SBA Releases Paycheck Protection Program Loan Forgiveness Application

As businesses turn their attention from Paycheck Protection Program (“PPP”) loan eligibility to loan forgiveness, the U.S. Small Business Administration (“SBA”) has released the Loan Forgiveness Application (“Application”), including detailed instructions for borrowers seeking to calculate (and maximize) the amount of their loan that will be forgiven. The Application answers many questions about loan forgiveness but leaves many unanswered. The Application must be filed directly with the borrower’s lender.

In addition to an interim final rule that formally implements the policy choices reflected in, or implied by, the Application, we expect the SBA to issue additional guidance before the earliest PPP borrowers apply for loan forgiveness. In addition, most expect Congressional or administrative action to further modify the terms of PPP loans, including potentially expanding the period during which borrowers may make expenditures that qualify for loan forgiveness. (See, for example, press coverage of Treasury Secretary Mnuchin’s comments.)

A PPP loan is forgivable up to the amount equal to the sum of costs incurred and payments made during the “Covered Period” for (1) payroll costs; (2) payment of interest on any covered mortgage obligation; (3) payment on covered rent obligation; and (4) any covered utility payment (e.g., electricity, gas, water, transportation, phone, or internet access). At least 75% of the potential forgiveness amount must be used for payroll costs and up to 25% can be used for covered mortgage interest, rent, and utility payment obligations. The Application (pg. 2) provides further detail regarding what constitutes “payroll costs” and “nonpayroll costs.”

 

Commentary: As expected, pursuant to the PPP Schedule A Worksheet, only employees whose principal place of residence is in the United States are considered for purposes of determining the eligible forgiveness amount and the reductions thereto. Salary/hourly wage reductions of employees whose principal place of residence is not the United States do not reduce the eligible forgiveness amount.

 

Under the Application, the maximum amount of the PPP loan that may be forgiven is the lowest of:

• The amount calculated as follows: (1) payroll costs plus nonpayroll costs; minus (2) salary/hourly wage reductions, subject to specified exceptions and a safe-harbor cure, multiplied by (3) average FTEs during the Covered Period or Alternative Payroll Covered Period over average FTE during the chosen reference period, subject to specified exceptions and a safe-harbor cure.
• Payroll costs divided by 0.75.
• The amount of the PPP loan.

 

Commentary: The initial calculation above is done without first adjusting for the required 75/25 split between payroll and nonpayroll costs. This is advantageous to borrowers, since any downward adjustments based on salary reductions or the FTE ratio may be done on a larger starting number. For example, if a borrower spent $50 on payroll costs and $50 on nonpayroll costs, and if its FTE reduction quotient were 1/2, the amount of loan forgiveness would be $50 (i.e., $100 x ½); if borrower were first required to adjust for the 75/25 split, the initial amount eligible for forgiveness would be $66.67 (i.e., $50 ÷ 0.75), and the amount forgiven would be $33.33 (i.e., $66.67 x ½).

 

The Application must be filed directly with the borrower’s lender.

Loan Period

The “Covered Period” for the purposes of the loan forgiveness calculations is an eight-week (56 day) period. The first day of the Covered Period is the loan disbursement date (i.e., the date a borrower received loan proceeds from its lender). If loan proceeds were received over several days, the Covered Period begins on the date of receipt for the very first installment.

Borrowers with a biweekly (or more frequent) payroll schedule may choose to use an “Alternative Payroll Covered Period,” which is the eight-weeks (56 days) that begins on the first day of the borrower’s first pay period following the loan disbursement date.

Borrowers that elect the Alternative Payroll Covered Period must use that period for all calculations where the Application references “the Covered Period or Alternative Payroll Covered Period.” However, where the Application only mentions “Covered Period,” the borrower must use the Covered Period to make the calculation. (Generally, nonpayroll costs must be calculated for the Covered Period and payroll costs may be calculated for the Covered Period or the Alternative Payroll Covered Period.)

 

Commentary: In addition to administrative ease, electing the Alternative Payroll Covered Period may allow additional runway to hire back employees to improve the borrower’s FTE ratio and, depending on a borrower’s payroll practices, it may increase the amount of payroll costs that can be included in a borrower’s forgiveness calculations. For example: If a borrower received a loan on April 23, 2020, its next payroll period began May 1, and it paid payroll May 3 for the period April 17 to April 30, electing the Alternative Payroll Covered Period would allow the borrower to include 10-weeks’ worth of payroll costs in is calculations (the eight-week payroll costs incurred during the Alternative Payroll Covered Period, plus the payroll costs for the period from April 17 to April 30 paid during the Alternative Payroll Covered Period). If the same borrower paid payroll on April 30 rather than May 3, it should consider the following to determine whether it is more advantageous to use the Covered Period or the Alternative Payroll Covered Period: The Covered Period would include 63 days of payroll costs – payment for payroll costs for the 7 days from April 17 to April 22 in addition to the 56 days of payroll costs that are paid or accrue from April 23 to June 17, the last day in the Covered Period. The Alternative Payroll Covered Period would include only 56 days of payroll costs but may still be more advantageous. This is because the Alternative Payroll Covered Period would end June 25, 2020 (compared to June 17), and FTE and payroll costs from June 17 to June 25 may be greater than payroll costs from April 17 to April 30. We assume past due compensation or past due nonpayroll costs paid in the Covered Period or Alternative Payroll Covered Period are allowable costs that may be forgiven. In contrast, advance payments are not allowable costs.

 

Calculating the Initial Forgiveness Amount

To calculate loan forgiveness, a borrower must complete the PPP Loan Forgiveness Calculation Form.

The initial forgiveness amount is the sum of

1. total eligible payroll costs incurred or paid during the Covered Period or Alternative Payroll Covered Period;
2. amount of business mortgage interest payments made during the Covered Period for any real or personal property mortgage obligation incurred before February 15, 2020 (excluding prepayments);
3. business rent or lease payment for real or personal property made during the Covered Period for leases in force before February 15, 2020; and
4. amount of business utility payments made during the Covered Period for services that began before February 15, 2020.

To calculate the eligible payroll costs incurred or paid (subsection (a) above), borrowers must complete PPP Schedule A and the PPP Schedule A Worksheet included in the Application. In short, “total eligible payroll costs” is the sum of “cash compensation” paid to employees during the Covered Period or Alternative Covered Period calculated using Table 1 (employees compensated at an annualized rate less than $100,000 in 2019 or not employed in 2019) and Table 2 (employees compensated at an annualized rate of more than $100,000 in 2019) of the PPP Schedule A Worksheet; borrower’s contribution to employee health insurance and retirement plans during the Covered Period or Alternative Payroll Covered Period; and amount paid by borrower during the Covered Period or Alternative Payroll Covered Period for employer state and local taxes assessed on employee compensation.

 

Commentary: Employees who make more than $100,000 on an annualized basis and who were not employed by the borrower in 2019 would be entered in Table 1. That suggests that reductions in the rate of those employees’ pay in the Covered Period or Alternative Payroll Covered Period below 75% of the rate in the first quarter of 2020 would affect loan forgiveness amounts. This is inconsistent with the CARES Act, and it is unclear why a “new” highly compensated employee should be treated differently than an “old” highly compensated employee. “Cash compensation” eligible for forgiveness may not exceed $100,000 as prorated for the Covered Period, meaning that the amount is capped at $15,385 for the eight-week period and not capped for pay periods within the eight-week period.

 

Adjustments to Initial Forgiveness Amount

The initial forgiveness amount may be reduced by salary/wage reductions and FTE reductions unless an appropriate safe harbor applies. Calculations must be made for each employee, listed by name and the last four digits of their social security number, in Table 1 or Table 2 of the PPP Schedule A Worksheet.

Salary/Wage Reduction. Borrowers must adjust the initial forgiveness amount by subtracting the “Total Salary/Hourly Wage Reduction” amount. This calculation is based on a reduction in salary/hourly wage for employees who received compensation from the borrower at an annualized rate of less than or equal to $100,000 for all pay periods in 2019 or were not employed by the borrower in 2019. Borrowers use the PPP Schedule A Worksheet, Table 1 to calculate the Total Salary/Hourly Wage Reduction. Salary/wage reduction is not needed if during the Covered Period or the Alternative Payroll Covered Period, the “average salary or hourly wage” for each employee listed in Table 1 was “at least 75% of such employee’s average annual salary or hourly wage between January 1, 2020 and March 31, 2020.”

 

Commentary: Salary adjustments in the Application are based on salary or wage rates in the first quarter of 2020, and not based on “total salary or wages of the employee during the most recent full quarter during which the employee was employed before the covered period,” as provided in Section 1106(d)(3) of the CARES Act.reduced FTEs and can manage employee returns to maximize loan forgiveness.

 

Borrowers will qualify for the “Salary/Hourly Wage Reduction Safe Harbor” if they restore salary/hourly wage levels. Specifically, under that safe-harbor, borrowers may forgo a salary/wage reduction for each Table 1 employee whose average salary or wage was reduced by more than 25% during the Covered Period or the Alternative Payroll Covered Period, if (1) the employee’s average salary/wage between February 15, 2020 and April 26, 2020 was less than the employee’s annual salary or wage as of February 15, 2020 and (2) the employee’s average annual salary or hourly wage as of June 30, 2020 is equal to or greater than the employee’s annual salary or hourly wage as of February 15, 2020 (see formula on pg. 7 of the Application). Reductions in salary/hourly wage for employees who received more than $100,000 in 2019 compensation have no bearing on whether a borrower qualifies for the safe harbor.

 

Commentary: It remains unclear what “restored” means. The formula on pg. 7 of the Application uses “average salary or hourly wage as of June 30, 2020” but does not specify what period is used to determine the average. “Average” may have been inserted by accident, so that the comparison is simply to the payment rate at two points in time (February 15 and June 30); alternatively, “average” may mean the average over any regular pay period that includes June 30, 2020, so that a borrower would have to take care to ensure it maintains the rate of pay over more than a single day. (It is also possible, although we believe unlikely, that “average” suggests the period from January 1, 2020 until June 30, 2020 or the period from the beginning of the Covered Period or Alternative Payroll Covered Period until June 30, 2020; either would require a bonus or other increase in pay, compared to pre-COVID-19 levels, to average out the low-pay periods intended to be cured.) The Application specifies the measurement date is “June 30” and not, as in Section 1106(d)(5)(B)(i)(II) of the CARES Act, “not later than June 30, 2020.” The safe harbor can “cure” salary reductions for the entire eight-week Covered Period or Alternative Payroll Covered Period. That is inconsistent with Section 1106(d)(5)(B) of the CARES Act, purported to apply the cure to reductions that existed until April 26, 2020 (the period 30 days after enactment of the CARES Act), but good news for borrowers that reduced salaries and can manage employee salaries to maximize loan forgiveness.

 

FTE Reduction. The loan forgiveness amount may be reduced “if the borrower’s average weekly FTE employees during the Covered Period (or the Alternative Payroll Covered Period) was less than during the borrower’s chosen reference period” (see line 11, Instructions for PPP Schedule A for guidance regarding the reference periods). To calculate the “Modified Total” forgiveness amount, borrowers must multiply the “FTE Reduction Quotient” by the amount calculated after applying the salary/wage reduction to the initial forgiveness amount.

The “FTE Reduction Quotient,” in turn, is calculated by dividing the “Total Average FTE” by the “Average FTE during the Borrower’s chosen reference period.” “Total Average FTE” is the sum of Average FTE for both employee groups (i.e. employees who received compensation at an annualized rate of less than or equal to $100,000 for all pay periods or were not employed by the borrower in 2019; and those who earned more than $100,000 in 2019) calculated using Tables 1 and 2 of the PPP Schedule A Worksheet.

The “Average FTE” calculation is based on the average number of hours paid per week (not worked) divided by 40. While calculating the “Average FTE,” borrowers may use a simplified calculation method and assign “1.0” for employees who work 40 or more hours per week and “0.5” for employees working fewer than 40 hours per week.

 

Commentary: The simplified calculation may provide an incentive to borrowers looking to improve the FTE ratio to hire several part-time employees to work significantly less than half-time (for example, 40 employees who each work one hour per week would count at 20 FTEs under the simplified calculation). Borrowers that elect to use the simplified calculation should understand that it will apply for purposes of calculating Average FTE during the chosen reference period.

 

Provided that the position is not filled by a new employee, borrowers can include in the FTE calculations (a) employees to whom the borrower extended a written offer during the Covered Period or the Alternative Payroll Covered Period, but the offer was rejected by the employee, and (b) employees who were fired for cause, voluntarily resigned, or voluntarily requested and received a reduction in hours during the Covered Period or the Alternative Payroll Covered Period. Additionally, while firing an employee (other than for cause) before or during the Covered Period affects the FTE calculations, it does not affect the salary/wage calculations.

The FTE reduction from the loan forgiveness amount will not apply if the borrower qualifies for the “FTE Reduction Safe Harbor.” The safe harbor is only available to borrowers that reduced their average FTE between February 15, 2020 and April 26, 2020 and then restored their total FTE as of June 30, 2020.

 

Commentary: It remains unclear whether the borrower’s average FTE over some period that includes June 30, 2020 is relevant or if only the FTEs who work on June 30, 2020 are counted. The Application specifies the measurement date is “June 30” and not, as in Section 1106(d)(5)(B)(ii)(II) of the CARES Act, “not later than June 30, 2020.” The safe harbor can “cure” FTE reductions for the entire eight-week Covered Period or Alternative Payroll Covered Period. That is inconsistent with Section 1106(d)(5)(B) of the CARES Act, purported to apply the cure to reductions that existed until April 26, 2020 (the period 30 days after enactment of the CARES Act), but good news for borrowers that reduced FTEs and can manage employee returns to maximize loan forgiveness.

 

Documentation and Attestations

A borrower must submit various documents in support of its Application and maintain (but not submit) certain documents that are likely relevant for audit purposes.

Documents That Must Be Submitted. In addition to the PPP Loan Forgiveness Calculation Form and PPP Schedule A, a borrower must submit documentation:

• verifying the cash compensation and non-cash compensation benefit payments made during the Covered Period or the Alternative Payroll Covered Period, including: (a) bank account statements and documents maintained by third-party payroll service providers; (b) tax forms (or equivalent third-party payroll service provider reports) such as payroll tax filings, and state quarterly business and individual employee wage reporting and unemployment tax filings; and (c) payment receipts, cancelled checks, or account statements regarding contributions made to health and retirement plans;
• supporting its FTE calculations based on the reference period chosen (e.g., payroll tax filings, state wage and unemployment tax filing, etc.); and
• demonstrating the existence of nonpayroll payment obligations, including (a) lender account statements or amortization schedule, receipts, or cancelled checks verifying business mortgage interest payments; (b) copies of lessor account statements, or lease agreement, receipts, or canceled checks verifying rent payments; and (c) copies of invoices, canceled checks, or account statements verifying utility payments.

Documents That Must be Maintained. In addition to submitting relevant documents, borrowers must maintain: (a) documentation supporting the calculations in Tables 1 and 2 of the PPP Schedule A Worksheet; (b) documentation of employee job offers/refusals, for cause terminations, voluntary resignations, and written request for reduction in hours; and (c) documentation supporting “FTE Reduction Safe Harbor” calculations.

As part of the Application, borrowers must make attestations related to compliance with laws and regulations governing the PPP and loan forgiveness calculations, and that the borrower has submitted the relevant documents to support its forgiveness calculations.

Loans over $2 Million

Borrowers must check a box on the Application if the borrower (together with its affiliates, if applicable) received PPP loans in excess of $2 million. We expect that all borrowers that check this box will have their loans reviewed by the SBA or U.S. Department of the Treasury, as described in FAQ 39 of the Paycheck Protection Program Frequently Asked Questions, published by the SBA in consultation with the Department of the Treasury.

 

Commentary: If a borrower is not required to include its affiliates for purposes of determining PPP loan eligibility (for example, if it has a NAICS code beginning with 72, as provided in Section 1102(d)(iv) of the CARES Act), it need not check this box as long as its individual loan is less than $2 million. For example, if Company A wholly owns restaurant Company B and restaurant Company C, each of which has a $1.5 million PPP loan, neither Company B nor Company C would need to check the box.