PPP Loan Forgiveness Application Reveals New Accounting Methods, Restrictions
On May 15, 2020, the Small Business Administration (“SBA”) released the long-awaited Loan Forgiveness Application, meant to facilitate government forgiveness of all or part of small business loans received through the widely used Paycheck Protection Program (“PPP”). The application form contains new details that were only hinted at in prior guidance issued by the SBA. Below are the key takeaways from the Application.
When Can Costs Be Incurred or Payments Made for Forgiveness?
The CARES Act, which created the PPP loan program, provides for loan forgiveness for “costs incurred and payments made” during the 8-week period following loan disbursement. This language led borrowers to question whether the SBA would only forgive eligible costs that were both incurred and paid for during the covered period.
According to the Loan Forgiveness Application, the SBA has chosen a more permissive, “either/or” approach: eligible costs may be forgiven provided they were either paid for or incurred during the covered period. Thus, eligible costs that were paid for at the start of the 8-week period may be included in the request for loan forgiveness. The application also clarifies that costs that were incurred, but not paid for, during the covered period (e.g., employee time incurred at the end of the period, before payroll has posted) may be included in the forgivable amount, as long as they are paid for during the next payroll or billing period. This permissive approach applies not only to eligible payroll costs but also to eligible non-payroll costs (rent, utilities, and mortgage interest). For costs that were incurred, but not paid for, at the end of the 8-week period, it is anticipated that the SBA will expect companies to include only a pro rata portion of the following pay period, if necessary, in order to include only those costs incurred during the 8 weeks.
You Can Choose to Start the 8-week Loan Forgiveness Period with the Start of Your Biweekly Payroll Period
Additionally, the application allows companies that have a biweekly, or more frequent, payroll to elect an “Alternative Payroll Covered Period,” which permits them to delay the start of their 8-week loan forgiveness period, for certain eligible payroll costs, to the start of their next regular pay period. The ordinary, 8-week loan forgiveness period—which, for all borrowers, begins on the date of loan disbursement—still applies to certain eligible non-payroll costs of borrowers electing the alternative payroll period.
Limits on Compensation for Employees
The application reveals a more restrictive approach to employee compensation eligible for forgiveness. The text of the CARES Act, and subsequent guidance by the SBA, limited the definition of “payroll costs,” the core category of expenses eligible for loan forgiveness, to cash compensation up to the equivalent of a $100,000 annual salary. This led borrowers to question how the SBA would “count” bonuses or periodic compensation in determining whether employees’ salaries had increased beyond $100,000 per year. According to the application, the SBA has taken a strict approach and limited loan forgiveness to $15,385 in cash compensation per employee (i.e., 8/52 of $100,000). This new guidance does not generally disqualify borrowers who paid individual employees more than $15,385 during the loan forgiveness period from seeking loan forgiveness for the first $15,385 paid to those employees, but it limits the total amount of loan forgiveness, particularly for borrowers who paid bonuses or other forms of compensation over $15,385, even if the employee would not earn more than $100,000 per year.
Safe Harbors for Rehiring or Employees Who Choose Not to Return
The application provides additional details on how loan forgiveness amounts may be reduced (either for reductions to full-time equivalent (“FTE”) headcount, or for salary reductions beyond 25% for employees who typically earn less than $100,000 per year). Of particular note, the application makes clear that the statutory safe harbor for re-hires, which applies to borrowers able to re-hire to pre-COVID-19 levels by June 30, 2020, exempts those borrowers from any reductions to loan forgiveness based on FTE headcount reductions. Much to the relief of many employers who have dealt with issues of employees not returning to work, the application provides a sensible reading of the forgiveness reduction by permitting employers not to count towards a reduction to FTE headcount any employee who:
- Rejected a good-faith written re-hire offer (also in prior guidance)
- Was fired for cause
- Voluntarily resigned
- Voluntarily requested a reduction in hours, provided in each case that the same position was not filled by a new employee
How to Calculate Full-time Equivalency?
Finally, the application calls for a specific FTE calculation for purposes of determining whether loan forgiveness must be reduced based on FTE headcount reduction. Unlike the definitions of FTE employees in the Affordable Care Act, the PPP loan defines full-time employees as those working 40 hours per week, not 30. The application also provides a more generous choice, instructing borrowers to use either of the following two calculations for all employees: (a) for each employee, enter the average number of hours paid per week, divided by 40, and round to the nearest tenth (no employee can be above 1.0) or (b) assign 1.0 for employees who work 40 or more hours per week, and assign 0.5 to all other employees. Whichever method the borrower chooses, it must be applied both to the 8-week loan forgiveness period and to the borrower’s chosen lookback period. If, under both methods, there is a proportional reduction in average FTE head count, the borrower must reduce its loan forgiveness amount by the same proportional amount—using whichever of the two methods results in a smaller proportional reduction. As discussed above, if the borrower meets the safe harbor by rehiring employees by June 30, then it need not apply either calculation.
In announcing the Loan Forgiveness Application, the SBA indicated that it would soon release additional guidance and rules to assist borrowers in completing the application. Meanwhile, a bipartisan effort to modify the terms of the PPP loan program, including loosening certain restrictions on forgivable expenses, is gaining steam in Congress. We will update you with new details on either front once they emerge.
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