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SparkNotes on the PPP Loan Forgiveness Application

Chris Macksey

SPARKNOTES FOR THE PPP LOAN FORGIVENESS APPLICATION

Summary of Loan Forgiveness Application

So, the SBA has this lovely habit of trying to ruin accountant’s and attorney’s lives by releasing massive changes to guidance on a Friday night. This is the fourth f*%king time they have done this. No, we’re not mad, we love reading legalease on a Saturday  morning. Anyway, the SBA released the forgiveness application. There was a surprising amount of information in it, and there was an even more surprising amount of departure from previous guidance, further lending to the PPP mantra: “Subject to additional guidance.” The application comes in 6 parts, and here they are:

  1. PPP Loan Forgiveness Calculation Form: Essentially summarizing the information in the Schedule A. This form is pulling in all of the basic information about your loan and payroll system. It may be easiest to actually complete this last. 

  2. PPP Loan Forgiveness Certification Questionnaire: A series of questions making sure you didn’t give yourself a golden parachute, screwed your employees, built that wine cellar you always wanted, or bought a yacht. There really isn’t anything in there that should surprise you, 

  3. Schedule A: The meat and potatoes of the application. While just a lowly schedule to the application, it yields more information in 7 measly pages than we have seen in the last 4 weeks (months? Does it seem like time is bending?)

  4. Schedule A Worksheet: A sample worksheet to use to total up all of your employees and to calculate their FTE’s. This is probably what you want to do first.

  5. List of Documents to Maintain… That’s about it.

  6. Demographic Information Form (Optional): Optional means none of us are going to do it =]

Highlights of the Application

The PPP has two major components of forgiveness. Payroll Costs and “other” covered costs. The document breaks down, in better detail, some questions that we all had about the logistics of tracking these expenses.

Eligible payroll costs: 

  • Borrowers are generally eligible for forgiveness for the payroll costs paid and payroll costs incurred during the eight-week period. 

  • 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 non payroll costs: An eligible non payroll cost 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. The forgiveness application lends more validity to the assumption that only costs that are paid and accrued during the 8-week period will be forgiven. In other words, you still likely cannot pay rent or payroll costs that become due outside of the 8-week covered period. 

  1. Covered mortgage obligations: payments of interest ONLY on real or personal property incurred before February 15, 2020. This excludes non-secured loans (such as credit cards and business LOC’s). 

  2. Covered rent obligations: Rent or lease payments for  lease agreements for real or personal property in force before February 15, 2020. Covered utility payments: Payments for a service for the distribution of electricity, gas, water, transportation, telephone, or internet access for which service began before February 15, 2020.

Covered Period: The eight-week (56-day, because we’re paying attention to that now 🙄) Covered Period of your PPP loan. The first day of the Covered Period must be the same as the PPP Loan Disbursement Date. For example, if the Borrower received its PPP loan proceeds on Monday, April 20, the first day of the Covered Period is April 20 and the last day of the Covered Period is Sunday, June 14. 

Alternative Payroll Covered Period (New, Improved, and what every sane person is going to choose): For “administrative convenience,” Borrowers with a weekly or biweekly payroll schedule may elect to calculate eligible payroll costs using the eight-week period that begins on the first day of the first pay period following their PPP Loan Disbursement Date. This is a huge improvement over the original wording. This means we get to follow your current payroll cycle, and not have to do any crazy math or accounting to figure out what is forgiven. Most everyone is likely going to elect to use this method.

Borrowers who elect to use the Alternative Payroll Covered Period must apply the Alternative Payroll Covered Period wherever there is a reference in this application to “the Covered Period or the Alternative Payroll Covered Period.” However, Borrowers must apply the Covered Period (not the Alternative Payroll Covered Period) wherever there is a reference in this application to “the Covered Period” only.

New FTE Calculation: 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. 

The CARES Act wasn’t particularly helpful with this calculation, but the SBA has now announced that FTE should be calculated on 40 hours/week, as opposed to 30 hours/week. Not great, considering this is the assumption most people went with. The good news? This means that the FTE totals during your look-back period(s) will likely be lower than you had initially planned. The not-so-great news? This means that your employees will need to be scheduled to work at least 40 hours/week during your 8-week window to count as 1.0 FTE.

The SBA may have presented us with a gift, by allowing you to use a “simplified” calculation: an employee who hits 40 hours/week would count as 1.0 FTE, but employees who work anything less than that 40-hour threshold can simply be counted as .5 FTE (as opposed to the exact fraction proportionate to an employee’s weekly hours).  This means people working 1 hour a week would be .5, and those working 38 hours a week would be .5.

Now, this may change in the near future, like everything else has, so tread carefully with this. You also have to be considerate of this calculation in conjunction with the 25% reduction in wages. 

Expanded FTE Reduction Exceptions: Any positions for which the Borrower made a written offer to rehire an employee during the Covered Period or the Alternative Payroll Covered Period which was rejected by the employee; and (2) any employees who during the Covered Period or the Alternative Payroll Covered Period:

  1. were fired for cause

  2. voluntarily resigned

  3. voluntarily requested and received a reduction of their hours

In all of these cases, include these FTEs if the position was not filled by a new employee. How they are going to track whether or not the position was filled is anyone’s guess. Any FTE reductions in these cases do not reduce the Borrower’s loan forgiveness. This is a huge change, announced last week. It is important that you document communication in writing, otherwise this may not be enforceable, but this negates the concerns employers had about getting employees back on payroll. 

FTE Reduction Safe Harbor: This new aspect grants an exemption. Specifically, the Borrower is exempt from the reduction in loan forgiveness based on FTE employees described above if both of the following conditions are met: (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 not later than June 30, 2020 to its FTE employee levels in the Borrower’s pay period that included February 15, 2020. The idea here is that if the borrower laid off a large portion, or all of their staff after February 15th, but then plan to bring them all back by June 30th. Everyone should run this calculation in case you qualify. 

  1. Calculate the total average FTE between February 15, 2020 and April 26, 2020.

  2. Calculate the total FTE in the Borrower’s pay period that includes February 15, 2020. This is just the one pay period.

  3. If the entry for step 2 is greater than step 1, proceed to step 4. Otherwise, the FTE Reduction Safe Harbor is not applicable and the Borrower must complete line 13 of PPP Schedule A by dividing line 12 by line 11 of that schedule. 

  4. Enter the borrower’s total FTE as of June 30, 2020

  5. If step 4 is greater than or equal to step 2 you are exempt 🎉🥳. Otherwise, the FTE Reduction Safe Harbor does not apply.