Late Friday night the SBA and US Department of the Treasury issued the PPP Loan Forgivenss Application.  The application contains four parts, three of which are required with one optional.  In this email we will briefly go over some of the important clarifications or changes made in the application.  We encourage all recipients of PPP loans to spend time reading through the application, and familiarizing yourself with the process.  Our team is likewise becoming proficient on the application and we are here to answer your questions and assist you as you look to apply for forgiveness.

OF NOTE

Payroll Period

The application creates an option for borrowers with a biweekly (or more frequent) payroll to use an “Alternative Payroll Covered Period” that begins on the first day of their first pay period following the PPP Loan Disbursement Date, instead of having the first day of the 8-week covered payroll period occur in the middle of a pay period.  This should help companies simplify the “incurred” calculations on the front end of the 8-weeks for payroll.  Important: If this Alternative Payroll Covered Period is used, it only applies to payroll costs.  The 8-week covered period for qualified nonpayroll expenses still begins the date a borrower receives the funds.

Eligible Nonpayroll Costs

The application clarified some of the eligible nonpayroll costs.  It expanded loan interest payments to include loan interest on both real and personal property.  Likewise, business rent or lease payments for both real and personal property are included.  Utilities were specified as electricity, gas, water, transportation, telephone, or internet access.  Keep in mind all of the agreements for eligible nonpayroll costs must have been in place before Feb. 15, 2020.

“Incurred and Paid”

We have had lots of discussion about the qualified expenses “incurred and paid”” during the covered period.  Our interpretation of the application is that payroll costs and nonpayroll costs will be handled slightly differently.  Our interpretation is that payroll costs must be incurred and paid during the covered period except in the case where a regular payroll date falls after the covered period.  Payroll costs incurred but not paid by the end of the 8-week covered period (due to regular payroll schedule timing) are eligible for forgiveness if paid on or before the next regular payroll date after the covered period.

For nonpayroll costs, the application instructions suggest any eligible expenses paid during the covered period would qualify (without proration), and on the back end of the forgiveness period those costs incurred but not paid until after the covered period will qualify as long as they are paid on or before the next regular billing date.

Full-time Equivalent (FTE)

A reduction in forgiveness could occur if there is a reduction in full-time equivalents during the covered period.  The application clarifies to use 40 hours per week as the measure for a full-time equivalent.  The PPP Schedule A Worksheet instructions walk you through the calculation.  Interestingly, a simplified FTE calculation method was provided that allows companies to count employees working an average of 40 hours or more per week as 1.0 FTE, and then counting anyone averaging less than 40 hours per week as 0.5 FTE.  Determining which approach to take will be a strategic decision for borrowers.

Compensation- 13 Weeks vs. 8 Weeks

A reduction in forgiveness could occur if a borrower pays anyone less than 75% of their salary or wage over the 8-week covered period versus the prior full quarter (Jan 1 – March 31). Those who have followed this closely know that one of the issues has been how the SBA is going to compare the 13 week quarter wages to the 8-week covered period wages.  The answer laid out in the application is that the compensation will be annualized.  The calculations are presented in the application but basically you can use Q1 2020 pay multiplied by 4 to get an annualized salary/wage benchmark, and then compare that to the amount paid to that person over the 8 weeks * 52/8 (an annualized amount).  If the annualized pay over the 8 weeks is not less than 75% of the annualized pay for Q1, forgiveness will not be reduced based on that person’s pay.  Keep in mind this calculation must be made for each person.  If there was an employee for the company in Q1 that was replaced with a different person during the forgiveness period, our interpretation is the replacement’s compensation over the 8 weeks would be compared to the Q1 compensation of the person they replaced.

Safe Harbor for Pay Reductions and Reduced FTEs

The Safe Harbors are alive and well, which should be a welcome site for most borrowers who have had to reduce operations and/or struggled to bring employees back.  The important date for both of these Safe Harbors is June 30, 2020.  If an employer paid an employee less compensation (annualized) between Feb.15, 2020 and April 26, 2020 than they were paying them (annualized) as of Feb.15, 2020, they can bring that employee back up to at least 75% of their annualized pay by June 30, 2020 and not be penalized on forgiveness.  Similarly for FTEs, if a company reduced FTEs between Feb. 15, 2020 and April 26, 2020, they can restore the FTE levels by not later than June 30, 2020 to the levels that included Feb. 15, 2020 and not have forgiveness reduced.

Along with the FTE Safe Harbor, their are still FTE Reduction Exceptions which were expanded in the application.  Borrower loan forgiveness reductions based on FTEs will not include employees that (1) were furloughed but later offered their job back in writing and then rejected the offer, (2) were fired for cause, (3) voluntarily resigned, (4) voluntarily requested and received a reduction in hours.

Keep in mind the maximum forgiveness amount is up to the amount of qualified expenses paid and/or incurred (as described above) over the covered period, with no more than 25% of those expenses being for nonpayroll costs.  Any amount spent but not forgiven along with any amount of the loan not spent will convert to a 2-year loan with the same origination date as your 8-week forgiveness period at 1% interest.  The first payment is deferred 6 months from the origination date.  We believe many companies will ultimately be able to avoid forgiveness reductions with the Safe Harbor rules but will fail to spend or incur all of their loan dollars in the covered period, resulting in loans that must be repaid.

Documentation

There is a list of documentation required to be submitted and required to be maintained but not submitted in the application.  Here are the basics of what is required to be submitted to your lender:

  • PPP Loan Forgiveness Application (including calculation form)
  • PPP Loan Forgiveness Application Schedule A
  • Payroll documentation verifying eligible cash compensation and non-cash benefit payments to include:
    • Bank account statements or third-party payroll service provider reports
    • Tax forms (or equivalent third-party payroll service provider reports) to include payroll tax filings reported to the IRS and State quarterly business and individual employee wage reporting
    • Receipts, canceled checks, or account statements documenting the amount of employer contributions to employee health insurance and retirement plans
  • FTE documentation during the eight-week covered period and the prior reference period (which is elected by the borrower from three available options)
  • Nonpayroll expense documentation verifying the existence of obligations prior to February 15, 2020, and receipts, canceled checks, or account statements verifying eligible payments

Future Guidance

While the application has provided some much needed guidance and clarification, not all outstanding questions have been answered.  We expect more guidance will be forthcoming and will do our best to keep you informed.

If you need assistance with your loan tracking or you would like to discuss your situation relative to PPP loan forgiveness, we are here to help.  Reach out to your WR Partner or you relationship manager.  You can also email our COVID-19 task force for assistance:  COVID19TASKFORCE@websterrogers.com.