PPP Loan Forgiveness

On Friday, May 15th, the Small Business Administration (SBA) released the application for the Paycheck Protection Program (PPP) that borrowers will be required to complete and provide to lenders to receive forgiveness. The application includes instructions but does not include narrative-based guidance that would be helpful to clarify confusion around the definition of terms, like what is included in payroll costs or the treatment of self-rental payments. This lack of narrative guidance or clarity on some technical issues is especially disappointing considering many borrowers are already halfway through their loan periods and therefore will have limited options to increase the forgivable portion of their loan if they fall short of the full loan amount under the current guidance.

Application for PPP Loan Forgiveness

The forgiveness application and applicable instructions are 11 pages. This total includes two vital support schedules:

  • Schedule A
  • Schedule A Worksheet

The loan application begins with administrative items like legal name and loan numbers. It then progresses to items that may impact your forgiveness amount:

  • PPP Loan Amount: This will be the maximum amount of forgiveness available to the borrower. The application is consistent with the CARES Act as written, not the Interim Final Rule issued by the SBA and therefore only includes the principal of the loan, not any accrued interest.
  • PPP Loan Disbursement Date: The beginning of your 8-week period to incur forgivable expenses typically starts on the date you received funds. There are 3 caveats to this guidance
    • The application allows for some flexibility to choose the 8-week period for payroll costs to align with company specific payment dates.
    • Some situations where expenses incurred during the period but paid after the 8-week period expires could be eligible for forgiveness.
    • We have seen some loan statements from lending institutions indicating that loan funds were disbursed on the application date, instead of the true disbursement date. One banker we spoke with regarding this issue has indicated that it is an oversight in their system and the date funds were deposited into the borrower’s account will be the official disbursement date of the loan proceeds.
  • Employees at the Time of Application: Employee number is provided at various points and for various periods throughout the application. This specific request doesn’t appear to impact the forgiveness calculation based on the guidance provided to date.
  • Economic Injury Disaster Loan Advance Amount: This amount was capped at $10,000 by the CARES Act but was quickly reduced by the SBA due to lack of funding. Most recipients of this advance received $1,000 per employee up to $10,000. The forgiveness for the PPP loan forgiveness will be reduced by the amount of EIDL advance grant received.
  • Economic Injury Disaster Loan Application Number: Any EIDL funds finalized after January 31st and used for payroll was likely refinanced into your PPP loan. The SBA is requesting this loan information to ensure this was handled properly.
  • Payroll Schedule: You must indicate your regular payroll schedule to assist the SBA and your lender in determining when payroll costs are paid (or incurred) and therefore eligible for forgiveness. This schedule will also be used to calculate full-time equivalent employees, which will then factor into a potential reduction in the loan amount eligible for forgiveness.
  • Covered Period: The “covered period” is the 8-week period generally beginning on the date you received the loan disbursement. Only the costs paid or incurred within the 8-week period are generally eligible for PPP loan forgiveness. The inclusion of paid or incurred is very important for the forgiveness calculation.
    • Payroll costs are considered paid on the day of paycheck distribution or the day the ACH credit transaction is processed. This means you could receive funds on May 1st, and as part of your regular payroll process, pay your employees for the prior two weeks. Since the payroll was paid within the 8-week forgiveness period it would qualify for forgiveness. The application and instructions do not clarify how far in arrears payroll can be paid during the 8-week period and still receive forgiveness.
    • Payroll costs are incurred and therefore eligible for forgiveness on the day they are earned. This includes your last period of the 8-week period assuming those payroll costs are paid no later than the next regularly scheduled payroll date.
    • Rent, utilities, mortgage interest (non-payroll costs) will qualify for forgiveness if they are paid during the 8-week period or incurred during the 8-week period and paid by the next scheduled due date. It is not immediately clear if pre-payment of these items, if paid during the 8-week period, would be eligible for forgiveness. Additionally, the CARES Act allows for transportation costs as part of utilities. The only guidance provided to date is for self-employed individuals. It states that gas used for driving a business vehicle is a forgivable use of PPP loan proceeds. This suggests gas expenses and expenses from the standard mileage allowance may be permitted, but we need more complete guidance to be certain.
  • Alternative Payroll Covered Period: The instructions provide the flexibility to adjust your 8-week covered period to align with your payroll schedule. This adjustment would change the beginning of your covered period to beginning on the first day of the first pay period following the disbursement date. This alternative period is only applicable to payroll, it can not be used for other costs.

Worksheet to Schedule A

The completion of this worksheet is required prior to completing Schedule A, which requires the result of the worksheet on line 1 through 5. The worksheet computes 4 important items:

  1. Eligible compensation for each employee
  2. Limit the compensation of employees at $100,000 on an annualized basis
  3. Determine the number of full-time equivalent employees (FTEs) for the covered period (or alternative payroll period, if elected), and
  4. Using the FTEs calculated in 3 above, determine any reduction in the eligibility for forgiveness because FTEs were reduced during the covered period.

Each employee will be listed separately in table 1 or table 2, except:

  • Independent contractors – Not eligible for forgiveness
  • Owner-employees – based on the interim final rule, is based on 8/52 of Line 31 of the individual’s 2019 Schedule C, rather than any amounts paid or incurred in 2020
  • Self-employed individuals – Will be added in separately to Schedule A
  • Partners – Will be added in separately to Schedule A

Table 1 and 2

Cash Compensation: the amounts spent on “payroll costs” during the 8-week covered period are eligible for PPP loan forgiveness. Compensation that is included in this amount:

  • Salary, commission, or similar
  • Payment of cash tip or equivalent
  • Vacation, parental, family, medical, or sick leave payments
  • Separation or termination payments

Compensation does not include:

  • compensation of an individual employee in excess of an annual salary of $100,000, as prorated for the covered period. This provision necessitates that this amount never exceeds $15,384 in table 1 or 2
  • Employee with primary residence outside the United States
  • Qualified sick leave wages for which a credit is allowed under section 7001 of the Families First Coronavirus Response Act
  • Qualified family leave wages for which a credit is allowed under section 7003 of the Families First Coronavirus Response Act

Average FTE: This calculation must be completed for each employee, unless the Borrower elects to use the 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. If not simplified election is made, that the Borrower should enter the average number of hours paid per week, divide by 40, and round the total to the nearest tenth for each employee.

Salary/Hourly Wage Reduction: This calculation will determine whether the Borrower’s loan forgiveness amount must be reduced due to the statutory requirement concerning reductions in employee salary. The reduction in forgiveness amount is required if the reduction in wages over the 8-week period is in excess of 25% of the total salary or wages of the employee during the period from January 1, 2020 through March 31, 2020. There is a safe harbor provision that will allow the Borrower to avoid the reduction in forgiveness if that salary is restored to what it was on February 15, 2020, by June 30, 2020.

FTE Reduction Safe Harbor: A safe harbor exempts Borrowers from the loan forgiveness reduction based on FTE employee levels 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 restored its FTE employee levels by June 30, 2020 to its FTE employee levels in the Borrower’s pay period that included February 15, 2020.

As an additional note on the FTE reduction safe harbor, if a borrower provides evidence of a good-faith, written offer to rehire an employee during the covered period that was rejected by the employee, then that reduction in headcount will not result in reduced forgiveness. This also applies if an employee was fired for cause, voluntarily resigned, or voluntarily requested and received a reduction in hours.

Schedule A

Once the worksheet for Schedule A has been completed it will be used to complete the first 5 lines of Schedule A.

Lines 6 – 8: Non-cash compensation during the covered period (or alternative covered period) which includes group health care benefits, retirement benefits, and payment of state or local taxes assessed on compensation. These amounts are in addition to the $100,000 compensation cap previously discussed, so they should be included for all employees regardless of the previously calculated compensation.

Line 9: Total amount paid to owner-employees/self-employed individual/general partners will likely need additional clarification from the SBA. These individuals are not expected to be included in Table 1 or 2 of the Worksheet for Schedule A because health care and retirement costs for owners/general partners are not forgivable, but that is not explicit in the Schedule or instructions. This line is also expected to include guaranteed payments for partners because this amount is not required to be paid as “compensation”. This line also adds a new limitation for owners by requiring that the amount is capped at $15,384 or the 8-week equivalent of their applicable compensation from 2019, whichever is lower. This limits the amount included in the forgivable amount to 8/52 of the owner’s compensation for 2019 and prevents an owner from increasing their compensation during the covered period to maximize forgiveness.

Line 10. Payroll Costs (add lines 1, 4, 6, 7, 8, and 9)

If 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 you are done with Schedule A.

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. The SBA appears to provide a an additional safe harbor method, which states that if FTEs have been reduced relative to the elected look-back period, no reduction is required as long as FTEs are the same at the end of the covered period as they were on January 1, 2020.

Application for PPP Loan Forgiveness

Line 1 Payroll Costs: Calculated on Schedule A, line 10

Line 2-4 Other Eligible Costs: The CARES Act permits forgiveness for three other classes of expenses paid during the covered period including business mortgage interest payments, rent expense, and utilities. The applicable amounts paid or incurred in those categories should be entered on the applicable lines. No more than 25% of the loan forgiveness amount may be attributable to non-payroll costs reported on Lines 2, 3, and 4.

Line 5 Total Salary/Hourly Wage Reduction: The total eligible forgiveness amount is calculated on lines 1-4. The total amount is reduced if salaries are cut or FTEs are reduced. Any amount attributable to a reduction in salaries as reported on Table 1 are reported on Line 5, reducing the total amount eligible for forgiveness.

Line 7 FTE Reduction Quotient: If an FTE quotient was calculated on Schedule A to must be included here to determine the forgiveness reduction required.

Line 8-10 PPP Loan Forgiveness Amount Determined: This is determined by the lesser of the following amounts:

  1. The net amount from Line 6 (total costs less salary reduction amount) multiplied by the quotient on Line 7 for headcount reduction
  2. The loan principal balance
  3. The payroll costs (Line 1 of the application) divided by 75%. This ensures that no more than 25% of the total forgiveness is attributable to non-payroll costs

We fully expect that additional guidance, including narrative guidance, will be forthcoming from the SBA soon. Some Senators, including Sen. Rubio have already publicly stated that they feel there are adjustments that need to be made to the forgiveness guidance released. Hopefully, any additional guidance will provide clarity and be issued promptly.

Looking for information on documentation necessary to obtain PPP loan forgiveness? See our post on PPP Loan Forgiveness Documentation.

Subscribe to our Newsletter

* indicates required

Schedule a Free Consultation

Call 312.324.2811