The Current State of Paycheck Protection Program Loan Forgiveness
You may have heard that the Small Business Administration (“SBA”) released the Paycheck Protection Program Loan Forgiveness Application on Friday, May 15, 2020. Despite detailed instructions that accompany the 11-page application, many questions still remain.The application instructions include new guidance not covered by prior FAQs issued by the SBA or other Interim Final Rules implementing the PPP provisions of the CARES Act. In addition, the press release announcing the form states, “the SBA will also soon issue regulations and guidance to further assist borrowers as they complete their applications, and to provide lenders with guidance on their responsibilities.”
We anticipate that things will continue to change as the SBA releases additional guidance. As a result, we encourage you to:
- Seek professional advice.
This article was written to provide you with resources to assist you in researching PPP loan forgiveness requirements, and is not intended to be legal advice. We encourage you to speak with your legal and/or accounting advisors for professional advice on any interpretations of forgiveness application based on your particular situation. There are other implications for how you spend PPP loan proceeds that you may want to consider. For example, according to the IRS, business owners who take the loan won’t be able to write off expenses that would otherwise be deductible if they use the PPP proceeds to cover the cost and get forgiveness.
- Do not send in completed applications at this juncture, but do continue to gather documentation necessary to demonstrate your compliance with the requirements for using PPP loan proceeds on eligible expenses.
- Continue to refer to our PPP page on the ARB website for the most current information. FAQs are being posted on our website, and are updated regularly.
In the meantime, we’ve tried to address the most common questions about forgiveness below, based on our review of the application:
When can I submit the forgiveness application?¶
The forgiveness application covers expenses during an 8-week period following the funding of your PPP loan. We do not recommend completing the application until additional guidance has been issued, as several open questions remain. Additionally, the SBA will require copies of 941’s as part of your request, which may not yet be available.
Depending on when you received your PPP loan, there may be a significant time lag from the end of the 8-week “covered period” or “alternative covered period” and when you file your quarterly 941s. As a result, you may not be able to immediately file for forgiveness. For example, if your PPP loan was funded in May, your 8-week period may run into July and be covered by both second quarter and third quarter payroll reporting. This means you may not have filed 941s to submit with your forgiveness request until October. It is also unclear what documents a sole proprietor or partnership that does not have “payroll”, and does not file 941s, will use. More guidance is necessary.
At American Riviera Bank, we are working to configure an online, secure portal for requesting forgiveness. We will not be accepting paper applications. As with the initial PPP application (screenshot below), the online portal will include calculation tools to assist you in determining forgiveness amounts and determining the necessary supporting documentation. We recommend you continue to maintain detailed records to support your use of the loan proceeds for your best chance at full loan forgiveness. We ask that you do not e-mail or deliver these applications to our offices, as you will need to complete online certifications as part of your forgiveness application.
Once a request for forgiveness is received, lenders have 60 days to make a determination on loan forgiveness under the PPP.
When does the 8-week period begin for tracking expenses eligible for loan forgiveness?¶
Prior guidance by the SBA indicated that the “covered period” for forgiveness was the 8-week period following disbursement of your PPP loan; however, the PPP Loan Forgiveness Application issued on May 15, 2020 includes instructions that provide options for borrowers to calculate payroll costs using an “alternative payroll covered period that aligns with borrowers’ regular payroll cycles.”
According to the application instructions, for “administrative convenience”, 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 (the “Alternative Payroll Covered Period”).
For example:
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 Saturday, June 20.
BUT, 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, such as when calculating business mortgage interest payments, utility payments, and other nonpayroll expenses.
What documentation should I maintain to evidence payroll expense?¶
The application instructions include details on what is required. We’ve also included this information on the PPP page of our website under our Frequently Asked Questions. Of note, however, the application appears to indicate that payroll costs “incurred but not paid during the Borrower’s last pay period of the Covered Period” can be included if paid “on or before the next regular payroll date.” Please note that we are still waiting on guidance to further explain this provision on the application. In addition, we would need to wait for proof of this final payment before submitting your forgiveness application to the SBA.
What documents will be required to evidence my employee count before the pandemic?¶
The application provides flexibility in determining the appropriate time period for calculating FTE. Documentation will be required showing (at the election of the Borrower):
- the average number of FTE employees on payroll per month employed by the Borrower between February 15, 2019 and June 30, 2019;
- the average number of FTE employees on payroll per month employed by the Borrower between January 1, 2020 and February 29, 2020; or
- in the case of a seasonal employer, the average number of FTE employees on payroll per month employed by the Borrower between February 15, 2019 and June 30, 2019; between January 1, 2020 and February 29, 2020; or any consecutive twelve-week period between May 1, 2019 and September 15, 2019.
Documents may include payroll tax filings reported, or that will be reported, to the IRS (typically, Form 941) and state quarterly business and individual employee wage reporting and unemployment insurance tax filings reported, or that will be reported, to the relevant state.
What documents will be required to prove nonpayroll, eligible expenses?¶
The application instructions provide detailed guidance on what is required, such as copies of lease agreements and canceled checks. Again, the application appears to indicate that an eligible nonpayroll cost is one 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.” Further guidance is needed from the SBA. In addition, as with payroll, we would have to wait for proof of payment prior to submitting your forgiveness application to the SBA.
How much of my loan will be forgiven?¶
Further guidance by the SBA is still needed; however, based upon a review of the new application, it appears that if you do the following, you may qualify for full loan forgiveness:
- spend 75% or more of the total loan amount on payroll costs (defined in Interim Final Rule on Paycheck Protection Program posted on April 2, 2020 (85 FR 20811));
- restore your employee count to pre-pandemic levels no later than June 30, 2020 (subject to certain exceptions); and
- incur payroll expenses within 25% of pre-pandemic totals.
Again, documentation will be important to ensure the maximum loan forgiveness.
The application instructions above indicate that the forgiveness amount will be the smaller of the following calculations:
- “Modified Total Amount”: Payroll Costs, plus Business Mortgage Interest Payments, Business Rent or Lease Payments, Business Utility Payments MINUS Total Salary/Hourly Wage Reduction (from PPP Schedule A, line 3).
MULTIPLIED BY THE FTE Reduction Quotient (enter the number from PPP Schedule A, line 13 or enter 1.0 if the FTE Reduction Safe Harbor has been met and you have not reduced the number of employees or the average paid hours of your employees between January 1, 2020 and the end of the Covered Period).
- PPP Loan Amount.
- Total Payroll Costs DIVIDED by 75% (note that you may not obtain forgiveness in an amount that exceeds the PPP Loan Amount).
It is interesting to note that the application appears to eliminate what some interpreted as a safe harbor for restoring FTE within 75% of pre-pandemic levels. Instead, while there are exceptions for employees who declined offers of rehire, it appears as though if your employee count as of June 30, 2020 is less than your pre-pandemic levels, your forgiveness amount may be reduced by a ratio that divides your current count by the pre-pandemic levels.
Are there any exemptions to the FTE count?¶
The application does appear to include an exemption to the FTE count if jobs are restored by June 30, BUT as noted above the forgiveness amount is the smaller of the 75% payroll threshold, PPP Loan Amount, or the FTE “Modified Total” amount. Therefore, your forgiveness amount will likely still be reduced if you did not spend enough on payroll costs because of the delay in rehiring. If you did not spend the money on payroll costs, you can also save those funds to pay down the remaining PPP loan balance.
Are there any exemptions to the requirement to rehire by June 30?¶
SBA and Treasury instituted an exception excluding laid-off employees whom the borrower offered to rehire (for the same salary/wages and same number of hours) from the CARES Act’s loan forgiveness reduction calculation. According to SBA FAQ 40 issued on May 13, 2020, the forgiveness amount will not be reduced for employee reductions related to:
- Individuals to whom the borrower has made a written offer in good faith to rehire but the employee declined;
- Employees whose employment was terminated for cause; or
- Employees who voluntarily resigned.
Documentation will be required to support any such exemptions. In addition, employees who reject offers of re-employment may forfeit eligibility for continued unemployment compensation.
How do I calculate my Full-Time Equivalent?¶
The instructions for line 11 of the application indicate that it is the Borrower’s election, to use either
- February 15, 2019 to June 30, 2019;
- January 1, 2020 to February 29, 2020; or
- In the case of seasonal employers, either of the preceding periods or a consecutive twelve-week period between May 1, 2019 and September 15, 2019.
Again, the application instructions remind the Borrower that the calculations on lines 11, 12, and 13 will be used to determine whether the Borrower’s loan forgiveness amount must be reduced based on reductions in full-time equivalent employees, as required by the statute.
It again specifies that the actual loan forgiveness amount that the Borrower will receive may be reduced if the Borrower’s average weekly FTE employees during the Covered Period (or the Alternative Payroll Covered Period) was less than during the Borrower’s chosen reference period. The Borrower is only exempt from such a reduction if the FTE Reduction Safe Harbor applies, which we discuss above. Note there is no reference to restoring FTE within 75% of pre-pandemic levels in the application.
What happens if I received an EIDL after I applied for the PPP? ¶
The CARES Act only contemplated refinancing EIDLs received before April 3. EIDL advances did not have to be repaid. The new application, however, appears to deduct the amount of any EIDL advance from your forgiveness amount. More guidance is necessary; however, if you received an EIDL advance you should consider setting aside that money to pay down your PPP loan if you do not wish to carry a loan balance in the event it is not forgiven.
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