21 May 2020 PPP Loan Forgiveness Application Details
PPP Loan Forgiveness Application-At Least Some Guidance!
On May 15, 2020, the SBA issued a PPP Loan Forgiveness Application which provided clarifications to several outstanding questions. Many questions are still outstanding, but we are off to a good start. The Application goes through a series of tables and worksheets to calculate many of the variables that can come into play in calculating loan forgiveness. The SBA and Treasury indicated that further guidance will be coming, but did not indicate when that will be. It should be noted that your lender will be making the determination on the amount of loan forgiveness based on the documentation you provide.
I am not going to go into preparation details for the application or the types of expenses that create opportunities for forgiveness. Those topics have already been discussed at great length. Instead, the following will attempt to go through the theory of the calculations and the clarifications that the application and instructions provided. This article already has more detail than I would like, but here goes!
Alternative Payroll Covered Period
Previous information seemed to make it clear that the eight-week Covered Period began on the day of the first loan disbursement and extended for exactly eight weeks. A clarification for payroll cost calculation now provides an Alternative Payroll Covered Period. A Borrower with biweekly or more frequent payroll periods may now use an eight-week period that begins on the first day of their first pay period following their PPP Loan disbursement. Note that this option is not available for Borrowers with semi-monthly and monthly pay periods. The use of this Alternative Payroll Covered Period is only available for certain specific uses. For instance, it may not be used for rent, utility payments, etc.
Paid and Incurred
Though we haven’t received complete guidance on the “paid and incurred” concepts, some clarifications were attempted, but now seem to create even more confusion. Though the initial rules implied a requirement that costs be paid and incurred during the Covered Period. The guidance now states:
Borrowers are generally eligible for forgiveness for the payroll costs paid and payroll costs incurred during the eight-week (56 day) Covered Period (or Alternate Payroll Covered Period.
Payroll Costs are considered paid on the day paychecks are distributed or the Borrower initiates an ACH transaction. Payroll Costs are considered incurred on the day the employees pay is earned. Now we know that Payroll Costs incurred but not paid during the Covered Period (or Alternative Payroll Covered Period) are eligible for forgiveness if paid on or before the next regular payroll date. This now eliminates the need to consider adjusting a payroll period to make sure it is paid on or before the last day of the eight-week period.
What is still subject to question is whether this new guidance implies that the payroll costs paid is in fact mutually exclusive from the payroll costs incurred. The conservative approach is to assume we are still talking about payroll for an eight-week period.
The alternative approach that many believe is applicable is that any payroll costs paid during the Covered Period would be allowable, even if they were not incurred during the Covered Period. An example of this would be a circumstance where the Borrower’s pay periods are semi-monthly, the Covered Period begins April 13th, ends June 7th and the first normal pay date during the Covered Period is April 15th. Using this mutually exclusive approach could allow for those April 15th salary payments to be included in the forgiveness calculation (even though the only pay incurred was for 3 days), but also still include on a pro-rata basis those paid through June 7th but paid on June 15th, after the Covered Period ended.
In essence, this example would allow for a total of 68 days of Payroll Costs to be included in the forgiveness calculation.
Though it would seem obvious, the SBA also clarified that where costs were both paid and incurred during the eight-week period could only be used once.
Non-payroll costs such as business mortgage interest, rent and utilities must be paid during the Covered Period or incurred during the Covered Period and paid by the next regular billing date, even if the billing date is after the Covered Period. The paid or incurred concept from above seems applicable here as well. Based on the verbiage, it should be assumed that these expenses allowed to be paid after the end of the Covered Period need to be paid on time to be eligible for forgiveness. These non-Payroll costs are still limited to no more than 25% of Loan Forgiveness.
$100,000 Per Person Payroll Limitation
The limitation of $100,000 per employee was clarified to be $15,385 for the eight-week Covered Period.
There was a new development here. The Loan Forgiveness Application requires separation of Owner Employees, a self-employed individual or general partners compensation from employee Payroll Costs. It also stipulates that the allowed compensation for forgiveness will be the lesser of the eight-week Covered Period compensation, the $15,385 cap, or the eight-week equivalent of their applicable compensation in 2019.
Clarification was provided that verified a Full-Time Equivalent employee was in fact based on a 40-hour work week.
Additionally, a Borrower may also elect to use a simplified method that assigns 1.0 FTE for any employee that works 40 or more hours per week and .5 FTE for employees who work fewer hours.
Of significant importance is the wording in the Loan Forgiveness Application that FTE’s are to be calculated on a weekly basis, not per pay period or per month (emphasis added):
Average FTE: This calculates the average full-time equivalency (FTE) during the Covered Period or the Alternative Payroll Covered Period. For each employee, enter the average number of hours paid per week, divide by 40, and round the total to the nearest tenth. The maximum for each employee is capped at 1.0. A simplified method that assigns 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.
This calculation will be used to determine whether the Borrower’s loan forgiveness amount must be reduced due to a statutory requirement concerning reductions in full-time equivalent employees. Borrowers are eligible for loan forgiveness for certain expenditures during the Covered Period or the Alternative Payroll Covered Period. However, the actual loan forgiveness amount that the Borrower will receive may be less, depending on whether the Borrower’s average weekly number of FTE employees during the Covered Period or the Alternative Payroll Covered Period was less than during the Borrower’s chosen reference period.
The instructions also indicate for Line 11 of the PPP Schedule A where the Borrower is calculating FTE’s for the chosen reference period (emphasis added):
Enter the Borrower’s total average weekly full-time equivalency (FTE) during the chosen reference period.
Navigating the Forgiveness Reduction Calculations and Safe Harbors
For a Borrower who has had no reduction in employees and no reduction in pay, this becomes a non-issue other than completing the forms and providing the documentation. Unfortunately for most of the clients that have contacted us, it is not that simple.
Loan Forgiveness may be reduced if a Borrower’s employee count declines and/or a Borrower has reduced payroll costs from periods in 2019 or 2020. There are available Safe Harbors and Rehiring alternatives that can eliminate some or all those reductions in the amount forgiven, but they can be complicated. The employee count and salary reduction calculations and some of the possible alternatives have been documented before, but we will go through them again adding the new information provided last Friday.
Reduction in Number of Employees
If an employer has a reduction in weekly employee count during specific measured periods, the amount of loan Forgiveness will be reduced based on a formula. The formula is a comparison of the weekly average number of full-time equivalent employees during the eight-week period divided by the weekly average number of full-time equivalent employees during one of two periods. The employer could choose which of these two periods is most beneficial.
Period 1: the period beginning February 15, 2019 through June 30, 2019.
Period 2: the period beginning January 1, 2020 through February 29, 2020.
For example, if an employer has 30 calculated employees during the eight-week period and had 50 employees during the period February 15, 2019 through June 30, 2019 period but had 40 employees during the period January 1, 2020 through February 29, 2020, the Forgiveness would be 75% of the loan amount. This would be calculated as 30 eight-week period employees divided by the 40 January 1, 2020 through February 29, 2020 employees, since that would be the most beneficial choice.
As a note, the new guidance changed the measurement period for seasonal employers who may now use either of the two periods above or any consecutive twelve-week period between May 1, 2019 and September 15, 2019.
Reduction in Salary and Wages
This calculation is on a per employee basis, not on an overall salary and wages basis. The amount of Forgiveness shall be reduced by the amount of any reduction in total salary or wages of any employee during the eight week period that is in excess of 25 percent of the total salary or wages of the employee during the most recent full quarter during which the employee was employed before the eight week period, i.e. 1/1/20 through 3/31/20. Guidance here allows for exclusion of all employees not employed during the Covered Period or Alternate Payroll Covered Period. In other words, an employee who worked in the first quarter but did not work in the Covered Periods does not count against the Borrower in the loan forgiveness calculation.
This calculation is a dollar for dollar reduction in Forgiveness on any reduction in salary or wages in excess of 25% of an employee.
It is important to note that under the provisions of the Act, employees that received an annualized pay rate of $100,000 or more, in any single pay period in 2019 are excluded from this calculation.
So, an employee who meets the $100,000 plus criteria whose salary was reduced by more than 25% or was terminated will not impact the loan Forgiveness under this calculation. It could, however, still impact the employee count calculation above.
The Act provides for an exemption opportunity from the Employee Count and Salary Reduction penalties above. Since there have been several questions about this from clients, we are providing some detail on how this appears to work. We recognize that this exemption criteria is confusing and we are going to try and simplify it as much as possible.
The way the Act is worded, if you meet these specified criteria, the amount of the Loan Forgiveness will not be reduced by the reduction in number of employees above or will not be reduced as a result of a reduction in the salary or wages of one or more employees above
- during the period beginning on February 15, 2020 through April 26, 2020 there has been a reduction in the number of full-time equivalent employees compared to the number of full-time equivalent employees in its pay period including February 15, 2020, and the employer eliminates that reduction of full-time equivalent employees not later than June 30, 2020 and/or
- during the period beginning on February 15, 2020 through April 26, 2020 there has been a reduction in the salary or wages of one or more employees and the employer eliminates that reduction not later than June 30, 2020.
In other words, if an employer looks at their full-time equivalent employees as of February 15, 2020 and compares them to their full-time equivalent employees between February 15, 2020 and April 26, 2020 and that comparison shows a reduction, the employer can bring their full-time equivalent employee count back up to the February 15, 2020 level by June 30, 2020 and there will be no reduction in the amount of Loan Forgiveness. It is believed that this exemption is an all or nothing exemption, meaning either the employee count has been met by June 30, 2020, or it has not.
Also, if an employer looks at the wage rate paid to any employee as of February 15, 2020 and compares them to the wage rate paid to that employee between February 15, 2020 and April 26, 2020 and that comparison shows a reduction, the employer can bring the wages for that employee back up to the wage rate level at February 15, 2020 no later than June 30, 2020 and there will be no reduction in the amount of Loan Forgiveness for that employee.
Additional FTE Reduction Exception
If an FTE position has not been filled, but meets the following qualifications, that FTE reduction will not reduce the Borrower’s loan forgiveness.
- Any positions for which the Borrower made a good-faith, written offer to rehire an employee during the Covered Period or the Alternate Payroll Covered Period which was rejected by the employee
- Any employees who during the Covered Period or the Alternate Payroll Covered Period
- Were fired for cause
- Voluntarily resigned or
- Voluntarily requested and received a reduction of their hours.
For assistance in managing your way through your PPP Forgiveness, give us a call and we can discuss the options and costs.
As stated earlier, there are still questions that require clarification, such as can bonuses be paid during the Covered Period, possible restrictions on self-paid rent, hiring relatives, etc. We are anticipating additional guidance, but this is what we have to work with so far.