What You Need To Know About the PPP Loan Forgiveness Application

On May 15, 2020, the Small Business Administration (SBA) published its Paycheck Protection Program (PPP) Loan Forgiveness Application (Application) along with instructions for completing the Application. Borrowers must use this Application to determine the amount of the PPP loan that may be “forgiven” by their lender. The Application and its instructions address some administrative questions regarding loan forgiveness; however, some questions remain unanswered.

Key takeaways from the PPP loan forgiveness application include:

  • Expenses paid OR incurred. Borrowers may include eligible payroll and non-payroll expenses paid OR incurred during the 8-week period after receiving their PPP loan (“covered period”).
  • Alternative Payroll Covered Period. A new Alternative Payroll Covered Period allows borrowers to align the covered period with their own payroll period.
  • Average FTE. A relatively simple interpretation to calculate the number of full-time equivalent (FTE) employees.
  • Wage/Salary Reduction. Instructions to calculate wage/salary reduction.
  • Bonuses to Owners/General Partners. Owner employees and general partners are barred from issuing bonuses to themselves to fill shortfalls in eligible expenses used to apply for loan forgiveness.
  • Covered Rent. Covered rent obligations include leases on both real and personal property.

Covered Period

The Application permits borrowers to include eligible payroll and non-payroll expenses paid OR incurred during the covered period.

Payroll expenses are paid on the day the paychecks are distributed or the borrower originates an ACH credit transaction. Payroll expenses are incurred on the day they are earned. The Application states that payroll expenses incurred but not paid during the last pay period of the 8-week covered period are eligible for forgiveness as long as they are paid on or before the next regular pay period. Therefore, even though these funds are paid to employees after the covered period, they are still eligible for forgiveness. How far in arrears a borrower may pay wages with PPP funds and continue to count those wages towards loan forgiveness remains unclear.

Non-payroll expenses (mortgage, rent, and utilities) that are incurred during the 8-week covered period, and paid after the covered period, must be paid by the next billing cycle.

Alternative Payroll Covered Period

The PPP Loan Forgiveness Application allows borrowers to select an “alternative payroll covered period.” The alternative payroll covered period is the 8-week (56 day) period beginning on the first day of the first pay period following the PPP loan disbursement date. Borrowers now have an option to calculate payroll expenses using an “alternative payroll covered period” that aligns with their regular payroll cycles.

Number of Full-time Equivalent Employees

Part of the PPP loan forgiveness calculation is determining the number of FTEs employed by the borrowers. [See previous discussion on calculating loan forgiveness]. The Application states that a borrower must, for each employee, enter the average number of hours paid per week, divide by 40 and round the total to the nearest tenth. No one may be counted as more than 1 FTE. A borrower may elect to use a simplified method and  ascribe a 1.0 for each employee who works 40 hours or more per week and a 0.5 for each employee who works less than 40 hours per week.

It seems that the Application (line 10) includes another safe harbor for reducing FTEs. Even if FTEs have been reduced relative to the look-back period elected by the borrower, loan forgiveness will not be reduced if the number of FTEs is the same at the end of the covered period as they were on January 1, 2020. It is unclear whether this is a second safe harbor rule, in addition to the existing rehiring-before-June 30, 2020 safe harbor rule.

Wage/Salary Reduction

The amount of PPP loan forgiveness will be reduced by the amount of any reduction in total average wages or annual salary of any employee during the 8-week covered. To determine the amount of forgiveness reduction, you must review the wages or salary of each employee.

The forgiveness amount will be reduced if the reduction in wages/salary over the 8-week period is in excess of 25% of the total wages or salary of an employee from January 1, 2020 through March 31, 2020. Employees with annualized wages or salary of more than $100,000 are not included in this calculation, which means that if you reduce wages or salary of an employee who makes over $100,000, your PPP loan forgiveness amount will not be affected.

Bonuses to Owners/General Partners

The Application states that the total amount paid to owner-employees, self-employed individuals and general partners is capped at $15,384 ($100,000/year) OR the 8-week equivalent of their applicable compensation for 2019, whichever is lower. This prevents owners, self-employed individuals, and general partners from increasing their compensation during the covered period to maximize forgiveness.

Covered Rent

The Application explicitly states that the amount of business rent or lease payments for real or personal property during the covered period, pursuant to lease agreements in force before February 15, 2020, are included in the non-payroll expenses.

The SBA plans to release additional regulations and guidance to assist borrowers as they complete their PPP Loan Forgiveness Applications. Stay tuned.