Employers with PPP loans have been anxiously waiting guidance on forgiveness for over a month. On Friday, the Small Business Administration (SBA) provided some insight by releasing the PPP Loan Forgiveness Application, with useful guidance in the instructions.
One of the more important bits of guidance was welcome relief on the timing of payroll. As we know, borrowers may ask to be forgiven for certain costs incurred during the 8-week period following the loan disbursement, including wages to employees. However, it wasn’t clear how forgiveness would work if the employer’s payroll did not start and/or end on the beginning or end of the 8-week period. Would only the amounts paid during the 8-week period count? Or could we or must we prorate wages for payroll periods that overlapped the beginning or end of the 8-week forgiveness period? The Forgiveness Application provides two helpful insights on this issue:
- If the borrower pays employees every two weeks, or more frequently, the borrower may adjust the 8-week forgiveness period to begin on the first day of the borrowers next full payroll period after loan disbursement. This generally would avoid any need to prorate wages as the forgiveness period would coincide exactly with the borrowers pay periods. This is not available to borrowers who pay less frequently than every two weeks (such as those with twice-a-month or monthly payrolls)
- For all borrowers, the SBA clarified that payroll costs include those amounts paid during the 8-week period as well as those incurred but not paid during the 8-week period as long as they are paid on or before the next regular payroll date. As discussed below, this helpful clarification will prevent borrowers from needing to accelerate their regular payroll timing to ensure forgiveness.
For purposes of item 2, above, SBA clarified that “paid” means the day paychecks are distributed or the employer originates an ACH credit transaction and payroll costs are “incurred” on the day the employee’s pay is earned. This guidance is helpful to employers as follows:
- Employers do not need to prorate their first pay period, which may include days preceding the disbursement date of the loan so long as the pay date falls within the 8-week forgiveness period.
- Employees’ wages that have been earned but not paid during the last pay cycle that falls within the 8-week forgiveness period, will be eligible for forgiveness (assuming it is paid on or before the next regular payroll date). Employers will not be required to accelerate paycheck disbursal to ensure those wages are actually paid within the 8-week period to be included in the forgiveness amount.
The combination of these two clarifications also means that slightly more than 8 weeks’ worth of wages might be counted in the 8-week forgiveness period, which may be helpful for employers strategizing how they can maximize forgiveness by boosting payroll costs counted in the 75% threshold. For information on what qualifies as payroll costs, see Interim Final Rule on Paycheck Protection Program posted on April 2, 2020 (85 FR 20811).
All PPP borrowers should evaluate their strategy in light of this new guidance.
