The Small Business Administration and the Treasury Department have finally issued an application and instructions for borrowers seeking forgiveness of all or a portion of their Paycheck Protection Program (PPP) loans. As might be expected, the material introduces some new questions and ambiguities.
Highlights from the application and its instructions include:
Alternative Payroll Covered Period. Until now, the applicable rules and guidance have provided that amounts used appropriately by borrowers in the eight week period beginning on the date of disbursement of PPP loans (Original Covered Period) could be eligible for forgiveness. The recently released application and instructions, however, now provide for an alternative period. Specifically, borrowers with a biweekly or more frequent payroll schedule may elect to calculate eligible payroll costs using the eight week period that begins on the first day of their first pay period following the PPP loan disbursement (Alternative Payroll Covered Period). Borrowers may find this particularly helpful since it may allow for an easier audit trail. It is unclear, however, whether businesses that use different pay schedules for different employees would be eligible to use the Alternative Payroll Covered Period if one pay schedule is less frequent than biweekly. If a borrower elects to use the Alternative Payroll Covered Period, it must do so for all purposes, including with respect to rent, utilities and mortgage interest calculations for which forgiveness is sought. (References to Applicable Covered Period below are meant to refer to the Original Covered Period or Alternative Payroll Covered Period, as elected by the borrower.)
Eligible Payroll Costs. As is widely known, borrowers of PPP loans are generally eligible for forgiveness for the payroll costs paid and incurred during the Applicable Covered Period. The instructions clarify that payroll costs are considered paid on the day that paychecks are distributed or the borrower originates an ACH credit transaction. In addition, payroll costs are considered incurred on the day that the employee’s pay is earned, meaning that, for example, payroll costs incurred but not paid during the borrower’s last pay period of the Applicable Covered Period are eligible for forgiveness as long as the amount is paid on or before the next regular payroll date. Not surprisingly, borrowers may count for forgiveness purposes only once payroll costs that were both paid and incurred and the instructions include a reminder that cash compensation is capped at $100,000, as prorated for the Applicable Covered Period. The instructions provide no additional guidance on various outstanding questions that apply with respect to benefit related costs.
Eligible Non-Payroll Costs. The instructions make clear that eligible non-payroll costs (such as covered business mortgage interest payments, covered rent obligations and covered utility payments) must either be paid during the Applicable Covered Period or incurred during the Applicable Covered Period and paid on or before the next regular billing date, even if the billing date is after the Applicable Covered Period. The instructions also remind borrowers that non-payroll costs cannot exceed 25% of the total forgiveness amount and that non-payroll costs that were both paid and incurred within the Applicable Covered Period can only be counted once.
Potential Reduction in Amount Forgiven. As a reminder, the amount forgiven may be reduced as a result of employee or salary/hourly wage reductions.
The instructions provide a long-awaited definition of Full Time Equivalent (FTE) Employee. Borrowers are instructed, for each employee, to calculate the average number of hours paid per week, divide by 40, and round the total to the nearest tenth, capping each employee at 1.0. The instructions also offer a simplified method of calculation that assigns 1.0 for employees who work 40 hours or more per week and 0.5 for employees who work fewer hours that may be used at the election of the borrower. Guidance is also provided for purposes of calculating the salary/hourly wage reduction amount and various FTE reduction exceptions, including a restoration of FTE employee levels by June 30, 2020.
Other Matters. The instructions provide significant detail regarding the information and documentation that must be submitted in order to apply for PPP loan forgiveness, so be sure to review the application and instructions carefully and discuss the submission with your legal and financial advisors. The application also includes an extensive representation and certification by the borrower on a variety of matters including the use of the amount forgiven and a six year document retention requirement (for materials submitted to the lender and other back-up materials).