SBA Releases PPP Loan Forgiveness Application and Issues Formal Guidance Regarding PPP Loan Forgiveness

May 19, 2020
Firm Publication

This alert, originally published May 19, 2020, was updated to reflect further guidance issued by the SBA on May 22, 2020 regarding PPP loan forgiveness.

The Small Business Administration (SBA) has released the first major guidance regarding the forgiveness of loans made under the Paycheck Protection Program (PPP). The PPP loan forgiveness application, which was posted to the U.S. Treasury’s website on May 15, provided some long-awaited and much needed clarity regarding the calculation of forgivable expenses and the statutory reductions in the amount eligible for forgiveness based on reductions in employee compensation and headcount. The application also contains a number of borrower certifications and outlines the extent of the documentation that borrowers will be required to reference in calculating the forgiveness amount.

The SBA subsequently issued two new interim final rules on May 22 providing, respectively, additional clarifications regarding PPP loan forgiveness (the Forgiveness Rule) and information about the SBA’s process for reviewing PPP loans for compliance with program
requirements (the Loan Review Rule).

Forgivable Expenses

In general, borrowers are eligible for loan forgiveness in the aggregate amount of certain qualifying expenses paid or incurred during the eight-week period commencing on the date that the borrower first received PPP loan proceeds from its lender (the Covered Period). For payroll costs only, borrowers with a biweekly (or more frequent) payroll schedule may elect to use an “Alternative Payroll Covered Period” beginning on the first day of the first pay period commencing after the date of loan disbursement in lieu of the standard Covered Period, but the borrower must use either the Covered Period or the Alternative Payroll Covered Period consistently for all payroll costs.

Payroll Costs

Borrowers are eligible for loan forgiveness for (1) payroll costs paid during the Covered Period or Alternative Payroll Covered Period, and (2) payroll costs incurred during the last pay period of the Covered Period or Alternative Payroll Covered Period and paid on or before the next regular payroll date after the expiration of the Covered Period or Alternative Payroll Covered Period. 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. For employees who are not performing work but are still on the borrower’s payroll, payroll costs are incurred based on the schedule established by the borrower (typically, each day that the employee would have performed work).

Payroll costs generally include compensation to U.S. employees in the form of cash compensation; payment for vacation, parental, family, medical or sick leave; employer-paid group health insurance premiums (and other expenses for the provision of group health insurance coverage); employer contributions to defined-benefit or defined-contribution retirement plans; and payment of state and local taxes assessed on compensation of employees. Payroll costs eligible for loan forgiveness include pay to furloughed employees, bonuses, and hazard pay.

For each 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 or Alternative Payroll Covered Period (i.e., a per-employee maximum of $15,385 for the applicable period).

For owner-employees, self-employed individuals, and general partners, the total amount of payroll costs for each such individual eligible for forgiveness across all entities may not exceed the lesser of 8/52 (i.e., approximately 15.38%) of 2019 compensation or $15,385. For Schedule C filers, 2019 compensation refers to owner compensation replacement based on proration of the net profit amount shown on the taxpayer’s 2019 IRS Form 1040 Schedule C line 31. For general partners, 2019 compensation refers to the amount of their 2019 net earnings from self-employment (reduced by claimed section 179 expense deductions, unreimbursed  partnership expenses, and depletion from oil and gas properties) multiplied by 0.9235. No additional forgiveness is provided for retirement or health insurance contributions for self-employed individuals, including Schedule C filers and general partners.

Non-Payroll Costs

Non-payroll costs eligible for forgiveness consist of the following payments made or incurred during the Covered Period:

  • Interest payments on any business mortgage obligation on real or personal property incurred before February 15, 2020 (not including any prepayment or payment of principal).
  • Business rent or lease payments pursuant to lease agreements for real or personal property in force before February 15, 2020.
  • 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.

An eligible non-payroll 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 non-payroll costs cannot exceed 25% of the total forgiveness amount.

Reductions to the Forgivable Amount

The CARES Act provided that the total amount of the PPP loan eligible for forgiveness would be subject to reduction based on decreases in the compensation to employees and in the total number of full time equivalent employees. The forgiveness application clarifies how these reductions will be implemented.

The reduction to the forgivable amount based on employee compensation levels (the Salary/Hourly Wage Reduction) will be applied first. Then the reduction to the forgivable amount based on changes in the total number of full time equivalent employees (the FTE Reduction) will be applied.

Salary/Hourly Wage Reduction

The Salary/Hourly Wage Reduction is calculated on a per-employee basis based on the annualized salary (for salaried employees) or hourly wage (for hourly employees) of each employee (other than employees who received wages or salary from the borrower at an annualized rate of pay in excess of $100,000 during any pay period in 2019) during the Covered Period or Alternative Payroll Covered Period (as applicable, consistent with the borrower’s election).

For any such employee whose average annual salary or hourly wage, as applicable, during the Covered Period or Alternative Payroll Covered Period was at least 75% of such employee’s average annual salary or hourly wage between January 1, 2020 and March 31, 2020 (Q1 2020), the amount of the Salary/Hourly Wage Reduction will be zero. For each employee whose average compensation level decreased by more than 25% during the Covered Period or Alternative Payroll Covered Period, relative to Q1 2020, there will be a dollar-for-dollar reduction to the forgivable amount as follows, unless the safe harbor described below is satisfied:

To calculate the Salary/Hourly Wage Reduction with respect to any salaried employee:

  • Step 1: Multiply the employee’s average salary between January 1, 2020 and March 31, 2020 by 0.75.
  • Step 2: Subtract the employee’s average salary during the Covered Period or Alternative Payroll Covered Period (as applicable, consistent with the borrower’s election) from the amount calculated in Step 1.
  • Step 3: Multiply the amount calculated in Step 2 by 8, and then divide by 52.

To calculate the Salary/Hourly Wage Reduction with respect to any hourly employee:

  • Step 1: Multiply the employee’s average hourly wage between January 1, 2020 and March 31, 2020 by 0.75.
  • Step 2: Subtract the employee’s average hourly wage during the Covered Period or Alternative Payroll Covered Period (as applicable, consistent with the borrower’s election) from the amount calculated in Step 1.
  • Step 3: Multiply the amount calculated in Step 2 by average weekly hours for January 1, 2020 and March 31, 2020, and then multiply by 8.

The Salary/Hourly Wage Reduction Safe Harbor is met for a given employee (i.e., there is no Salary/Hourly Wage Reduction with respect to such employee) if both of the following conditions are met: (1) the employee’s annual salary or hourly wage as of February 15, 2020 was greater than or equal to the employee’s average annual salary or hourly wage between February 15, 2020 and April 26, 2020, and (2) the employee’s average annual salary or hourly wage as of June 30, 2020 was greater than or equal to the employee’s annual salary or hourly wage as of February 15, 2020. (We note that the Salary/Hourly Wage Reduction Safe Harbor formula refers to a comparison of the “annual salary or hourly wage as of February 15, 2020” to the “average annual salary or hourly wage as of June 30, 2020″ (emphasis added). It is not clear from the application whether this difference is intended to result in a different methodology for calculating the salary or wage rate as of June 30 vis-à-vis February 15, or an error in the form.)

The Forgiveness Rule also states that the Salary/Hourly Wage Reduction will apply “only to the portion of the decline in employee salary and wages that is not attributable to the FTE reduction” so that borrowers will not be “doubly penalized.” It is clear from the forgiveness application and the Forgiveness Rule that reducing an employee’s hours but not his/her wage rate will not result in a Salary/Hourly Wage Reduction for such employee (though this circumstance would likely result in an FTE Reduction). However, there would seem to be a latent inconsistency between the Forgiveness Rule and the forgiveness application on this point in the event that an employee had both his/her wage rate and hours reduced during the Covered Period or Alternative Payroll Covered Period, as the applicable worksheet to the forgiveness application calculates the Salary/Hourly Wage Reduction by multiplying the wage rate decrease by the employee’s average hours worked in Q1 2020.

Based on the published loan application and the Forgiveness Rule, payments of or reductions in commission payments are not taken into account for purposes of the Salary/Hourly Wage Reduction calculation.

FTE Reduction

The FTE Reduction is a proportional reduction in the total forgiveness amount based on the borrower’s average weekly full time equivalent employees (FTE) during the Covered Period or Alternative Payroll Covered Period (as applicable, consistent with the borrower’s election) relative to the borrower’s average weekly FTE during a specified reference period. For purposes of this calculation, the reference period may be any of the following, at the borrower’s election:

  • February 15, 2019 to June 30, 2019.
  • January 1, 2020 to February 29, 2020.
  • For seasonal employers only, any consecutive 12-week period between May 1, 2019 and September 15, 2019.

FTE is determined based on a 40-hour work week. Each employee’s FTE value is calculated by taking the average hours paid per week to such employee, dividing by 40 and rounding the total to the nearest tenth. The maximum FTE number for each employee is 1.0, regardless of hours worked. In the alternative, the borrower may elect to utilize a simplified system that counts all employees who work 40 hours or more per week as 1.0 FTEs and all employees who work fewer hours as 0.5 FTEs.

The following situations will not count as reductions to the borrower’s FTE count for purposes of calculating the FTE Reduction (though borrowers should note that these circumstances may also impact employees’ eligibility for unemployment benefits):

  • Any position for which the borrower made a good-faith, written offer to rehire an employee during the Covered Period or Alternative Payroll Covered Period which was rejected by the employee provided that (1) the offer must be for the same salary or wages and the same number of hours as earned by such employee in the last pay period prior to the separation or reduction in hours, and (2) the borrower must inform the applicable state unemployment insurance office of such employee’s rejected offer of reemployment within 30 days of the employee’s rejection of the offer.
  • Any employee who, during the Covered Period or Alternative Payroll Covered Period, was fired for cause, voluntarily resigned or voluntarily requested and received a reduction of his/her hours.

A borrower is exempt from the FTE Reduction if both of the following conditions are met (the FTE Reduction Safe Harbor): (1) borrower’s total FTE during the pay period inclusive of February 15, 2020 is greater than the borrower’s total average FTE between February 15, 2020 and April 26, 2020, and (2) the borrower’s total FTE as of June 30, 2020 is greater than the borrower’s total FTE during the pay period inclusive of February 15, 2020.

Application Process and Certifications

The borrower may submit its forgiveness application to its lender beginning at the end of the Covered Period. The lender must issue a decision regarding the borrower’s application for loan forgiveness to the SBA and, if applicable, request repayment of the forgivable portion of the loan by the SBA, within 60 days after receipt of a complete application for forgiveness. Importantly, because the SBA will take up to 90 days to review the loan and forgiveness application before issuing payment to the lender, the borrower may not receive confirmation that its forgiveness application has been approved for up to 150 days after submission, by which time the six-month
payment deferral period on the PPP loan would have run and the borrower would have been required to begin making payments on the PPP loan. Accordingly, borrowers should consider submitting their PPP loan forgiveness applications as promptly as practicable following the expiration of the Covered Period.

The SBA may review any PPP loan (including borrower eligibility, loan amounts and use of proceeds and loan forgiveness amounts) based on the provisions of the CARES Act, the rules and guidance available at the time of the borrower’s PPP loan application, and the terms of the borrower’s loan application. If SBA determines that the borrower was ineligible for a PPP loan, then the loan will not be eligible for forgiveness.

The PPP loan forgiveness application requires the borrower to certify, among other things, that (1) the dollar amount for which forgiveness is requested was used to pay costs eligible for forgiveness in accordance with the application instructions, (2) that the borrower has accurately verified the payments for the eligible payroll and non-payroll costs for which it is requesting forgiveness, and (3) that the information provided in the application and in all supporting documents and forms (e.g., the attached worksheets) is true and correct in all material respects. The borrower will also be required to indicate whether the borrower, together with its affiliates (as determined consistent with the SBA’s interim final rule on affiliates, published April 15, 2020), received PPP loans with an original principal amount in excess of $2 million.

Each borrower will be required to submit with its forgiveness application detailed documentation verifying (1) the eligible cash compensation and non-cash benefit payments from the Covered Period or Alternative Payroll Covered Period; (2) the average number of FTE employees on payroll during the reference period applicable to determining the borrower’s FTE Reduction; and (3) with respect to any non-payroll costs for which the borrower seeks forgiveness, the existence of any the applicable obligations and/or services prior to February 15, 2020 and eligible payments from the Covered Period.

The forgiveness application also includes attached worksheets that require detailed payroll cost data on a per-employee basis. The SBA does not require these worksheets to be submitted with the application, but borrowers must retain these worksheets and the back-up documentation supporting their accuracy (together with “all [other] records relating to” the borrower’s PPP loan) in its files for six years after the date the loan is forgiven or repaid in full. The borrower must permit authorized representatives of the SBA, including representatives of its Office of Inspector General, to access such files upon request.

***

This alert is intended to provide information, insights and understanding of the authors as of the date this alert was published. The rules and available guidance regarding the PPP are regularly being refined and clarified by the SBA and other agencies. As a result, any specific content of this alert may be affected by the evolving nature of applicable guidance. PPP participants will need to evaluate and draw their own conclusions and determine their approach relative to participation in the PPP based on their business’s specific circumstances, cash flow forecast and strategy. Readers are encouraged to contact legal counsel to address the legal implications and the specific impact of the CARES Act on your business, including your participation in the PPP.

The Bass, Berry & Sims CARES Act Task Force has been closely monitoring developments related to the unprecedented governmental assistance programs enacted in response to the COVID-19 pandemic. If you have questions about the PPP and your business, please contact the authors or your relationship attorney at the firm.