SBA PPP Loan Application
On Friday, May 15, the Small Business Administration (SBA), in consultation with the Department of the Treasury, released the Paycheck Protection Program (PPP) Loan Forgiveness Application and detailed instructions for the application.
The link to the announcement and the new SBA Loan Forgiveness Application is here:
The form and instructions inform borrowers how to apply for forgiveness of their PPP loans. There are additional explanations about rules and some new rules explained, some of which could be advantageous for employers. We believe that many of the questions that we had may be resolved in this release.
There still remain some unanswered questions and the new release raises a few new questions. However, on the whole, we feel like this is a very helpful package.
SBA has said they still plan to issue additional regulations and guidance regarding remaining questions. We hope that is true. It’s challenging to know exactly how to plan and make accurate decisions without some of those guidelines. So, the question is: when, SBA? Soon. How soon? Very soon!
Following are a few highlights of some of the new rules that we’re seeing in this application, many which may be beneficial and some which still bear further explanation. We wanted to get this to you as soon as possible while we’re continuing to study the changes:
- The first is the Loan Forgiveness Application itself. This brings a significant piece of the puzzle to the table. The Application is an 11-page document which contains 4 pages of forms: Application, Schedule A, Worksheet for Schedule A and Borrower Certifications. Plus 7 pages of instructions.
- 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.
- While the requirement that no less than 75% of forgivable funds must be attributed to payroll costs remains, the Application appears to make clear that total payroll costs that are less than 75% of the actual loan funds, will still be forgivable. This means that, if an employer were to spend, say, 50% of the loan funds on allowable payroll costs, there can still be forgiveness so long as no more than 25% of the forgivable amount is for non-payroll costs. This was very welcome news.
- The instructions indicate that you are permitted to choose an “Alternative Payroll Covered Period” (ACP). The 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.)
- Forgiveness includes “any amounts paid to owners (owner-employees, a self-employed individual, or general partners)... capped at $15,385 (the eight-week equivalent of $100,000 per year) for each individual or the eight-week equivalent of their applicable compensation in 2019, whichever is lower.” This means that owners cannot increase their compensation during the CP/ACP to be higher than their average was in 2019.
- Also, the statement above “forgiveness includes any amounts paid to owners...” stands alone. There is no other description about the nature or type of owner compensation, whether it be by draw or compensation through the payroll system. Unless and until guidance to the contrary comes out, this would appear to mean, if you take it literally, "any amounts paid."
- Full Time Equivalent Employee (FTE) has now been defined as follows:
- Employees who average 40 or + 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 8-week 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.)
- For the salary/wage reduction, the most significant indication is that the reporting will, in fact, look at each separate employee on an individual basis. There a number of questions related to this which we will be studying carefully.
- There was no change to the Safe Harbor protection if an employer restores either or both of the FTE count or the salary/wage deficit by June 30 as compared to February 15. In fact, the instructions have expanded the language to include an additional look back period for compensation of employees whose salaries or hourly wages was reduced by more than 25% during the CP/ACP.
- The instructions have also added a new exemption from the loan forgiveness reduction related to FTE. Previously, there was an exception provided that applied to laid off employees to whom the borrower had made a “good faith, written offer to rehire... which was rejected by the employee.” This has been extended to now include employees who “(a) were fired for cause, (b) voluntarily resigned, or (c) voluntarily requested and received a reduction of their hours. In all of these cases, include these FTEs... only if the position was not filled by a new employee. Any FTE reductions in these cases do not reduce the Borrower’s loan forgiveness.”
We will continue researching the Application and instructions, new updates and our reporting process to determine how you can be prepared to provide a full accounting to your lender along with the documentation needed for you to verify your payroll costs.
As we’ve stated, there are still some questions that need further clarification. For example:
- Are health care and retirement costs attributable to owners and self-employed also forgivable?
- With new rules for incurred payroll costs, does that include only the actual hours earned by employees during the CP/ACP, even if those hours are coupled with hours not earned during the CP/ACP? If we did move up a payroll that was otherwise scheduled to be paid following the CP/ACP so that it was paid within the CP/ACP, is that forgivable even though it may include employee hours not earned during CP/ACP? (We’re going to assume yes, since it would be a "payroll cost paid" during the CP/ACP.)
- For the salary/wage reduction, how do we assess the compensation for employees who may have been employed during the first quarter of 2020 but are no longer employed and whose position has been filled by a new employee? Or for employees who have become employed but were not employed during the first quarter of 2020?
- Expenses related to forgiveness are still not deemed "deductible" although there have been rumors that congress could pass an amendment allowing the deduction. At this point, there is no anticipation of that occurring.
These questions may or may not get resolved with further guidance but we’ll keep watching. In the meantime, we felt it would be important for you to have a summary of what just came out. You may want to remain in communication with your lender in case they are privy to additional information as well as to understand their thought process.
We believe that the following are strategies to consider:
- Revisit your 8-week CP to determine if might make sense to use an ACP that would begin on the day of your first payroll following the date of loan funding.
- Now that “Full Time Equivalent Employees” (FTE) has been defined, recalculate your FTE counts for both the 8-week CP (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.
- While the question of whether spending less than 75% of loan funds would lead to no forgiveness has presumably now been taken off the table, it still remains that the only way to achieve 100% forgiveness is if 75% of the loan funds are spent on payroll costs and no more than 25% spent on allowable non-payroll costs.
- If you have laid off, furloughed or reduced hours of employees prior to your receiving the loan, you may want to bring some or all of them back to full time at least during the 8-week period.
- In some cases, you may have employees in the above suggestion for whom you may not currently have work. It still may make sense to bring some or all of them back in order to help you achieve 75% of loan proceeds being paid out for payroll costs, FTE count versus the look back and/or to maintain no more than a 25% of reduction in pay per employee (or average cost per FTE and/or total compensation) versus the look back.
- In some cases, for employees who have either remained employed or have come back, it may make sense to offer an ‘incentive bonus’ during this 8-week period.
- It may be a consideration to move up the timing of your next payroll that is scheduled following the 8-week period so that all or some of it is paid before the 8-week period ends.
- You may want to forecast the non-payroll costs, allowable for loan forgiveness, during the 8-week period. These costs are limited to equal no more than 25% of the loan proceeds.
- If your total forecast for the above-mentioned non-payroll costs shows less than the 25% target, you may want to consider moving up the timing of payment for some of those costs that may come due shortly following the end of the 8-week period.
- We recommend that you work with your CPA to complete this Application.
We will continue to review and communicate with you as this develops further.