PPP Loan Forgiveness Application–Clarity?. . .Well, Clearer!

Jul 8, 2020

By Harry A. Steindler, CPA – Partner

This past weekend, the SBA released the form and instructions for applying for loan forgiveness for companies that have received (or will receive) a PPP Loan.

The instructions are relatively easy to follow and help to resolve issues long pondered by borrowers and their advisors. Many of these resolutions seem to fall in the borrower’s favor, or at least give borrowers some flexibility in accumulating expenditures that qualify towards loan forgiveness.

Some Important Highlights From the Application and Instructions

Payroll Period – One of the challenges for borrowers has been trying to figure out how to match their payroll periods with the eight weeks that make up the “Covered Period.” The Covered Period begins the day you receive your loan and runs for 56 days. The SBA is allowing borrowers whose payroll is biweekly or more frequent to establish an “Alternative Payroll Covered Period” (APCP). If elected, the APCP begins the first day of the first pay period following the PPP loan disbursement. For instance, if your loan was received on April 20th, and your next payroll period began on April 26th, the APCP would begin on April 26th and end on June 20th, which would align with the biweekly (or weekly) payroll periods. There, that’s much easier!

Borrowers with semi-monthly or monthly payroll periods do not have the APCP option, so the calculation will require more number-crunching at the end of the Covered Period. Payroll costs paid within the Covered Period are eligible for forgiveness. Payroll costs are considered paid on the day that paychecks are distributed or the Borrower originates an ACH credit transaction. Payroll costs incurred within the Covered Period are eligible for forgiveness. Payroll costs are considered incurred on the day that the employee’s pay is earned. Payroll costs incurred but not paid during the Borrower’s last pay period of the Covered Period are eligible for forgiveness if paid on or before the next regular payroll date.

Eligible Non-Payroll Costs – This seems too good to be true – Let’s see if the SBA FURTHER clarifies. The instructions state:

“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.”

This seems to imply that paying Eligible Non-Payroll Costs (mortgage interest, rent, and utilities) during the Covered Period, even if they were incurred prior to the Covered Period, counts towards loan forgiveness, independent of when actually incurred. As an example, a borrower is late paying April rent; during the Covered Period, the borrower pays April, May, and June rent. The above instructions state that all three months of rent would be included as Eligible Non-Payroll Costs (paid OR incurred). Let’s see if the SBA has anything more to say about this. These instructions also clarify that an Eligible Non-Payroll Cost incurred during the period only needs to be paid by the next vendor billing date following the Covered Period to be included in calculating loan forgiveness. It also clarifies that you cannot “prepay” any expenses and include those amounts in your forgiveness calculation.

Other Non-Payroll Cost Clarifications – Covered rent obligations include business rent or lease payments pursuant to lease agreements for real or personal (auto and equipment) property. It seems that equipment leases would include most anything – shop or factory equipment, office equipment, postage machine, etc. It is unclear whether leases defined as finance-type leases would qualify.

The 75% Rule (75% of Covered Expenses Must be for Eligible Payroll) – As we have been suggesting all along, the application makes it clear that the 75% rule is not an “all or nothing” calculation. Instead, if payroll costs fall short of 75% of total eligible expenses, to determine total eligible expenses for forgiveness purposes, eligible payroll costs are reduced mathematically to the point where they make up 75% of eligible expenses.

Counting Full Time Equivalent Employees (FTE) for Purposes of Determining if Loan Forgiveness Must be Reduced  After much educated guessing because of lack of any definition from the SBA, we now know how this works!! One FTE is considered an employee who works, on average, 40 hours per week – both for determining FTEs during the Measurement Period and the Covered Period (or APCP). For each employee, you calculate their average hours paid per week, divide by 40, and round to the nearest tenth of an hour. The maximum quotient is 1.0. You add up all of the calculations to determine your FTEs. Alternatively, you can elect a simplified method that assigns each employee who works 40 or more hours per week a 1.0, and each employee who works fewer than 40 hours per week a .5, and add those together to determine your FTEs.

FTE Reduction Exceptions  From the instructions:

“Indicate the FTE of (1) any positions for which the Borrower made a good-faith, written offer to rehire an employee during the Covered Period or the Alternative Payroll Covered Period which was rejected by the employee; and (2) any employees who during the Covered Period or the Alternative Payroll Covered Period (a) were fired for cause, (b) voluntarily resigned, or (c) voluntarily requested and received a reduction of their hours. In all of these cases, include these FTEs on this line only if the position was not filled by a new employee. Any FTE reductions in these cases do not reduce the Borrower’s loan forgiveness.”

FTE Reduction Safe Harbor  From the instructions:

“A safe harbor under applicable law and regulation exempts certain borrowers from the loan forgiveness reduction based on FTE employee levels. Specifically, the Borrower is exempt from the reduction in loan forgiveness based on FTE employees described above 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 then restored its FTE employee levels by not later than June 30, 2020 to its FTE employee levels in the Borrower’s pay period that included February 15, 2020.”

And Finally . . . . 

The instructions include worksheets to gather information and documents that must be submitted or retained. Note, the SBA stated during a webinar on May 19th that they are not ready to give any further clarification on forgiveness issues.

The Paycheck Protection Program Loan Forgiveness Application:

We will continue to closely monitor any new developments and keep you informed. If you have any questions or would like help in reviewing your eligibility for any of these programs, please contact your MichaelSilver tax professionals at 847.982.0333.