On Friday, May 15, the Small Business Administration (SBA) announced an important release for borrowers who received loans through the Paycheck Protection Program (PPP). The bureau made public a form and instructions for borrowers to use to apply for PPP loan forgiveness. Click here to view the loan forgiveness application and instructions in full.
The application includes the following components:
  1. PPP Loan Forgiveness Calculation Form (with instructions)
  2. PPP Schedule A (with instructions)
  3. PPP Schedule A Worksheet (with instructions)
  4. Documents that Each Borrower Must Submit with PPP Loan Forgiveness Application
  5. PPP Borrower Demographic Information Form (Optional)
Only items 1 & 2 above are required to be submitted to the lender servicing the PPP loan.
What we have learned…
Covered Period
  • The eight-week Covered Period begins on the date the borrower receives the PPP loan proceeds.
  • Those borrowers with biweekly (or more frequent) payroll periods may elect to use the Alternate Payroll Covered Period (the 8-week period beginning on the first day of the first pay period beginning after the PPP loan proceeds are received).
    • Eligible borrowers will want to compute their forgiveness using all allowable periods to determine which period is the most beneficial.
    • Eligible borrowers electing to use the Alternative Payroll Covered Period must use:
      • The Alternative Payroll Covered Period to calculate the following Payroll Costs:
        • Cash compensation
        • Employer contributions for employee health insurance
        • Employer contributions to employee retirement plans
        • Employer paid state and local taxes assessed on employee compensation (e.g. state unemployment insurance)
      • The Covered Period to calculate the following Non-Payroll Costs:
        • Mortgage interest payments
        • Rent and/or lease payments
        • Utility payments
Costs Eligible for Forgiveness (Paid or Incurred)
  • For purposes of calculating Payroll Costs and Non-Payroll Costs eligible for forgiveness (“Eligible Costs”), borrowers include the amount of any payments for Eligible Costs made during the Covered Period or Alternative Payroll Covered Period, as applicable, (“Applicable Period”) plus the amount of any Eligible Costs incurred during the Applicable Period, but not paid until after the end of the Applicable Period, provided that the payments for any incurred Payroll Costs are made on or before the next regular pay date and the payments for any incurred Non-Payroll costs are made on or before the next regular billing date. Payroll costs are deemed paid when the paychecks are distributed or when the borrower initiates the ACH transactions for direct deposit. Payroll costs are deemed incurred as the employee earns their pay.
  • The costs paid and incurred methodology does wind up creating some winners and losers, especially for borrowers with semi-monthly and monthly pay schedules. Borrowers who received their PPP loan proceeds immediately before a pay date appear to be able to effectively claim more than eight weeks of payroll, whereas borrowers who received their PPP loan proceeds on the first day of a new pay period appear to be limited to eight weeks of payroll. Absent further guidance to the contrary, borrowers may be well-served by accelerating the payment of the pay period straddling the end of their Applicable Period, to be paid on the last day of their Applicable Period.
Maximum Cash Compensation
  • The maximum amount of cash compensation (gross wages, tips, gross commissions, paid leave, etc.) allowed to be claimed with respect to any employee is limited to $100,000, as pro-rated for the Applicable Period, or $15,385. This means that borrowers do not need to calculate the limitation on a per pay period basis and that borrowers who pay their employees variable and/or non-recurring amounts over the Applicable Period (e.g. overtime hours, commissions, bonuses, etc.) may be able to claim larger payroll costs per employee than they previously expected.
  • For self-employed individuals and partners in partnerships, the maximum amount of payments made to the self-employed individual or partner that can be claimed for forgiveness (the eight-week equivalent of their applicable 2019 compensation) is-similarly capped at $15,385 per individual.
Reduction to Forgiveness Due to a Reduction in Full-Time Equivalency (“FTE”)
  • FTE is used to determine whether the borrower’s loan forgiveness must be reduced. Generally, borrowers must reduce the amount of forgiveness they are otherwise eligible for if they reduced the number of FTE employees during the Applicable Period (e.g. reduced the number of full-time employees or reduced hours or reduced the average number of hours for part-time employees).
  • FTE is calculated on a basis of 40 hours a week. The borrower is required to calculate the FTE for each employee by dividing the employee’s average hours paidper week during the Applicable Period by 40 and rounding to the nearest tenth (all employees are capped at a FTE of 1.0). Alternatively, borrowers may elect to utilize a simplified method that assigns an FTE of 1.0 for all employees who work an average of 40 or more hours per week and an FTE of 0.5 for employees who workless.
  • Many borrowers (i.e. those that cannot attest that they did not reduce the number of employees or the average hours paid to employees between January 1, 2020 and the end of the Covered Period) will be required to perform time consuming detailed PTE employee calculations for a number of periods to determine whether (and the extent to which) their loan forgiveness must be reduced.
Reduction to Forgiveness Due to a Reduction in Salary and Wages
  • Borrowers may also be required to reduce their loan forgiveness if they reduced the amount of salary or wages of any specified employee more than 25%. The CARES Act specifies that the above reduction only pertains to employees who did not receive, during any pay period in 2019, wages or salary at an annual rate of $100,000 or more. The PPP Loan Forgiveness Application instructions potentially reduces the number of specified employees by excluding employees who received compensation at an annualized rate of $100,000 during any pay period in 2019. The choice to use “compensation” in lieu of “wages or salary” begs the question as to whether significant amounts paid for overtime and/or bonuses, commission, etc. during any given pay period in 2019 to employees earning wages or salary of less than $100,000 might cause those employees to be excluded from the specified employees subject to the salary reduction requirements.
Limitation for Non-Payroll Costs
  • The instructions thankfully dispel the rumors that have been circulating regarding the 75% limitation imposed by the SBA. The mechanics of the PPP Loan Forgiveness Calculation Form clearly indicate that otherwise eligible forgiveness is limited to the lesser of (a) the PPP loan amount or (b) 75% of Payroll Costs paid or incurred during the Applicable Period. Effectively, the initial guidance from the SBA that no more than 25% of the loan forgiveness may stem from Non-Payroll Costs remains true.
Documentation Requirements
  • The application contains an entire page solely devoted to documentation required to be submitted and/or retained by the borrower.
  • Borrowers are required to submit the following information along with their PPP Loan Forgiveness Application:
    • Payroll Costs – documentation verifying the eligible cash compensation and non-cash benefits paid and incurred during the Applicable Period, including:
      • Bank statements or third-party payroll reports
      • Payroll tax forms covering all portions of the Applicable Period
      • Receipts, statements, or cancelled checks supporting non-cash employee benefits paid or incurred during the Applicable Period (e.g. employer paid health insurance, retirement plan contributions, SUTA, etc.)
    • FTE – documentation showing the average number of FTE employees per month for the reference period chosen by the borrower to determine whether there has been a reduction in FTE employees since January 1, 2020 (e.g. payroll reports and payroll tax returns filed with the IRS and other state and local governments).
    • Non-Payroll Costs – documentation verifying the existence of mortgage, rent, and lease obligations and utility services prior to February 15, 2020 and documentation supporting any amounts paid or incurred for Non-Payroll Costs during the Applicable Period (e.g. lender statements and/or amortization schedules and cancelled checks supporting mortgage interest, copies of lease agreements and cancelled checks supporting rent and lease payments, and copies of utility bills and cancelled checks supporting utility payments).
  • Borrowers are required to maintain (but not provide) the following documents:
    • Documentation supporting the amount of compensation paid of incurred to each employee during the Applicable Period, including any calculations for the reduction in forgiveness related to reductions in salary and wages.
    • Documentation supporting the limitation of cash compensation paid to each employee to $100,000 annualized ($15,385).
    • Documentation regarding any job offers and refusals, firings for cause, voluntary resignations, and written requests from employees for reductions in work schedule during the Applicable Period.
    • Documentation supporting the FTE Reduction Safe Harbor calculation on the PPP Schedule A Worksheet.
  • Borrowers are required to retain all records relating to the borrower’s PPP loan, including documents supporting the original application and the borrower’s certification as to the necessity of the PPP loan, documents supporting the forgiveness application, and documents supporting compliance with PPP requirements. The borrower must retain all of the above information in its files for six years after the PPP loan is forgiven or paid in full. The above files must be provided to any authorized representatives of the SBA, upon request.
Some important things that remain unresolved…
  • While no guidance has been released to the contrary, it is not clear whether borrowers seeking to maximize their loan forgiveness can pay discretionary bonuses, commissions, or other like compensation to employees during the Applicable Period.
  • Since the compensation paid or incurred methodology seemingly allows borrowers to claim forgiveness related to payroll paid during the Applicable Period (regardless of whether it was actually incurred during the Applicable Period), it’s not clear whether borrowers can choose to accelerate the payment of a pay period that straddles the end of their Applicable Period to claim forgiveness based on the Payroll Costs associated with the entire pay period, instead of the portion of the Payroll Costs that were incurred during the Applicable Period.
  • To date, all guidance regarding employer retirement plan contributions has been silent as to the time period relating to the contributions. It remains to be seen whether borrowers can claim forgiveness relative to a 2019 profit-sharing payment paid during the Applicable Period or if any 2020 retirement plan contributions paid during the Applicable Period are limited to amounts based on employee compensation paid during the Applicable Period.
  • Borrowers carefully managing employee salary and wages during their Applicable Period with a specific aim towards avoiding the reduction in PPP Loan forgiveness based on reduced employee wages need clarification as to what is included in “compensation”.
  • While the CARES Act specifically provided that any PPP Loan forgiveness would not be taxable, the IRS issued guidance indicating that any expenses attributable to the loan forgiveness would not be deductible and left it up to Congress to “fix”. Some members of Congress have indicated that the IRS guidance is in opposition to their intent, but we don’t yet know whether Congress will act.
  • Some members of Congress and Treasury Secretary Mnuchin have discussed the possibility of extending the forgiveness period beyond eight weeks or relaxing some eligible cost definitions. While many borrowers would welcome such relief, it would need to be announced timely to enable borrowers to make meaning spending decisions.
In Closing
The American Institute of Certified Public Accountants and other organizations have been quick to note that the PPP Loan Forgiveness Application, while providing some much-awaited guidance, leaves many major issues unresolved. The SBA has indicated that it plans to release additional regulations and guidance regarding completing the loan forgiveness application. We will continue to update you with guidance as it becomes available. If you have questions or wish to discuss these matters, please contact us.

Abeles and Hoffman, P.C.