On May 15, 2020, the Small Business Administration (SBA) released the Paycheck Protection Program (PPP) Loan Forgiveness Application, offering some clarity, for now, on how loan forgiveness will work in practice.
The application provides detailed instructions to borrowers seeking loan forgiveness and outlines the documentation they must submit and maintain to support their forgiveness request. Some uncertainties remain, and additional guidance from the SBA is expected.
In particular, we note the following key updates and clarifications:
- Alternative Payroll Period: The application allows borrowers with a biweekly (or more frequent) payroll to select an “Alternative Payroll Covered Period” for payroll costs only. This is optional and for administrative convenience. The period begins on the first day of the borrower’s first payroll period after the loan’s disbursement and continues for eight weeks after that date. Borrowers who elect to use the Alternative Payroll Covered Period must apply the Alternative Payroll Covered Period wherever there is a reference to such period in the application.
- 75% Payroll Cost Requirement: A borrower must spend 75% of the loan forgiveness amount on payroll costs. The application explains how the SBA will enforce this requirement. Specifically, it clarifies that the requirement is not an “all or nothing” calculation, and the borrower is eligible for loan forgiveness on the payroll costs it actually spends during the covered period. However, the total amount eligible for forgiveness may not exceed the total amount spent on payroll costs during the covered period, divided by 0.75. This can decrease the total amount eligible for forgiveness, including forgiveness for amounts the borrower spends on non-payroll covered expenses.
- Calculation of Average FTE: Under the PPP, loan forgiveness can be reduced if there has been a reduction in “average full-time equivalent (FTE) employees” during the covered period. The application clarifies that “average full-time equivalent employees” should be calculated on a weekly basis based upon a 40-hour workweek. In the alternative, borrowers may simplify the calculation by treating all employees who work 40 hours or more per week as one (1) FTE and all employees who work less than 40 hours per week as 0.5 FTE.
- Exceptions to FTE Reduction: The application adds additional employee exceptions when calculating the FTE reduction (if applicable). An employee will not reduce the borrower’s loan forgiveness if, during the covered period (or the alternative payroll period, if applicable), the employee (a) was fired for cause, (b) voluntarily resigned or (c) voluntarily requested and received a reduction in his or her hours.
Borrowers can expect further changes to the application, particularly with the fluidity of SBA guidance and recent discussions surrounding potential legislative revisions to the PPP.