Updated May 18, 2020 to include the Loan Forgiveness Application and related worksheets.
Now that you have your Paycheck Protection Program loan, what steps should you take to ensure you receive the forgiveness you expect from your bank and the SBA?
We created this two-part article as a resource to assist you with the forgiveness process. Part one of the article focuses on the process and steps you might consider implementing to manage the forgiveness process. Part two contains a summary of requirements borrowers must meet to obtain forgiveness. This section also includes a link to the Loan Forgiveness Application and related instructions. The application, released late on Friday, May 15, 2020, goes a long way in resolving many of the open questions on the forgiveness process. Even with these clarifications, banks and borrowers will need additional clarity to finalize the application process.
The guidance from the SBA to banks and borrowers is evolving and we will add to and edit this article as new information becomes available. While your bank should always be the main source for final forgiveness guidelines, please remember they are working hard to navigate through some unanswered questions as well.
Part 1 – Actions to Consider as Part of the PPP Forgiveness Process
Part 2 – Summary of Borrower Requirements to Obtain Loan Forgiveness
The Paycheck Protection Program Loan Forgiveness Application was released on Friday, May 13, 2020.
Forgiveness, in full or in part, of your PPP loan will be based on several factors. The list of considerations below is based on the guidance we have been able gather and is not an exhaustive list. Although the PPP Loan Forgiveness Application has been released, this is still an evolving process and we will make our best effort to keep this article updated. More current information may be available directly from the SBA or your bank.
The Covered Period is the 56 day period beginning on the first day loan proceeds are disbursed to the Borrower. (Example - If you received your proceeds on Monday, April 20th, the first day of the Covered Period will be April 20th and the last day of the Covered Period is Sunday, June 14th.)
Alternative Payroll Covered Period
Borrowers that pay biweekly or more frequently may elect an Alternative Payroll Covered Period that aligns with the first day of the pay period following loan disbursement. This alternative period may only be used for calculating eligible payroll. All other eligible expenses will use the Covered Period outlined above. (Example - If you received your proceeds on Monday, April 20th and the first day of your next pay period begins on Sunday, April 26th, the first day of the Alternative Payroll Covered Period will be April 26th and and the last day of the Alternative Payroll Covered Period will be Saturday, June 20th.) Borrowers that elect to use the Alternative Payroll Covered Period must use this same period anytime there is a reference to "the Covered Period or the Alternative Payroll Covered Period". Borrowers must apply the Covered Period (not the Alternative Payroll Covered Period) when the application only references the "Covered Period."
One of the factors that will impact forgiveness is whether the funds are spent on allowable expenses during the eight-week covered period or alternate covered period.
Expenses eligible for forgiveness include:
Eligible Payroll Costs
Borrowers are generally eligible for forgiveness for the payroll costs paid and payroll costs incurred during the eight-week (56-day) Covered Period (or Alternative Payroll Covered Period) (“payroll costs”). Payroll costs are considered paid on the day that paychecks are distributed or the Borrower originates an ACH credit transaction. 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 Alternative Payroll Covered Period) are eligible for forgiveness if paid on or before the next regular payroll date. Otherwise, payroll costs must be paid during the Covered Period (or Alternative Payroll Covered Period). For each individual employee, the total amount of cash compensation eligible for forgiveness may not exceed an annual salary of $100,000, as prorated for the covered period. Count payroll costs that were both paid and incurred only once.
Eligible Payroll Costs include:
Payroll expenses that are not eligible for forgiveness include:
Owner compensation may not exceed eight weeks worth of 2019 compensation and is capped at $15,385 per individual. This applies to owner-employees, self-employed, and individual/general partners.
Eligible Nonpayroll Costs
Borrowers are limited to spending no more than 25% of the loan proceeds on non payroll expenses. Any non payroll expenses greater than 25% will reduce the amount of loan forgiveness available to the borrower.
The PPP Schedule A Worksheet included with the Loan Forgiveness Application provides a calculation that reduces loan forgiveness based on any salary or wage reductions greater than 25%. The actual amount of loan forgiveness the Borrower will receive may be reduced if the salary or hourly wages of individual employees during the Covered Period or the Alternative Payroll Covered Period was less than during the period from January 1, 2020 to March 31, 2020. If the Borrower restored salary/hourly wage levels, the Borrower may be eligible for elimination of the Salary/Hourly Wage Reduction amount. Borrowers will complete the worksheet on pages 7 and 8 of the Loan Forgiveness Application to determine if the loan forgiveness amount will be reduced due to salary or wage reductions.
One of the larger significant requirements for a Borrower to receive full forgiveness is their ability to maintain a consistent staffing level. This is will be measured by comparing your Full Time Equivalent (FTE) employee count to a prior period. The Loan Forgiveness Application states:
To calculate the average full-time equivalency (FTE) during the Covered Period or the Alternative Payroll Covered Period. For each employee, enter the average number of hours paid per week, divide by 40, and round the total to the nearest tenth. The maximum for each employee is capped at 1.0. A simplified method that assigns a 1.0 for employees who work 40 hours or more per week and 0.5 for employees who work fewer hours may be used at the election of the Borrower. This calculation will be used to determine whether the Borrower’s loan forgiveness amount must be reduced due to a statutory requirement concerning reductions in full-time equivalent employees. Borrowers are eligible for loan forgiveness for certain expenditures during the Covered Period or the Alternative Payroll Covered Period. However, the actual loan forgiveness amount that the Borrower will receive may be less, depending on whether the Borrower’s average weekly number of FTE employees during the Covered Period or the Alternative Payroll Covered Period was less than during the Borrower’s chosen reference period (see Instructions to PPP Schedule A, Line 11). The Borrower is exempt from such a reduction if the FTE Reduction Safe Harbor applies. See the FTE Reduction Safe Harbor instructions below
FTE Reduction Exception
The forgiveness process provides for certain reductions in the FTE requirements. A Borrower may reduce the number of required FTE's if any of the following conditions are met:
FTE Reduction Safe Harbor
Borrowers are exempt from the forgiveness reduction calculations above if they meet both of the following conditions:
Documentation Required for Forgiveness
This list includes some of the documents that your bank may ask you to provide as part of your loan forgiveness application. Please check with your bank for a final list of required documents:
*PPP Loan Forgiveness Application
*PPP Schedule A
*Full Time Equivalents
Documentation showing (at the election of the Borrower):
The selected time period must be the same time period selected for purposes of completing PPP Schedule A, line 11. Documents may include payroll tax filings reported, or that will be reported, to the IRS (typically, Form 941) and state quarterly business and individual employee wage reporting and unemployment insurance tax filings reported, or that will be reported, to the relevant state. Documents submitted may cover periods longer than the specific time period.
Documentation verifying existence of the obligations/services prior to February 15, 2020 and eligible payments from the Covered Period.
Additional Documentation Borrowers Must Keep On File For Six Years
PPP Schedule A Worksheet or its equivalent and the following:
Borrowers must also maintain records relating to their PPP loan, including documentation submitted with their loan application, documentation supporting the certifications as to the necessity of the loan request and its eligibility for a PPP loan, documentation necessary to support the loan forgiveness application, and documentation demonstrating the material compliance with PPP requirements. The Borrower must retain all such documentation in its files for six years after the date the loan is forgiven or repaid in full, and permit authorized representatives of SBA, including representatives of its Office of Inspector General, to access such files upon request.
Good Faith Certification Safe Harbor
On May 13, 2020 the SBA released a safe harbor provision related to the good faith certification of the economic uncertainty for all borrowers that, together with their affiliates, received loans with original principal amounts of less than $2MM. The safe harbor deems that these borrowers have, in good faith, made the required certification concerning the necessity of the loan request. (question 46 of the SBA's FAQ document) With this provision, the SBA has answered one of the more looming questions regarding a borrowers true eligibility to participate in the loan program and ultimately to receive forgiveness.
This summary has been provided as a courtesy and all information contained in this article should be confirmed through your bank or the SBA website.
HCP provides the information in this blog for general guidance only. The content does not constitute legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other advisers. The information is provided "as is," with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, express or implied.