as part of the FTE calculation. And any W-2 compensation paid to them during this period would count toward your overall payroll costs and toward your compensation per employee as compared to the lookback.

 

17. Do profit sharing contributions qualify for payroll expense?

Yes, when paid during the Covered Period.

 

18. If not forgiven, is there an early payment penalty?

No, there is not an early payment penalty.

 

19. How will the SBA determine if my certification that “current economic uncertainty makes this loan request necessary to support the ongoing operations of” my business?

Originally, the Treasury gave borrowers until May 14, 2020, and since extended the deadline to May 18, 2020, to return funds if they believe that the certification was not made in “good faith.”

The SBA and Treasury have updated their FAQs to explain how they would review this certification. Under question 46, the Treasury states, “Any borrower that, together with its affiliates, received PPP loans with an original principal amount of less than $2 million will be deemed to have made the required certification concerning the necessity of the loan request in good faith.”

For those with loans over $2 million, the Treasury states that these applications may be reviewed to determine if they believe the good faith certification was met. If they determine the loan is not eligible for loan forgiveness, they will inform the lender. If the borrower pays back the loan, the “SBA will not pursue administrative enforcement or referrals to other agencies.” Additionally, for the lenders the determination “will not affect SBA’s loan guarantee.”

 

20. Allocation of at Least 60% of Loan Proceeds to Payroll Costs: does this mean I won’t be forgiven if I don’t spend 60% of the loan on payroll costs?

On June 8, 2020, SBA Administrator Jovita Carranza and Treasury Secretary Steven Mnuchin clarified that partial loan forgiveness will be available to borrowers who used less than 60% of the loan on payroll costs during the covered period, subject to at least 60% of the loan forgiveness amount having been used for payroll costs.

 

21. What is the cash compensation maximum allowable amounts for non-owner employees?

The maximum allowable compensation for employees is $100,000 per year.  That means $15,385 for the 8-week covered period or $46,154 for the 24-week covered period.

Allowable cash compensation as a part of Payroll Costs have been defined to include salary, wages, and tips, up to $100,000 annualized per employee and prorated over the Covered Period. The only examples of the prorated amounts provided by the SBA include for a 24-week covered period, a maximum of $46,154, and for an 8-week covered period, a maximum of $15,385 per individual. Since the SBA has now allowed for a borrower who has exhausted their funds prior to the end of the 24-week covered period, it is not clear if they are able to use a prorated period, that is, number of weeks equal to that which they needed to exhaust their loan funds. In other words, if a borrower exhausted their funds in 16 weeks, would they be able to count 100,000 prorated over 16 weeks or would it be capped at 8 weeks or would the full 24-week maximum be allowed?

 

22. Can owners be paid from the loan?  Would owner pay be included in forgiveness?

Yes, owners may be paid from the loan and those payments would qualify for forgiveness.

Please note, per the SBA and Treasury, an owner is defined as owning 20% or more of borrower.

The maximum allowable compensation for owners is as follows:

• 8-week covered period: up to $15,385 (8 weeks’ worth (8/52) of 2019 owner-employee compensation)
• 24-week covered period: up to $20,833 (2.5 months’ worth (2.5/12) of 2019 owner-employee compensation)
• Cash compensation has been interpreted by the SBA/Treasury to be W-2 wages or self-employment income that the owner-employee pays self-employment taxes on, such as Schedule C, line 31 or Schedule K-1, line 14a.

 

There has been no explanation for why owner-employees would not only be treated differently than employees for a 24-week covered period but also differently than they were treated for an 8-week period.

 

23. Describe the different types of owner-employees? Are there distinctions between how any of these is treated?

• C-corporation owner-employees are capped by the amount of their 2019 employee cash compensation and employer retirement and health insurance contributions made on their behalf.
• S-corporation owner-employees are capped by the amount of their 2019 employee cash compensation and employer retirement contributions made on their behalf, but employer health insurance contributions made on their behalf cannot be added because those payments are already included in their employee cash compensation.
  
  This seems like an inconsistency. While it is true that, for owners of flow through organizations, their insurance is treated as part of their income, the already uneven low maximum amounts allowable simply make this a punitive provision. Most owners will have actual prorated cash compensation far in excess of the arbitrary selected here so to also limit health insurance costs, when it is allowable for non-owner employees, ends up having a ‘doubling effect’ on top of the already inconsistent cap mentioned above.
• Schedule C or F filers are capped by the amount of their owner compensation replacement, calculated based on 2019 net profit.
• General partners are capped by the amount of their 2019 net earnings from self-employment (reduced by claimed section 179 expense deduction, unreimbursed partnership expenses, and depletion from oil and gas properties) multiplied by 0.9235.
• Self-employed business owners, including Schedule C or F filers and general partners, may not include health or retirement benefits as eligible payroll costs.

 

24. Explain the rehiring safe harbor.

The Paycheck Protection Program Flexibility Act sets up that you have until December 31, 2020 to rehire workers in order to restore FTE headcount or wage reductions and achieve maximum forgiveness.

 

25. What if the employee has the same hourly rate but reduced hours?

For hourly employees, we are not looking at total pay, it’s wage rate.  Hours could be reduced, but rate doesn’t change; however, reducing hours could affect the FTE count.  The law may have been written this way in order not to double penalize businesses.

 

26. What about eliminating director-level role for more entry level role?

Nothing we’ve seen says you cannot do that; however, you would want to be able to justify it as strategic decision to your bank.  In addition, remember that you do not need to worry about making salary changes to employees who make more than $100,000; therefore, reducing a high earner’s pay would not affect the salary reduction.

 

27. What documentation will we be required to submit to the bank?

There are four categories of documentation that borrowers should consider: documentation related to eligibility, necessity, use of funds, and forgiveness.

Eligibility: First, a borrower should maintain records with information used to determine their eligibility for applying for and participating in the PPP. Ideally, these documents would address issues related to SBA size standards, compliance with SBA affiliation rules, and employee count, among other considerations.  This may include payroll reports by a recognized third-party payroll processor and certain tax records, any documents that the borrower relied upon in making the application.

Necessity: Second, a PPP borrower should be able to produce documentation containing information used to substantiate the certification on its PPP loan application that the “current economic uncertainty makes this loan request necessary to support the ongoing operations” of the borrower. This information should help the borrower show it made the certification in good faith, taking into account its business activity at the time of the application, and the borrower’s ability to access other sources of liquidity sufficient to support its operations.

Use of Funds: Third, PPP borrowers should maintain accurate records of how PPP loan proceeds were used. These usage records should allow the SBA to track the inflow of PPP loan proceeds from the borrower’s lender and the outflow of PPP loan proceeds toward payment of covered expenses, like payroll expenses and lease payments.

Forgiveness: Fourth, if the borrower will seek forgiveness, it must maintain and submit documentation set forth in the SBA’s loan forgiveness applications along with additional documentation lenders may require. This may include bank account statements, third-party payroll service provider reports, payment receipts, tax forms, account statements, cancelled checks, and payroll tax filings reported, or that will be reported, to the IRS. Borrowers will also have to submit documentation verifying existence of the obligations and services prior to February 15, 2020, for which PPP loan proceeds were used, such as lender amortization schedules, current lease agreements, receipts or cancelled checks, and utility invoices.  In addition, borrowers will want any documentation relevant to exemptions, such as employee job offers and refusals and documentation of reduced business activity.

 

28. What about documentation that you may want to keep in your file for future reference if needed?

All records relating to the PPP loan, including documentation submitted with the PPP loan application, documentation supporting the borrower’s certifications as to the necessity of the loan request and its eligibility for the PPP loan, documentation necessary to support the borrower’s loan forgiveness application, and documentation demonstrating the borrower’s material compliance with PPP requirements, must be retained in the borrower’s files for 6 years after the date the loan is forgiven or repaid in full. In addition, the borrower must permit authorized representatives of the SBA to access such files upon request.