On May 15, 2020, the SBA released a PPP Loan Forgiveness Application form. There are four parts to the document: (i) the PPP Loan Forgiveness Calculation Form, (ii) PPP Schedule A, (iii) the PPP Schedule A Worksheet, and (iv) the optional PPP Borrower Demographic Information Form. Only parts (i) and (ii) are required to be submitted to the lender. The application includes many borrower-favorable rules that will reduce complexity and the time and effort it takes to calculate the forgiveness amount.
Below are some initial insights relating to the application, grouped for convenience. For the sake of brevity, we limit the discussion to new information and to modifications of prevailing interpretations.
contact a member of Withum’s SBA Financial Assistance Services Group.
General PPP Loan Application Details
1. The application lists an expiration date of October 31, 2020, suggesting that October 31 is the deadline for borrowers to submit applications to their lenders.
2. The application allows for the use of an alternative 8-week covered period to align with a borrower’s payroll schedule. This Alternative Payroll Covered Period (APCP) applies only to payroll costs and only if the borrower has a bi-weekly (or more frequent) payroll schedule; thus, it is not available to borrowers that pay employees twice per month.
3. There is a box to check if the loan (when combined with any affiliate loans) exceeds $2M, presumably to make it easier for the lender or SBA to flag the application for review. See FAQ #39.
Key Terms and Definitions
4. Payroll costs:
A. The application takes a disjunctive approach to paid and incurred, meaning paid or incurred
B. Payroll costs must be paid during the covered period (CP) or APCP, except that payroll costs incurred during the last pay period are included even if paid on or before the next regular payroll date that is beyond the eight-week period
i. This seems to include (i) payroll incurred before the CP or APCP but paid during the CP or APCP and (ii) payroll incurred at the end of the CP or APCP but paid after the CP or APCP, subject to the cap of $15,385 per person
a. This would expand the definition of eligible payroll costs to include more than eight weeks of pay for employees, which would act as a disincentive to use an APCP
b. For example, if a borrower pays its employees bi-weekly, and it distributes its paychecks in the ordinary course one week after the start of the CP, then the borrower will end up including 10 weeks of pay in the payroll costs
c. It is not clear if this expansive view was intended or will be fixed in the future
ii. The certifications in the application limit forgiveness on compensation for owner-employees, self-employed, and general partners to eight-weeks’ worth of 2019 compensation, and caps the amount at $15,385
a. This limits the ability to pay amounts in excess of 2019 compensation, including any hazard pay or bonus pay
b. This implies that hazard pay, bonus pay, and amounts in excess of 2019 compensation can be provided to other persons, such as employees
C. Group health care benefits include employer contributions to a self-insured, employer-sponsored group health plan, but do not include any pre-tax or after-tax employee contributions
D. Retirement benefits include employer contributions to employee retirement plans, but do not include any pre-tax or after-tax employee contributions
5. Nonpayroll costs (i.e., overhead):
A. Same favorable paid or incurred rule as for payroll costs
B. Maintains the 25% rule – nonpayroll costs cannot exceed 25% of the total forgiveness amount
Loan Forgiveness Calculation
6. The forgiveness formula in Schedule A can be summarized as follows:
A. Add payroll costs and nonpayroll costs
B. Reduce for headcount and wage reductions to arrive at the Potential Forgiveness Amount (PFA)
C. Final forgiveness amount is the smaller of (i) the PFA, (ii) the PPP loan amount, or (iii) the payroll costs divided by 75%
7. There is no reduction in forgiveness if the borrower fails to spend at least 75% of loan amount on payroll costs
Wage Reduction Rule
8. The application requires an employee-by-employee comparison, as expected.
9. The application requires the base period for this calculation to be the first three months of 2020, i.e., from January 1, 2020, through March 31, 2020, as opposed to the most recent three months.
10. The application fixes the structural problem in the statute that compares eight weeks in the CP to three months in the base period. The application compares average annual salaries/hourly wages during the CP (or APCP) to average annual salaries/hourly wages during the first three months of 2020, and then reduces forgiveness as follows: (i) for salaried employees, by an amount equal to the annualized reduction in excess of 25% multiplied by 8/52 and (ii) for hourly employees, by an amount equal to the hourly wage reduction in excess of 25% multiplied by the average number of hours worked per week in Q1 2020 multiplied by eight.
11. The application follows the quirky formulation in the statute by excluding any employee that made more than $100,000 on an annualized basis during “any single pay period” in 2019. Thus, if paid weekly, the wage reduction rule does not apply to any employee who received more than $1,923 per pay period in 2019, or more than $3,846 per pay period in 2019 if paid on a bi-weekly basis.
12. The application does not require a headcount and wage reduction for the same employee where the person is employed during the base period but is not employed during the CP. The headcount reduction rule will apply but the wage reduction rule will not apply because it applies only to those employees who are employed during the CP.
13. The Salary/Hourly Wage Reduction Safe Harbor takes a snapshot approach to the rehire exemption. It looks to the employee’s average annual salary/hourly wage as of June 30, 2020 and there is no requirement that any compensation be paid or incurred prior to June 30, and there is no requirement any compensation be paid or incurred after June 30, though we expect substance over form will be applied on any subsequent audit.
14. The Schedule A Worksheet requires the borrower to list the last four digits of each employee’s Social Security number. Even though this Worksheet is not required to be submitted to the lender, we believe this requirement is intended to prevent fraud because the Worksheet must be maintained in the borrower’s files and produced to the SBA upon request.
Headcount Reduction Rule
15. The full-time equivalency (FTE) calculation is different than expected. The application allows for two methods to determine the average weekly number of FTEs:
A. Base method – for each employee, divide the average number of hours paid per week by 40 and round to the nearest tenth, capping any individual employee at 1
i. For example, borrower has three employees that work 40, 50 and 10 hours, respectively. There are 2.3 FTEs (40/40 + 50/40 capped at 1 + 10/40 rounded to nearest tenth)
B. Simplified method – each employee who works 40 hours or more per week is 1 FTE, and every other employee is assigned 0.5
i. Same example as above. There are now 2.5 FTEs (1 + 1 + .5)
C. Although borrowers have a choice between the two methods, they are required to use the same method consistently throughout this computation
i. If the total number of hours worked by part-time employees is reduced in the CP, then the simplified method may result in a greater FTE count during the CP because each part-time employee is assigned 0.5
ii. If the total number of hours worked by part-time employees is increased in the CP, then the base method may result in a greater FTE count during the CP because part-time employees can be assigned a higher FTE count
16. FTE Reduction Exceptions – FTE reductions during the CP (or APCP) will not reduce loan forgiveness if they result from any of the following: (i) the employee was fired for cause, (ii) the employee voluntarily resigned, or (iii) the employee voluntarily requested and received a reduction in their hours. This favorable rule can be viewed as an expansion of the exception in FAQ #40 for employees that were laid-off and refused to return to work.
17. The FTE Reduction Safe Harbor takes a snapshot approach to the rehire exemption. It looks to the borrower’s total FTE count as of June 30, 2020, and there is no requirement that any compensation be paid or incurred prior to June 30, and there is no requirement that the employee be retained for any period of time after June 30, though we expect substance over form will be applied on any subsequent audit.
Certifications and Documentation
18. The certifications on page four require the borrower to certify, among other things, that (i) it verified the amount of payroll and nonpayroll costs, (ii) the loan was used for authorized purposes, and (iii) the information and supporting documents are true and complete in all material respects.
19. The borrower has to acknowledge that the SBA may require additional information to evaluate eligibility and forgiveness, and a borrower’s failure to provide the information can result in the SBA’s determination that the borrower was ineligible for the PPP loan or that it is not entitled to loan forgiveness.
20. There are extensive documentation requirements on page 10, and the borrower must retain all documentation for six years after the date the loan is forgiven or repaid in full, and permit the SBA and its authorized representatives to access the documents upon request.
SBA Financial Assistance Services
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