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Highlights of PPP Loan Forgiveness Application Clarifications

May 22, 2020

Highlights of PPP Loan Forgiveness Application Clarifications

  • Borrowers can calculate forgiveness during a 56-day period that either starts on the date of PPP loan disbursement, or, if payroll is every 2 weeks or more frequently, it can start on the date of the first payroll period after loan disbursement.
  • A payroll cost is considered incurred on the date that the employee’s pay is earned. Payroll costs may include amounts paid after the end of the 56-day period as long as they are paid on or before the next regular payroll date.
  • For eligible retirement plan contributions, borrowers may include unpaid 2019 retirement plan contributions and any 2020 contributions paid during the 8-week period beginning on the loan disbursement date.
  • There is no forgiveness reduction related to FTE count if the borrower reduced its FTE employee levels after February 15, 2020, and before April 26, 2020, and then restores its FTE levels by June 30, 2020 to the FTE level as of February 15, 2020.
  • Extensive documentation must be submitted to the lender for PPP forgiveness, including bank statements or third-party payroll service provider reports documenting cash compensation paid to employees, employment tax forms, and receipts, invoices, and statements showing payment of forgivable expenses.

On May 15, the SBA released a loan forgiveness application with rules for determining PPP loan forgiveness. We now have guidance that will result in more accurate calculations, providing planning opportunities to maximize loan forgiveness. There are still unanswered questions, but there is greater clarity than we had before.

In general, loan forgiveness is made up of covered payroll costs, rent, utilities and lease payments paid or incurred during a 56-day period. This allows borrowers to include some costs paid after the 56-day period, but incurred during that time. In addition, it appears that prepayments of rent and utility expenses are allowed to be included if paid during the 56-day period, although prepayment of interest expense is not permitted. The Forgiveness Application expires October 31, 2020, indicating that forgiveness applications must be filed by then or, if earlier, the 60-day period after the 56-day period ends.

The 56-day period

Borrowers will be able to use one of two 56-day periods for certain purposes. The Covered Period is the period beginning on the disbursement date of the loan. A borrower who pays employees every two weeks or more frequently can choose to use an Alternative Payroll Covered Period, a 56-day period beginning on the date of the first payroll period after the loan disbursement date.

Eligible Covered Payroll Costs

Covered Payroll Costs include cash compensation, employer contributions to group health plans and retirement plans, and state taxes assessed on compensation.

Cash compensation includes gross salary, wages, tips, commissions, paid time off (other than mandated paid FMLA or sick leave pay) and dismissal or severance paid during the Covered Period or the Alternative Payroll Covered Period. No amount in excess of $15,385 can be included or any person. For Schedule C sole proprietors, partners, and owner-employees, the maximum amount included cannot exceed $15,385 or 8 weeks’ worth of 2019 compensation, whichever is lower. The SBA is treating all owners the same regardless of whether their income is reported on a 1040 Schedule C, a K-1, or a W-2. Therefore, a shareholder employee of an S corporation or a C corporation will be subject to the same limitations as a partner in a partnership and a sole proprietor.

Payroll costs paid and payroll costs incurred during the 56-day period are eligible for forgiveness, but no amount can be counted more than once. A payroll cost is considered paid on the date that paychecks are distributed or an ACH transaction is originated. A payroll cost is considered incurred on the date that the employee’s pay is earned. Payroll costs may include amounts paid after the end of the 56-day period as long as they are paid on, or before, the next regular payroll date. Other than this exception, amounts must be paid during the Covered Period or the Alternative Payroll Covered Period.

Group health benefit costs and retirement plan contributions include all amounts paid for employees, but only the employer’s share of such amounts. Pre-tax employee contributions for health benefits and 401(k) salary deferrals are included in cash compensation and limited to the $15,385 maximum cash compensation amount.

By focusing on amounts paid, borrowers are able to include 2019 retirement plan contributions that have not yet been contributed to the plan and any 2020 contribution paid during the Covered Period or the Alternative Covered Payroll Period.  For group health benefits, borrowers can prepay insurance premiums. For self-insured plans, amounts also have to be paid during the Covered Period or the Alternative Payroll Covered Period. Borrowers not currently funding group health plan benefits in a trust or Voluntary Employees Beneficiary Association, may want to do so during the Covered Period or the Alternative Payroll Covered Period to maximize payments. Self-insured health benefits paid from the employer’s general assets or a special health plan bank account will be included in group health benefit costs.

Benefits costs attributable to Schedule C sole proprietors cannot be counted toward loan forgiveness. It is unclear whether benefit costs attributable to partners or other owner-employees can be included as eligible covered payroll costs. For that reason, borrowers may want to focus planning on group health plan and retirement plan benefits for employees only, not taking into account owner-employees.

Eligible Non-payroll Costs

Nonpayroll costs that can support loan forgiveness include:

  • Interest payments, but not any prepayment or payment of principal, on any business mortgage obligation on real or personal property incurred before February 15, 2020;
  • Business rent or lease payments on real or personal property in force before February 15, 2020; and
  • Business payments for a service for the distribution of electricity, gas, water, transportation, telephone or internet access. This does not seem to include any costs for sewer, trash pick-up, recycling, outdoor maintenance, or software or servicing costs related to internet unless it is for the distribution of internet services. While not explicitly stated, we assume that telephone costs include cell phone plan costs.

These costs can be included as long as they are either paid or incurred during the Covered Period and paid on or before the next regular billing date, even if that billing date is after the end of the Covered Period. Borrowers using an Alternative Payroll Covered Period for determining Covered Payroll Costs cannot use the same period for determining Eligible Nonpayroll Costs. Rather these costs must be paid or incurred in the 56-day period beginning with the loan funding date.

Reduction of Maximum Loan Forgiveness Amount

After totaling the payments and costs incurred in the 56-day period and eligible to be included in the forgiveness amount, the borrower needs to determine if decreases for certain reductions in employee’s wages and employment levels need to be applied. The reduction for salary and wage levels applies to employees who received compensation at an annualized rate of less than or equal to $100,000 during 2019 or were not employed by the borrower in 2019. The reduction for employment levels is based on average full-time equivalent (FTE) employees.

Reduction for Decreased Employment Levels

Employment levels are based on average FTE employees during the 56-day period.  A full time employee is one who works 40 hours (or more) per week. For individuals working less than 40 hours a week, the average number of hours paid per week are divided by 40 and rounded to the nearest tenth. The borrower can use a simplified method which uses .5 for any employee working less than 40 hours per week. This is a calculation done on a weekly basis.

There is no reduction for employment levels if the borrower reduced its FTE employee levels between February 15, 2020, and April 26, 2020, and then restored its FTE levels by June 30, 2020, to the FTE level in the pay period that included February 15, 2020.

There is also no FTE reduction for any employee if the borrower made a good-faith, written offer to rehire the employee during the 56-day period and that offer was rejected by the employee. In addition, there is no required reduction for employees who voluntarily resigned, were fired for cause or voluntarily requested and received a reduction in hours. If the position for these employees was filled by a new employee, this exception is not needed and does not apply.

Reduction for Decreased Wages

This reduction only applies to employees whose hourly wages or average annual salary were reduced by more than 25% during the 56-day period as compared to their hourly wages or average annual salary during the first quarter of 2020.  The reduction is evaluated on an employee-by-employee basis.  For those employees, determine the annual salary or hourly wage as of February 15, 2020, the average annual salary or hourly wage between February 15, 2020 and April 26, 2020, and the average annual salary or hourly wage as of June 30, 2020.  If the average annual salary or hourly wage between February 15, 2020 and April 26, 2020 is not greater than or equal to the amount as of February 15, 2020, there may be a reduction for decreased wages, unless the average annual salary or hourly wage as of June 30, 2020 equals or exceeds the amount as of February 15, 2020. To determine the reduction amount, first determine the difference between 75% of the average annual salary or hourly wage paid in the first quarter of 2020 and the average annual salary or hourly wage during the 56-day period. For hourly workers, determine 8 times the average number of hours worked in the first quarter of 2020 on a weekly basis and multiply that amount by the difference in hourly wage.  For salaried workers, the difference between 75% of the average annual salary paid in the first quarter of 2020 and the average annual salary paid during the 56-day period is multiplied by 8/52.

For both hourly and salaried workers, it appears that wages for all periods are based on base pay only without regard to overtime, bonuses, commissions, or other types of variable or non-predictable compensation.

Documentation Needed

Forgiveness will be verified by the lender who made the PPP loan.  In doing so, the lender will require the forgiveness application and Schedule A of the application, bank account statements or third-party payroll service provider reports documenting the amount of cash paid to employees, tax forms (e.g., Form 941) which overlap with the 56-day period and state quarterly business and individual employee wage reporting and unemployment insurance tax filings reported or to be reported, and payment receipts, cancelled checks or account statements documenting employer payments to group health and retirement plans. Borrowers are also required to submit evidence of their FTE counts in their chosen reference period prior to the forgiveness period.

Non-payroll cost documentation will need to include documents to verify the existence of obligations or services on February 15, 2020 and the payment during the Covered Period.  Interest payments are documented with a lender amortization schedule and receipts or cancelled checks verifying payment during the Covered Period, or lender account statements from February, 2020 through one month after the end of the Covered Period verifying interest amounts and eligible payments. Rent and lease payments are documented with a copy of the current lease agreement and receipts or cancelled checks verifying payment during the Covered Period or lessor account statements from February 15, 2020 through one month after the end of the Covered Period verifying the payments. Utility payments are documented with copies of invoices from February 15, 2020 through the Covered Period and receipts, cancelled checks or account statements verifying eligible payments.

To document FTE employees, there will need to be documentation showing the average number of FTE employees on payroll for each month between either February 15, 2019 and June 30, 2019 or January 1, 2020 and February 29, 2020, whichever the borrower is using for the forgiveness reduction calculation.  For seasonal employers, the time period for required documentation can be either of the above two or a consecutive 12-week period between May 1, 2019 and September 15, 2019. In addition, borrowers need to have documentation to show weekly FTE levels during the forgiveness period. This documentation may include payroll tax filings (e.g., Form 941) and state quarterly business and individual wage reporting and unemployment insurance tax filings that have been or will be reported and may cover periods overlapping the 56-day period. As noted below, none of the FTE documentation is required to be submitted to the lender but must be retained in the borrower’s files.

A borrower is required to maintain, but not submit, the Schedule A worksheet and documentation that supports:

  • the listing of each employee included in the forgiveness reduction calculation for decreased wages and employment levels, including documentation supporting the FTE calculation and, if applicable, documentation of the salary/wage reduction calculation
  • the listing of all employees receiving during any single pay period in 2019 compensation at an annualized rate of more than $100,000, including documentation supporting the FTE calculation
  • any employee job offers and refusals
  • any firings for cause, voluntary resignations and written requests by any employee for a reduction in a work schedule

All records relating to the PPP loan must be kept, including documentation:

  • submitted with the PPP loan application,
  • supporting the borrower’s certifications as to the necessity of the loan and the borrower’s eligibility for the loan,
  • supporting the loan forgiveness application, and
  • demonstrating material compliance with PPP loan requirements

All such records must be kept for 6 years after the loan is forgiven or repaid.


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