WOLF & CO Insights PPP Loan Forgiveness Instructions For Borrowers

PPP Loan Forgiveness Instructions For Borrowers

Since the launch of the Payment Protection Program (PPP), many interim rules and updated FAQs have been released—but guidance on the PPP’s loan forgiveness component has been minimal. Recognizing this need for clarification, the Small Business Administration (SBA) and U.S. Department of the Treasury released the PPP Loan Forgiveness Application and Instructions for Borrowers on May 15, 2020. The form and instructions seek to clarify how the SBA will process the loans, and provides instructions on how to calculate the amount of the loan to be forgiven.

Key Takeaways

  • Borrowers are allowed to utilize an Alternative Payroll Covered Period (APCP). Borrowers with a biweekly (or more frequent) payroll schedule may elect to calculate eligible payroll costs using the eight-week (56-day) period that begins on the first day of their first pay period following their PPP loan disbursement date. Otherwise, the Covered Period is an eight week (56-day) timeframe beginning on the date the loan is disbursed. The selection of either time period must be used consistently throughout the application.
  • The shift in the eight-week period under the APCP doesn’t apply to the calculation of expenses eligible for forgiveness (such as mortgage interest payments and rent, lease obligations, and covered utilities payments). The Covered Period for this purpose is eight-weeks beginning on the date the PPP loan was disbursed.
  • Eligible non-payroll costs haven’t changed from previous guidance and include:
    • Payment of interest on any business mortgage obligation on real or personal property
    • Rent or lease payment pursuant to a lease agreement for real or personal property
    • Business payment for distribution of electricity, gas, water, transportation, telephone, or internet access
  • Borrowers will be allowed to include payroll and non-payroll costs incurred during the Covered Period or APCP, but paid outside of the Covered Period or APCP, so long as those amounts are paid before the next billing date (for eligible mortgage, rent, or utility payments) or the next payroll date.
  • Payroll costs are considered on the day that paychecks are distributed or the day the borrower initiates an automated clearing house (ACH) transaction. Absent additional guidance, borrowers can include compensation paid during the Covered Period or the APCP, even if the amounts are earned prior to the start of the period. A business that pays payroll weekly in arrears—i.e. payroll for the week ending May 16 is paid May 22—will effectively be eligible for nine weeks of payroll forgiveness.
    • Cash compensation is capped at $15,385 per person and doesn’t include other payroll costs such as health insurance premiums, employer contribution to retirement plans, and employer’s share of state and local taxes. These are separate line items on the application and would be in addition to the cash compensation.
  • Full-time employee equivalents (FTE) are calculated based on a 40-hour standard per FTE. For example, an employee who works 40 hours or more will be counted as one, whereas an employee who works 24 hours will be counted as .60 (24/40) of an employee. For convenience, borrowers may use .5 for any employee who works fewer than 40 hours per week and 1.0 for any employee who works 40 or more hours per week. If a majority of a business’ part-time employees work less than 20 hours per week, it may be beneficial to elect the simplified calculation.
  • The following situations and employees will not be counted in determining reduction in loan forgiveness:
    • Employees who were fired for cause
    • Employees who voluntarily resigned
    • Employees who voluntarily requested and received reduction of their hours
    • Where the borrower made a good-faith, written offer to rehire a laid-off employee during the Covered Period or APCP, but was rejected by the employee
  • In accordance with the FTE Reduction Safe Harbor, the borrower is exempt from reduction in loan forgiveness amount based on FTE employees if both of the following conditions are met:
    • Borrower reduced its FTE employee levels in the period beginning February 15, 2020 and ending April 26, 2020
    • 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
  • At least 75% of the forgiveness amount must be used for payroll costs.
  • The instructions outline the documentation that borrowers will be required to provide with the loan forgiveness application, as well as maintain in their own files for six years.
  • Borrower must confirm, together with its affiliates, whether it received PPP loans in excess of $2 million. This relates to the SBA guidance that it will conduct a full review of any loan or group of affiliate loans in excess of $2 million that request forgiveness as outlined in FAQ #46.

This is not an official rule and still leaves many questions unanswered. In the press release issued with the application, the SBA stated it will issue regulations and guidance to further assist borrowers. We will continue to monitor activity surrounding the PPP and loan forgiveness, and provide updates as needed.