SBA Releases PPP Forgiveness Application and Instructions

May 16, 2020

On May 15, 2020, the SBA released the long-awaited Paycheck Protection Program (PPP) Loan Forgiveness Application and accompanying instructions. PPP borrowers must complete this application at the end of the eight-week covered period in order to obtain forgiveness of eligible expenses. Borrowers are required to submit the PPP Loan Forgiveness Calculation Form and a PPP Schedule A along with the Loan Forgiveness Application and supporting documentation to their lender. The SBA advised that additional regulations and guidance will be issued to further assist borrowers as they complete their applications, and to lenders with guidance on their responsibilities.

While not exhaustive, the application and instructions provide important new items and clarifications to the following issues relating to amounts eligible for forgiveness:

  • Alternative payroll covered period. For administrative convenience, the SBA established an elective “alternative payroll covered period” option. PPP borrowers may now elect to calculate eligible payroll costs using the eight-week period that begins on the first day of their first pay period following their PPP loan disbursement date.
  • “Paid or incurred” costs. In a departure from the statutory language allowing forgiveness for “costs incurred and payments made during the covered period,” eligible costs paid or incurred during the eight-week covered period are now eligible for forgiveness. There has been considerable confusion relating to both payroll and non-payroll costs that are paid or incurred outside of the covered period. The forgiveness application instructions have provided some flexibility and allow forgiveness for certain costs incurred prior to the loan disbursement date and paid during the covered period, as well as certain costs incurred during the covered period and paid after that period.
  • The instructions provide that payroll costs are considered paid on the day that paychecks are distributed or the borrower originates an automated clearing house (ACH) credit transaction. The payment may be for work performed during a prior period. 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 (or the alternative payroll covered period) are eligible for forgiveness if paid on or before the next regular payroll date. 
  • Eligible nonpayroll costs 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.
  • Forgiveness calculations, penalties and relief. The PPP Schedule A and worksheets contain clarifications and computational guidance regarding average full-time equivalency (FTE) employees, forgiveness penalties, penalty relief and safe harbors. Though loan forgiveness amounts may be impacted for reductions of FTE employees or salary levels of FTE employees during the covered period, several exemptions and safe harbors are available to borrowers.
  • Prior to the release of the forgiveness application, it was unclear how FTE employees would be calculated for purposes of the workforce reduction penalties. The instructions require a calculation of average FTE employees during the covered period (or alternative payroll covered period). This calculation is made by taking the number of hours paid to each employee per week, dividing by 40 and rounding to the nearest tenth. The maximum number for each employee is capped at 1.0. An alternative simplified method may also be utilized that assigns 1.0 for employees who work 40 hours or more and 0.5 for employees who work fewer hours.  Reduction penalties may apply if the average weekly FTE number during the covered period is lower than the average weekly FTE number for the period February 15, 2019 through June 30, 2019 or January 1, 2020 through February 29, 2020.
  • Safe harbor protections are available to eliminate workforce reduction penalties. The instructions state that there will be no reductions for loan forgiveness if (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 no later than June 30, 2020 to its FTE employee levels in the borrower’s pay period that included February 15, 2020. In addition, there are exceptions or no reductions in forgiveness for (1) any positions for which the borrower made a good-faith, written offer to rehire an employee during the covered period that was rejected by the employee; and (2) any employees who during the covered period (a) were fired for cause, (b) voluntarily resigned, or (c) voluntarily requested and received a reduction of their hours.
  • Loan forgiveness penalties also apply to salary or wage reductions to employees with an average annual salary or an average wage under $100,000 during 2019. The reduction in forgiveness amount is required if the reduction in wages over the eight-week period is in excess of 25% of the total salary or wages of the employee during the period from January 1, 2020 through March 31, 2020. The instructions provide a safe harbor if the annualized average salary or wage of the employee is restored by June 30, 2020.
  • Compensation caps. The instructions provide that the compensation of an individual employee earning in excess of $100,000 annually cannot exceed a covered period prorated amount of $15,385. The compensation caps are consistent with previous SBA guidance relating to self-employed individuals.  
  • Documentation. PPP Schedule A outlines the documents required to be submitted to the lender in order to support the PPP Loan Forgiveness Application.
  • Payroll documentation includes:
    • 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), including payroll tax filings and state quarterly business and individual employee wage reporting and unemployment insurance tax filings.
    • 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.
  • FTE documentation includes:
    • the average number of FTE employees on payroll per month employed between February 15, 2019 and June 30, 2019;
    • the average number of FTE employees on payroll per month employed between January 1, 2020 and February 29, 2020; or
    • in the case of a seasonal employer, the average number of FTE employees on payroll per month employed between February 15, 2019 and June 30, 2019; between January 1, 2020 and February 29, 2020; or any consecutive 12-week period between May 1, 2019 and September 15, 2019.
  • Nonpayroll documentation includes:
    • Business mortgage interest payments: Copy of the lender amortization schedule and receipts or cancelled checks verifying eligible payments from 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 verifying interest amounts and eligible payments.
    • Business rent or lease payments: Copy of the current lease agreement and receipts or cancelled checks verifying eligible payments from 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 verifying eligible payments.
    • Business utility payments: Copy of invoices from February 2020 and those paid during the covered period and receipts, cancelled checks or account statements verifying those eligible payments.

Marks Paneth will continue to monitor developments and will provide updates as they become available. Contact your Marks Paneth advisor if you need additional information or assistance or email responseteam@markspaneth.com.

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