As Borrowers begin calculating the amount of PPP loan forgiveness that they will be granted, the SBA has released the initial version of the application and instructions that will be necessary to provide Lenders with the appropriate documentation. The SBA has indicated there will be additional guidance forthcoming to assist both Borrowers and Lenders as they navigate the process. There are some notable clarifications and changes that we have highlighted below.
Eligible Payroll Costs
Borrowers are generally eligible for forgiveness for the payroll costs paid and incurred during the Covered Period (or Alternative Payroll Covered Period) (“payroll costs”). Payroll costs are considered paid on the day that paychecks are distributed or the Borrower originates an ACH credit transaction. Payroll costs are considered incurred on the day that the employee’s pay is earned. Payroll costs incurred but not paid during the Borrower’s last pay period of the Covered Period (or Alternative Payroll Covered Period) are eligible for forgiveness if paid on or before the next regular payroll date. Otherwise, payroll costs must be paid during the Covered Period (or Alternative Payroll Covered Period). For each individual employee, the total amount of cash compensation eligible for forgiveness may not exceed an annual salary of $100,000, as prorated for the covered period. Count payroll costs that were both paid and incurred only once.
Eligible Non-Payroll Costs
Nonpayroll costs eligible for forgiveness consist of: (a) covered mortgage obligations: payments of interest (not including any prepayment or payment of principal) on any business mortgage obligation on real or personal property incurred before February 15, 2020 (“business mortgage interest payments”); (b) covered rent obligations: business rent or lease payments pursuant to lease agreements for real or personal property in force before February 15, 2020 (“business rent or lease payments”); and (c) covered utility payments: business payments for a service for the distribution of electricity, gas, water, transportation, telephone, or internet access for which service began before February 15, 2020 (“business utility payments”). An eligible nonpayroll cost must be paid during the Covered Period or incurred during the Covered Period and paid on or before the next regular billing date, even if the billing date is after the Covered Period. Eligible nonpayroll costs cannot exceed 40% of the total forgiveness amount. Count nonpayroll costs that were both paid and incurred only once.
Covered Periods for Payroll (Standard or Alternative)
Due to the recently adopted Paycheck Protection Program Flexibility Act of 2020, the Covered Period (or Alternative Payroll Covered Period) has been expanded from 8 weeks (56 days) to 24 weeks (168 days). If a covered loan was received prior to the enactment of this law, the borrower may elect to keep their original 8-week Covered Period.
The first day of the Covered Period must be the same as the PPP Loan Disbursement Date. For example, 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 either Sunday, June 14 or Sunday, October 4.
Alternative Payroll Covered Period
For administrative convenience, Borrowers with a biweekly (or more frequent) payroll schedule may elect to calculate eligible payroll costs beginning on the first day of their first pay period following their PPP Loan Disbursement Date (the “Alternative Payroll Covered Period”). For example, if the Borrower received its PPP loan proceeds on Monday, April 20, and the first day of its first pay period following its PPP loan disbursement is Sunday, April 26, the first day of the Alternative Payroll Covered Period is April 26 and the last day of the Alternative Payroll Covered Period is either Saturday, June 20 or Saturday, October 10, depending on the length of Covered Period they choose. Borrowers who elect to use the Alternative Payroll Covered Period must apply the Alternative Payroll Covered Period wherever there is a reference in this application to “the Covered Period or the Alternative Payroll Covered Period.” However, Borrowers must apply the Covered Period (not the Alternative Payroll Covered Period) wherever there is a reference in this application to “the Covered Period” only.
FTE (Full-Time Equivalent) Standards
The application worksheet will calculate FTE based on 40 hours that will be rounded to a tenth. A simplified method that assigns a 1.0 for employees who work 40 hours or more per week and 0.5 for employees who work fewer hours may be used at the election of the Borrower.
FTE Reduction Exceptions and Safe Harbor
The following are considered to be an exceptions: (1) any positions for which the Borrower made a good-faith, written offer to rehire an employee during the Covered Period or the Alternative Payroll Covered Period which was rejected by the employee; and (2) any employees who during the Covered Period or the Alternative Payroll Covered Period (a) were fired for cause, (b) voluntarily resigned, or (c) voluntarily requested and received a reduction of their hours. Any FTE reductions in these cases do not reduce the Borrower’s loan forgiveness.
A safe harbor under applicable law and regulation exempts certain borrowers from the loan forgiveness reduction based on FTE employee levels. Specifically, the Borrower is exempt from the reduction in loan forgiveness based on FTE employees described above 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 not later than December 31, 2020 to its FTE employee levels in the Borrower’s pay period that included February 15, 2020.
There was significant attention paid to certifications that were required of the borrowers in the initial application process, we recommend you read page 4 of the SBA forgiveness application in its entirety prior to beginning the forgiveness process.
We expect additional changes and clarification in the days to come. Keep an eye out for a webinar with more answers. Our advisors are closely following COVID-19 relief efforts and will continue to publish insights to keep you informed about potential business impacts and benefits. Learn more about the Paycheck Protection Program or visit our COVID-19 Resource Center for more news, tools and insights you need to know in these uncertain times.All Insights