The U.S. Small Business Administration (SBA) and Treasury Department recently released a sample PPP Loan Forgiveness Application that answers many of the questions surrounding the PPP loan program and forgivable expenses. We expect additional guidance to be released soon, including an Interim Final Rule on loan forgiveness, that will answer or clarify further questions.
It’s important to note that the SBA may revise the Loan Forgiveness Application, and your lender may require a different loan forgiveness form specific to that financial institution. While the application does answer many questions, there are some unresolved issues. Contact your Lurie advisor for guidance specific to your situation before acting on this information.
The PPP Loan Forgiveness Calculation Method, Explained
The application consists of a three-part calculation to determine the amount eligible for forgiveness. Your potential forgiveness amount and frequently asked questions are listed below.
Loan forgiveness is limited to the lesser of:
(Total payroll costs + non-payroll costs) – FTE & salary reductions; or
PPP loan amount; or
Payroll costs divided by 0.75 (Payroll cost 75% requirement)
For help calculating your potential loan forgiveness amount, please contact your Lurie advisor.
The Covered Period for PPP loan forgiveness is the eight-week (56 day) period beginning on your loan disbursement date. For example, if you received your PPP loan proceeds on Monday, April 20, the first day of your Covered Period is April 20 and the last day of your Covered Period is Sunday, June 14.
The SBA has allowed for an alternative start date to the Covered Period called the Alternative Payroll Covered Period. Borrowers with a biweekly (or more frequent) payroll schedule may elect to start their eight-week (56 day) period on the first day of their first pay period following their PPP loan disbursement date. For example, if the Borrower received its PPP loan proceeds on Monday, April 20, and the first day of its first pay period following its PPP loan disbursement is Sunday, April 26, the first day of the Alternative Payroll Covered Period is April 26 and the last day of the Alternative Payroll Covered Period is Saturday, June 20.
Part 1: Payroll Costs + Non-Payroll Costs
The application asks for the payroll and qualifying non-payroll costs that the business has spent over the eight-week period since it received its PPP funds.
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”).
Incurred and Paid 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. This eliminates the need to run a special payroll date before the end of the eight-week Covered Period. Otherwise, payroll costs must be paid during the Covered Period (or Alternative Payroll Covered Period).
Payroll Costs includes:
- Wages/salaries – for each individual employee, the total amount of cash compensation eligible for forgiveness may not exceed $15,385, which is an annual salary of $100,000 as prorated for the covered period. Count payroll costs that were both paid and incurred only once.
- Group health benefits includes employer contributions to employee health insurance, including employer contributions to a self-insured plan.
- Retirement plan contributions includes employer contributions to employee retirement plans.
- Amounts paid to owners (owner-employees, self-employed individuals, or general partners) is capped at the lesser of: $15,385 (eight-week equivalent of $100,000 per year); or eight-week equivalent of their 2019 compensation (if it was lower than $100,000).
- Employer paid state and local taxes on employee compensation (state unemployment insurance tax or “SUTA”)
Nonpayroll costs eligible for forgiveness consist of:
- covered mortgage obligations: payments of interest (not including any prepayment or payment of principal) on any business mortgage obligation on real or personal property incurred before February 15, 2020 (“business mortgage interest payments”); and
- covered rent obligations: business rent or lease payments pursuant to lease agreements for real or personal property in force before February 15, 2020 (“business rent or lease payments”); and
- covered utility payments: business payments for a service for the distribution of electricity, gas, water, transportation, telephone, or internet access for which service began before February 15, 2020 (“business utility payments”).
An eligible nonpayroll 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. Eligible nonpayroll costs cannot exceed 25% of the total forgiveness amount. Count nonpayroll costs that were both paid and incurred only once.
Rent/lease expenses include payment for both real and personal property.
Part 2: FTE and/or Salary Reductions
There is a reduction in the forgiveness amount if you have reduced pay for employees greater than 25 percent or if you have not brought back the same number of full-time equivalent employees (FTEs) The FTE rule requires a small business to reduce its forgiveness request if it does not bring back the same number of employees that it had before the COVID-19 business impact. The application does provide for a waiver of this reduction if the business failed to bring back its same employee count during its eight-week period but later brought back the same number of employees by June 30, 2020.
40 hours = 1.0 FTE
- Each employee is capped at 1.0, meaning hours paid in excess of 40 do not get you a higher FTE for that employee
- Optional: can use 0.5 for any employee who is paid less than 40 hours
Test and comparison periods
The actual loan forgiveness amount that the Borrower will receive 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. For purposes of this calculation, the reference period is, at the Borrower’s election, either (i) February 15, 2019 to June 30, 2019; (ii) January 1, 2020 to February 29, 2020; or (iii) in the case of seasonal employers, either of the preceding periods or a consecutive twelve-week period between May 1, 2019 and September 15, 2019.
Divide the average weekly FTE’s during the Covered Period by the average weekly FTE’s during the reference period. The result is the percentage of eligible loan forgiveness (up to 100%).
The Borrower is exempt from any reduction based on FTE’s if the FTE Reduction Safe Harbor applies (see below).
Avg. FTE calculation
For each employee, take the average number of hours paid per week, divide by 40, and round the total to the nearest tenth. The maximum FTE 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.
FTE reduction exceptions
(fired, resignation, voluntarily requested reduction in hours)
You can count an individual as an FTE for: (1) any positions for which the Borrower made a good-faith, 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 (a) were fired for cause, (b) voluntarily resigned, or (c) voluntarily requested and received a reduction of their hours.
Safe Harbor for FTE re-hires by 6/30
A safe harbor under applicable law and regulation exempts certain borrowers from the loan forgiveness reduction based on FTE employee levels. 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.
Test and comparison periods
The actual amount of loan forgiveness the Borrower will receive may be less, depending on whether the salary or hourly wages of certain 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.
Salary/wage reduction calculation
The instructions for PPP Schedule A Worksheet provides a fill in the blank exercise to calculate any reduction in loan forgiveness if pay was recued more than 25%. The test is applied to each individual employee’s compensation.
Safe Harbor for eliminating salary/wage reductions by 6/30
If the average annual salary or hourly wage as of June 30, 2020 is equal to or greater than the annual salary or hourly wage as of February 15, 2020, the Safe Harbor is met and there is no loan forgiveness reduction for that employee’s compensation.
Part 3: Payroll Costs Divided by 0.75
The 75 percent payroll cost test is the last part. This states that the forgiveness request must be comprised of at least 75 percent payroll costs. The other 25 percent can only be rent, mortgage interest debt and utilities. If the forgiveness request in step three exceeds 75 percent, then you will instead take the amount of your payroll costs and will divide that by .75, and this will give you your total forgiveness amount. For rent/leases – the latest guidance includes both real property and personal property.
Loan amount: $1,000,000
Spent on payroll costs: $700,000
Spent on nonpayroll costs: $200,000
Total spent: $700,000 + $200,000 = $900,000
Payroll costs divided by 0.75: $700,000/0.75 = $933,333
Our loan forgiveness is limited to lesser of:
- Payroll costs + nonpayroll costs: $900,000
- PPP Loan amount: $1,000,000
- Payroll costs divided by 0.75: $933,333
We are eligible for loan forgiveness of the amount we spent, $900,000, assuming we have no further limitations because of FTE and/or salary/wage reductions.
Non-forgivable nonpayroll costs $0 (nothing to repay for this category)
Unspent: $100,000 (must repay)
Total to be repaid over the loan period at 1% interest: $100,000
Loan amount: $1,000,000
Spent on payroll costs: $500,000
Spent on nonpayroll costs: $400,000
Total spent: $500,000 + $400,000 = $900,000
Payroll costs divided by 0.75: $500,000/0.75 = $666,667
Our loan forgiveness is limited to lesser of:
- Payroll costs + nonpayroll costs: $900,000
- PPP Loan amount: $1,000,000
- Payroll costs divided by 0.75: $666,667
We are limited by the 75% test and eligible for loan forgiveness of $666,667 which is made up of 75% payroll costs ($500,000) and 25% nonpayroll costs ($166,667 out of our $400,000 nonpayroll costs is forgivable), assuming we have no further limitations because of FTE and/or salary/wage reductions.
Non-forgivable nonpayroll costs $400,000 – $166,667 = $233,333 (must repay)
Unspent: $100,000 (must repay)
Total to be repaid over the loan period at 1% interest: $333,333
What are the Required Certifications?
Just like on the PPP loan application, the loan forgiveness application includes several certification statements that are required to be made by the borrower. As of May 16, the following certifications are listed – but may be expanded in the final rule.
- The dollar amount for which forgiveness is requested:
- was used to pay costs that are eligible for forgiveness (payroll costs to retain employees; business mortgage interest payments; business rent or lease payments; or business utility payments);
- includes all applicable reductions due to decreases in the number of full-time equivalent employees and salary/hourly wage reductions;
- does not include nonpayroll costs in excess of 25% of the amount requested; and
- does not exceed eight weeks’ worth of 2019 compensation for any owner-employee or self-employed individual/general partner, capped at $15,385 per individual.
- I understand that if the funds were knowingly used for unauthorized purposes, the federal government may pursue recovery of loan amounts and/or civil or criminal fraud charges.
- The Borrower has accurately verified the payments for the eligible payroll and nonpayroll costs for which the Borrower is requesting forgiveness.
- I have submitted to the Lender the required documentation verifying payroll costs, the existence of obligations and service (as applicable) prior to February 15, 2020, and eligible business mortgage interest payments, business rent or lease payments, and business utility payments.
- The information provided in this application and the information provided in all supporting documents and forms is true and correct in all material respects. I understand that knowingly making a false statement to obtain forgiveness of an SBA-guaranteed loan is punishable under the law, including 18 USC 1001 and 3571 by imprisonment of not more than five years and/or a fine of up to $250,000; under 15 USC 645 by imprisonment of not more than two years and/or a fine of not more than $5,000; and, if submitted to a Federally insured institution, under 18 USC 1014 by imprisonment of not more than thirty years and/or a fine of not more than $1,000,000.
- The tax documents I have submitted to the Lender are consistent with those the Borrower has submitted/will submit to the IRS and/or state tax or workforce agency. I also understand, acknowledge, and agree that the Lender can share the tax information with SBA’s authorized representatives, including authorized representatives of the SBA Office of Inspector General, for the purpose of ensuring compliance with PPP requirements and all SBA reviews.
- I understand, acknowledge, and agree that SBA may request additional information for the purposes of evaluating the Borrower’s eligibility for the PPP loan and for loan forgiveness, and that the Borrower’s failure to provide information requested by SBA may result in a determination that the Borrower was ineligible for the PPP loan or a denial of the Borrower’s loan forgiveness application.
What are the Documentation Requirements?
The SBA Loan Forgiveness Application provided a list of documentation that is required to be submitted with any request for loan forgiveness, as well as a list of documentation that does not need to be submitted with the loan forgiveness application but is required to be retained in the borrower’s files for a period of 6 years.
Documentation verifying the eligible cash compensation and non-cash benefit payments from the Covered Period or the Alternative Payroll Covered Period consisting of each of the following:
- 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) for the periods that overlap with the Covered Period or the Alternative Payroll Covered Period:
- 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.
- 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 (PPP Schedule A, lines (6) and (7)).
Documentation showing (at the election of the Borrower):
- the average number of FTE employees on payroll per month employed by the Borrower between February 15, 2019 and June 30, 2019;
- the average number of FTE employees on payroll per month employed by the Borrower 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 by the Borrower between February 15, 2019 and June 30, 2019; between January 1, 2020 and February 29, 2020; or any consecutive twelve-week period between May 1, 2019 and September 15, 2019.
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.
- Business mortgage interest payments: Copy of 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 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.
PPP Schedule A Worksheet or its equivalent and the following:
- Documentation supporting the listing of each individual employee in PPP Schedule A Worksheet Table 1, including the “Salary/Hourly Wage Reduction” calculation, if necessary.
- Documentation supporting the listing of each individual employee in PPP Schedule A Worksheet Table 2; specifically, that each listed employee received during any single pay period in 2019 compensation at an annualized rate of more than $100,000.
- Documentation regarding any employee job offers and refusals, firings for cause, voluntary resignations, and written requests by any employee for reductions in work schedule.
- Documentation supporting the PPP Schedule A Worksheet “FTE Reduction Safe Harbor.”
All records relating to the Borrower’s PPP loan, including documentation submitted with its PPP loan application, documentation supporting the Borrower’s certifications as to the necessity of the loan request and its eligibility for a PPP loan, documentation necessary to support the Borrower’s loan forgiveness application, and documentation demonstrating the Borrower’s 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.
For More Information or Assistance with Your PPP Loan Forgiveness
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