The Small Business Administration (“SBA”) has released the application for the forgiveness of paycheck protection program (“PPP”) loans.  Intended to provide a resource for small businesses to maintain their workforces, these PPP loans are eligible for forgiveness in an amount generally equal to payroll costs and certain mortgage interest, rent and utility expenses^[1] during the “Covered Period,” defined as the 8-week period beginning upon disbursement of a PPP loan. Previous guidance provided that no more than 25% of PPP loan forgiveness may be attributable to nonpayroll costs.

The application packet released by the SBA includes: (i) a PPP Loan Forgiveness Calculation Form, with accompanying instructions; (ii) a certification page; (iii) a PPP Schedule A, with accompanying instructions, which helps to calculate the forgiveness amount and adjustments thereto; (iv) a PPP Schedule A Worksheet, with accompanying instructions, which is a helpful tool for borrowers to calculate the adjustments to their forgiveness amount on account of workforce reductions or pay cuts; (v) a page clarifying documentation that is required to be submitted with the application or maintained by the borrower; and (vi) an optional PPP Borrower Demographic Information Form.

The forgiveness application provides helpful clarification on several points discussed herein, including a new “Alternative Payroll Covered Period” and how to define a “full-time equivalent employee.”  As with the initial application for a PPP loan, a borrower will return its completed forgiveness application to its PPP lender, along with the required documentation.  An authorized representative of the borrower must certify that the forgiveness amount was (i) used to pay costs that are eligible for forgiveness; (ii) includes any applicable reduction to the forgiveness amount; (iii) does not include forgiveness for nonpayroll costs in excess of 25% of the forgiveness amount requested; and (iv) does not exceed 8-weeks’ worth of 2019 compensation for any owner-employee or self-employed individual/general partner (subject to a cap).

Adjustment to the Covered Period for Certain Borrowers

The application provides that borrowers that have a biweekly, or shorter, payroll schedule may choose to calculate eligible payroll costs using the 8 weeks (56 days) beginning on the first day of the borrower’s pay period following its PPP loan disbursement, rather than the date of disbursement itself.  The application refers to this alternative as the “Alternative Payroll Covered Period” and is clear that borrowers that elect to use it must do so in any place where the application provides for either “the Covered Period or the Alternative Payroll Covered Period.”  Note, though, that where the application refers only to the Covered Period, a borrower may not use the Alternative Payroll Covered Period, even if it has elected to do so. This Alternative Payroll Covered Period, therefore, is relevant for determining payroll costs eligible for forgiveness and calculating any decrease in the forgiveness amount due to a reduction in workforce or employee wages, but is not relevant for other purposes (e.g., calculating amounts spent on eligible rent costs).

Payroll costs and other eligible expenses must be paid or incurred to be eligible for forgiveness.

There had been much debate regarding whether an expense incurred, but not paid, during the Covered Period (or, as applicable, the Alternative Payroll Covered Period) would be eligible for forgiveness.  The application clarifies that payroll costs eligible for forgiveness include such costs that are either paid during the Covered Period or Alternative Payroll Covered Period or are incurred, but not paid, during the last pay period of the Covered Period or Alternative Payroll Covered Period.  In the case of payroll costs falling into the latter category, these costs must be paid on or before the next regular payroll date to be eligible for forgiveness.

For nonpayroll costs, such costs must be paid during the Covered Period or incurred during the Covered Period. If incurred, but not paid, during the Covered Period, an eligible nonpayroll cost must be paid on or before the next regular billing date to be eligible for forgiveness. The application reiterates that nonpayroll costs cannot exceed 25% of a borrower’s total forgiveness amount; in fact, the borrower must certify that no more than 25% of its forgiveness amount is on account of nonpayroll costs.

The application also clarifies that mortgage interest or rents arising in connection with real or personal property are eligible for forgiveness, provided that the interest or rents arise in connection with a mortgage or lease in place prior to February 15, 2020.

Reduced Forgiveness Amount Due to Workforce Reduction or Wage Cuts

Workforce Reduction: Defining a “Full-Time Equivalent Employee”

A borrower’s PPP loan forgiveness amount may be decreased to the extent its average number of “full-time equivalent employees” per month during the Covered Period (or, as applicable, the Alternative Payroll Covered Period) is less than the average number of such employees per month during one of the following periods, as chosen by the borrower: (i) February 15, 2019 to June 30, 2019; (ii) January 1, 2020 to February 29, 2020; or, (iii) if a seasonal employer, any consecutive 12-week period between May 1, 2019 and September 15, 2019.^[2]  To determine the average number of full-time equivalent employees, a borrower must calculate the average number of such employees for each pay period falling within a month.

However, “full-time equivalent employee” was not defined prior to the release of the forgiveness application.  Instructions in the application clarify that a borrower’s number of full-time equivalent employees is derived as follows:  A borrower must take the average number of hours paid per week for an employee and divide that number by 40, rounding the quotient to the nearest tenth.  The maximum for each employee is 1.0.  The SBA has provided that a borrower may choose to use a simplified method that assigns 1.0 to each employee who works 40 hours or more per week and 0.5 to the remaining employees who work fewer hours. Note that various non-PPP-related rules require determinations of full-time equivalent employees, and a borrower should take care that the determination of its full-time equivalent employees for purposes of PPP loan forgiveness has used the method described above and set forth in the application.

Borrowers should remember that the PPP provides a safe harbor that bars this workforce reduction rule from applying if the borrower reduced its full-time equivalent employee levels in the period between February 15, 2020 and April 26, 2020, but restored its full-time equivalent employee levels by June 30, 2020 to the levels reflected in the pay period that included February 15, 2020.  The application instructions explicitly recognize this safe harbor.

In addition to the above safe harbor, the SBA issued guidance providing that employees who refuse an offer from the borrower to return to work will not affect a borrower’s PPP loan forgiveness. The application instructions take into account such employees and direct the borrower to indicate (i) any position for which the borrower made a good faith offer to rehire any employee during the Covered Period or Alternative Payroll Covered Period, which the employee rejected and (ii) any employee who during the Covered Period or Alternative Payroll Covered Period were either (a) terminated for cause, (b) voluntarily resigned, or (c) voluntarily requested and received a reduction in work hours.  The application instructions are clear that none of these circumstances will reduce a borrower’s PPP loan forgiveness.

Wage Cuts: Determined on the Basis of Annualized Salaries and Wages

A borrower’s forgiveness amount may also be reduced in the event certain employees’ wages have been subjected to a greater than 25% cut compared to their respective wages in the first quarter of 2020.^[3]  The application provides a step-by-step worksheet to help a borrower determine whether this forgiveness amount reduction could apply to it.  A borrower must make the calculation on an employee-by-employee basis.  If either (a) none of a borrower’s employees have faced any reduction in salary or wages compared to January 1, 2020 through March 31, 2020, or (b) a borrower’s employee(s) have faced a reduction, but in each case, the reduced salary or wages was equal to at least 75% of the salary or wages the particular employee earned January 1, 2020 through March 31, 2020, then this reduction will not apply.  For these purposes, the application clarifies that a borrower will use the average annual salary or hourly wage, as applicable, of an employee.

Instructions to the application include a step-by-step guide to calculating this reduction, for both hourly wage and salaried employees.

As with the reduction in forgiveness amounts on account of workforce reductions, there is a safe harbor that will exempt a borrower from a reduction in its forgiveness amount on account of wage cuts so long as (i) during the period from February 15, 2020 to April 26, 2020, there was a reduction, as compared to February 15, 2020, in the salary or wages or one or more employees, but (ii) the borrower eliminates such reduction by June 30, 2020.

Required Documentation

The forgiveness application sets out the documentation that is required to be submitted along with the PPP Loan Forgiveness Calculation Form and PPP Schedule A.  As anticipated, a borrower must submit:

• Documentation verifying payroll costs during the Covered Period (or Alternative Payroll Covered Period), including (i) bank account statements (or third-party payroll service provider reports) reporting compensation paid, (ii) relevant tax forms (e.g., IRS Form 941 and any applicable state returns), and (iii) any payment receipts, cancelled checks, or account statements documenting the amounts of employer contributions to employee health insurance and/or retirement plans.
• Documentation showing the average number of full-time equivalent employees during the period elected by the borrower. The application contemplates this may include IRS Form 941 and any relevant state filings.
• Documentation verifying existence of nonpayroll costs prior to February 15, 2020 and any eligible payments thereof during the Covered Period. The instructions explicitly contemplate that a borrower may provide (i) a lender amortization schedule or lender account statements to verify payments of mortgage interest, (ii) a lease agreement and receipts or cancelled checks verifying rental payments or a copy of lessor account statements from the Covered Period to verify rental payments, and (iii) copies of invoices and receipts, cancelled checks, or account statements to verify eligible utility payments.

Each borrower should be careful to include support for any expense claimed for forgiveness with its application.

In addition to the foregoing, the application provides that borrowers must maintain the following items, even though not required to submit them with their applications:

• PPP Schedule A Worksheet (or equivalent)
• Documentation supporting each employee included in the PPP Schedule A Worksheet (in general, those employees who must be taken into account in considering whether a borrower’s forgiveness amount must be reduced due to pay cuts). This will generally require that a borrower maintain its records on those employees it employed during the Covered Period (or, as applicable, the Alternative Payroll Covered Period), including: addresses, details on compensation, hours worked, documentation supporting the borrower’s calculation of any reduction in salary or wages, and documentation supporting the determination that an employee did not earn an amount in any single pay period in 2019 that would be in excess of $100,000 if annualized.
• Documentation regarding any employee job offers and refusals, any terminations for cause, voluntary resignations and requests for reduction in hours. All the foregoing items should be documented in writing and retained in a borrower’s records.
• All documentation supporting a borrower’s determination that it has rehired sufficient full-time equivalent employees by June 30, 2020 to be eligible for the safe harbor. Note that, if a borrower determines that the safe harbor protecting it from reduction of forgiveness amount on account of wage cuts applies to it, that borrower should also keep meticulous records to support that determination.

Finally, the application is clear that a borrower should maintain all records relating to its PPP loan, including all documents submitted with its PPP application, any documents supporting the certifications the borrower made in its PPP application, and any documentation supporting the borrower’s material compliance with the PPP requirements.  All documents should be retained for at least 6 years after the date of PPP loan forgiveness.  The application explicitly contemplates that borrowers should permit the SBA access to such documentation upon request.

[1] Mortgage interest and rental expenses are eligible for forgiveness if the mortgage or lease, as applicable, was in place prior to February 15, 2020.  Utility expenses are eligible for forgiveness if the utility service began before February 15, 2020.

[2] This reduction is deployed by a formula: a borrower must divide (i) the average number of full-time equivalent employees per month during the Covered Period (or Alternative Payroll Covered Period) by (ii) the average number of full-time equivalent employees per month during the historical period elected by the borrower.  The borrower must then multiply the forgiveness amount it is otherwise entitled to by the resulting quotient.

[3] This only applies to employees who “did not receive, during any single pay period during 2019, wages or salary at an annualized rate of pay in an amount more than $100,000.”

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