SBA Releases Forgiveness Application for Paycheck Protection Program
On May 15, 2020, the Small Business Administration (SBA) released a loan forgiveness application form for its Paycheck Protection Program (PPP), a loan program under the Coronavirus Aid, Relief, and Economic Stability Act (the CARES Act). The new application form seeks to provide further guidance and clarification for borrowers seeking to have some or all of their PPP loans forgiven, including with respect to making the necessary calculations to determine the forgiven amount. Below is a brief summary of some of the key features of the new application form and what they may mean for PPP borrowers.
Forgiveness period election
To ease the administrative burden of preparing and processing loan forgiveness requests, the SBA allows borrowers with a biweekly (or more frequent) pay period to elect to calculate eligible payroll costs, using a forgiveness period beginning on the first day of their first full pay period following their receipt of the loan. While this option may be useful for some borrowers, borrowers making this election should bear in mind that the payroll costs during the first few days following their receipt of the loan would not be included in the forgiven amount.
Timing of payroll costs
According to the forgiveness application form, payroll costs are considered paid on the day that paychecks are distributed or the borrower originates an ACH credit transaction. Payroll costs incurred but not paid during the covered forgiveness period must be paid on or before the borrower’s next regular payroll date to be forgiven. This is consistent with Section 1106 of the CARES Act, which provides that payroll costs “incurred” and “payments made” during the covered period will be forgiven. Borrowers should be sure that any payroll costs incurred towards the end of the eight-week period are paid in accordance with the above mechanics to avoid missing out on having those amounts forgiven.
Calculation of forgiven amount
Given the two reduction provisions contained in the CARES Act (one based on employee head count and the other based on pay cuts), and the SBA’s limitation that at least 75% of the forgiven amount must be used for payroll costs (of note, as further discussed in the section below relating to the legislative amendments to the PPP, this portion of the application and the SBA’s 75/25 rule may ultimately be updated), some borrowers may have been wondering how to apply these provisions and the order in which to apply them. The forgiveness application form divides up the calculation into narrow line items listed on the form. Below is a high level overview of the forgiveness calculation, which is summarized based upon a four-step approach:
Step 1. Determine the total costs incurred or paid during the covered period that are eligible for forgiveness. This includes payroll costs and mortgage interest, rent, and utilities, the latter three of which must have been in place before February 15, 2020.
Step 2. Determine if pay was reduced by more than 25% for any employee making $100,000 annually or less by entering the average annual salary or hourly wage during the covered period by the average between January 1 and March 30, 2020. If the quotient is more than 0.75, there is no reduction. If it is greater than 0.75, there will be a reduction unless the safe harbor is met (i.e. pay is restored by June 30, 2020).
Step 3. Determine if the full-time equivalent employee headcount (as described below) was reduced. There are two safe harbors which a borrower can use to avoid a reduction: (a) restore full-time equivalent employee headcount by June 30, or (b) make a good-faith, written offer to rehire an employee during the covered period which was rejected by the employee(s).
Step 4. Apply the 75% payroll cost requirement by dividing the amount of payroll costs from Step 1 by 0.75. The quotient will be the maximum amount of the loan that can be forgiven, assuming such amount does not exceed the loan amount. Also remember that if a borrower received an SBA Economic Injury Disaster Loan Advance, that amount will be deducted from the forgiven amount.
Full time equivalent employees
Many borrowers may know that the PPP forgiven amount will be reduced if the borrower reduces its full time equivalent employee headcount and fails to restore it to prior levels by June 30, 2020. However, based on the original information contained in the CARES Act and SBA guidance, the meaning of “full-time equivalent” lacked clarity. The SBA in its latest guidance now clarified that in the context of PPP loan forgiveness full-time equivalent employees are determined based on a 40-hour weekly average per employee. In other words, to determine the headcount for a potential forgiveness reduction, a borrower should divide its average number of paid hours per week by 40. Alternatively, borrowers may use a simplified method which considers employees working over 40 hours per week as one full-time equivalent employee, and those employees working less than 40 hours per week as a 0.5 full-time equivalent employee. However, in either case the maximum number of hours per employee considered for this formula is capped at 40, so employees working more than 40 hours per week will still only count as one full-time equivalent employee, regardless of the formula the borrower uses.
Documentation
The forgiveness application form requires that every borrower include the following documents with its application:
- Bank account statements or third-party payroll service provider reports documenting the amount of cash compensation paid to employees.
- Tax forms (or equivalent third-party payroll service provider reports) for the periods that overlap with the covered period:
- Payroll tax filings reported, or that will be reported, to the Internal Revenue Service (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.
- Payment receipts, cancelled checks, or account statements documenting the amount of any employer contributions to employee health insurance and retirement plans that the borrower included in the forgiveness amount.
- Documentation showing the average number of full-time equivalent employees during the applicable periods.
- Documentation verifying existence of the non-payroll cost obligations/services prior to February 15, 2020 and eligible payments from the covered period:
- For business mortgage interest payments, a copy of the lender amortization schedule and receipts or cancelled checks for the covered period; or lender account statements from February 2020 and the months of the covered period through one month after the end of the covered period.
- For rent or lease payments, a copy of the lease agreement and receipts or cancelled checks for the covered period; or lessor account statements from February 2020 and from the covered period through one month after the end of the covered period.
- For utility payments, a copy of invoices from February 2020 and those paid during the covered period and receipts, cancelled checks, or account statements verifying those eligible payments.
The forgiveness application form also lists documents that each borrower must maintain, but is not required to submit with the application. While the form does not explain the reasons for such a requirement, perhaps it is to ensure that each borrower has such documentation readily on hand in the event the SBA decides to investigate the loan and forgiveness request in further detail. The documents the borrower must maintain include:
- The forgiveness calculation worksheet used to complete the forgiveness application.
- Documents supporting the listing of each individual employee and compensation in the application and schedules thereto.
- Documents regarding any employee job offers and refusals, firings for cause, voluntary resignations, and written requests by any employee for reductions in work schedule.
- Documents supporting the full-time equivalent reduction safe harbor.
- All records relating to the borrower’s PPP loan, including the loan application documents, borrower’s certifications, documents necessary to support the borrower’s loan forgiveness application, and documents demonstrating the borrower’s material compliance with the PPP requirements.
Each borrower must retain all such documents in its files for six years after the date the loan is forgiven or repaid in full, and borrowers must give authorized representatives of the SBA access to such documents upon request.
Open issues
While the forgiveness application form provides some much-needed clarification on key issues regarding PPP loans and forgiveness, there are still a number of lingering questions that the form does not answer. Among them are whether cash bonuses paid to employees during the covered period are forgivable. The word “bonus” is not included in the CARES Act or SBA definition of “payroll costs.” The term does include “salary, wages, commissions, or similar compensation.” Some have taken the position that bonuses fall within the phrase “similar compensation.” However, to date the SBA has not issued guidance on this point, and borrowers should proceed with caution in making such bonus payments with an expectation of having them forgiven.
Another open issue is the scope of the eligible non-payroll costs, and particularly utility payments. According to the forgiveness application, these include payments for services for electricity, gas, water, transportation, telephone, or internet access for which service began before February 15, 2020. Many businesses nowadays use cell phones to conduct their affairs. The term “telephone” may, but does not necessarily, encompass payments for cell phones and related services.
As described above, one of the supporting documents required to be submitted with the forgiveness application is payroll tax filings reported to the IRS, which are typically submitted on Form 941, employers’ quarterly federal tax return form. For some businesses, Form 941 for the applicable period will not be filed with the IRS until months after the forgiveness period ends. Whether a borrower in such a case will need to wait until then to submit its forgiveness application remains unclear.
While not an exhaustive list, the forgoing are some of the important issues to be aware of when applying for PPP loan forgiveness. Borrowers should consult with the SBA and their lenders in order to seek clarification on these or any other issues relating to the PPP loan and forgiveness terms.
Useful clarification of certain eligible non-payroll costs
The forgiveness application form provides helpful clarification on what non-payroll costs entail, and perhaps even expands on what many previously understood the term “payroll costs” to include. The form describes covered mortgage obligations and rent obligations on “real or personal property.” The inclusion of personal property may come as a surprise to some, especially with respect to “mortgage” obligations, which are generally understood to mean only those obligations that are secured by real property. This expanded interpretation could benefit borrowers paying interest on obligations secured by personal property, such as their inventory.
Recent Legislative Amendment to PPP
Soon after the SBA released the forgiveness application form, Congress enacted legislation titled the “Paycheck Protection Program Flexibility Act of 2020” which, among other things, extends the forgiveness period to 24 weeks (though any borrower who received a PPP loan before this new law was enacted can elect to use the eight-week forgiveness period instead), requires that at least 60% of a PPP loan must be used for payroll costs to have any of that loan forgiven, and extends the grace period for restoring employee levels from June 30, 2020 to December 30, 2020. Borrowers should be aware that, as a result of the new legislation, the SBA’s forgiveness application form may be updated in the coming weeks, and with these changes it is possible that the SBA may come out with new guidance. Borrowers should consult with their lenders to ensure the proper application form is used. More information on the Paycheck Protection Program Flexibility Act is available here.
Conclusion
While the SBA’s loan forgiveness application form provides some useful clarification on what borrowers will need to complete their application and have a portion (or all) of their loan forgiven, it still leaves some questions unanswered. Additionally, with Congress recently enacting new legislation amending some of the key components of the PPP, borrowers may need to adjust their calculations and perhaps even amend their forgiveness applications, if they have not yet been submitted. Unless and until the SBA clarifies those issues, it will be up to the borrowers to seek answers and support from their lenders to determine how the CARES Act, SBA rules and guidance, and the forgiveness application form will be interpreted and apply in practice.
As always, Nason Yeager is here for you 24/7 to assist in any way we can. We hope everyone stays safe and healthy through these unprecedented times.