The Department of the Treasury (Treasury) recently issued a Paycheck Protection Program (PPP) Loan Forgiveness Application Form (the Forgiveness Application) that resolves some important questions regarding how borrowers will compute forgivable loan amounts and what supporting documentation is required to be submitted, maintained and retained in connection with the Forgiveness Application. The application can be found here.
Treasury and the Small Business Administration (SBA) intend to issue additional detailed guidance soon, and Congress is working to enact legislation to make certain helpful changes to the PPP. We hope that Treasury and the SBA will themselves, or with Congress, quickly act to extend the June 30 deadline for using PPP funds. A number of borrowers will not be receiving their borrowed funds until late May or even June, and they will need a full eight weeks to spend the funds for qualified purposes. Some believe legislation is required to extend the June 30 date for making qualified expenditures. Others believe Treasury and the SBA may interpret CARES Act Section 1106(a)(3), which defines the “covered period” as the eight-week period beginning on the date of the origination of a covered loan, as authority to allow borrowers that receive loans before June 30 to use the funds during an eight-week period that extends beyond June 30.
In the interim, the Forgiveness Application, among other items, clarifies several key points and provides meaningful guidance to borrowers who will be applying for PPP loan forgiveness. The key points from this newly provided guidance are explained below.
Considering the complexity of the PPP loan forgiveness calculations and the importance of complying with the Treasury and SBA requirements related to PPP loans, borrowers should consult with legal counsel for help preparing and reviewing their Forgiveness Applications and all applicable supporting documentation requirements. BakerHostetler has developed proprietary tools to assist clients with calculating their potential loan forgiveness amounts and navigating the various nuances involved in calculating and maximizing PPP loan forgiveness and otherwise complying with borrower PPP loan obligations.
1. Definition of Paid or Incurred. The PPP Program allows borrowers to use loan proceeds during the eight-week (56-day) period after loan origination (the Covered Period) on payroll costs, utilities, rent and interest on mortgages encumbering real property (the Covered Expenses). Language in the CARES Act requires that Covered Expenses be paid and incurred during the Covered Period. The Forgiveness Application states and clarifies that Covered Expenses will be considered paid on the date they are actually paid, and that Covered Expenses incurred during the Covered Period can be paid on the next regular payment date and still qualify for forgiveness.
Example 1: Corporation Z received a $2 million PPP loan on April 30. Corporation Z’s normally biweekly payroll run occurs on May 1 and will include payments to employees for services before Corporation Z’s Covered Period. Corporation Z can use its PPP loan for the May 1 payroll run even though it includes payment for services rendered prior to its Covered Period. The May 1 payroll run is considered paid during the Covered Period and is eligible for forgiveness. The remaining payroll incurred in the 56-day period can also be forgiven.
Example 2: Corporation Z received a $2 million PPP loan on May 5. Corporation Z’s Covered Period expires on June 30. Corporation Z’s utility bill for June services will not be received until July 15. Corporation Z can use its PPP loan proceeds to pay its June utility bill on July 15. The June utility bill is considered incurred during the Covered Period and is eligible for forgiveness.
Notwithstanding the foregoing clarification, clear guidance is lacking regarding whether the entire amount of a bonus paid to a borrower’s employees during the Covered Period will qualify for forgiveness, or if only the pro rata portion allocable to the part of the year that ends on the last day of the Covered Period will qualify for forgiveness. Additionally, it is unclear whether prepaid expenses paid during the Covered Period that will accrue after the Covered Period will be excluded from forgivable expenses.
2. Alternative Covered Period (for Payroll Costs Only). Many borrowers received their loans during payroll periods, which means their Covered Period will end during payroll periods. Prior to the Forgiveness Applications, borrowers had to consider utilizing short payroll runs. For administrative convenience, the Forgiveness Application allows borrowers to elect to calculate payroll costs using the 56-day period that begins on the first day of their first pay period following commencement of the Covered Period. Essentially, this provision allows the borrower’s normal payroll runs to be coterminous with expiration of the borrower’s Covered Period, so a borrower does not have to use short payroll runs. Notably, the Alternative Covered Period does not apply for nonpayroll costs and related calculations in the Forgiveness Application.
Example 3: Corporation Z received its PPP loan on Tuesday, April 21. Corporation Z’s next normal payroll run will occur on Monday, April 27. Corporation Z can elect an alternative payroll Covered Period beginning on April 27 and ending on June 22. All payroll paid or incurred between April 27 and June 22 will be forgivable.
3. Clarified Definition of Rent and Lease Payments. The Forgiveness Application clarifies that a rent or lease payment for personal property is a forgivable Covered Expense, provided that there was a valid lease agreement in force before February 15, 2020. This will be helpful for borrowers leasing expensive equipment in their business. Note, however, that neither the statute nor the Forgiveness Application address whether there will be a distinction between operating leases and capital leases for this purpose.
4. Calculation of Full-Time Employees. PPP loans are subject to a reduction calculated by multiplying a borrower’s forgivable loan amount by a fraction, the numerator of which is the average number of full-time equivalent employees (FTEs) during the borrower’s Covered Period (or the borrower’s Alternative Payroll Covered Period), and the denominator of which is, at the election of the borrower, either (a) the average number of FTEs between February 15, 2019, and June 30, 2019, or (b) the average number of FTEs between January 1, 2020, and February 29, 2020 (collectively, the Testing Periods).
For the standard method, the following calculation is performed for the Covered Period and each of the Testing Periods: Each employee’s average number of hours paid per week is divided by 40 and rounded to the nearest tenth, with all employees capped at 1. The amounts are then added together, and the fraction explained above is derived and multiplied by the forgivable amount. If the fraction equals 1, then the total forgivable amount is forgiven. If the fraction reduces to, for example, 4/5, then 80% of the forgivable amount is forgiven.
The simplified method allows a borrower to assign 1 to any employee who works 40 or more hours per week and 0.5 to any employee who works less than 40 hours per week. As explained above, the amounts are then added together, and the fraction is derived and then multiplied by the forgivable amount.
Example 4: Corporation Z employed (a) 10 employees who worked 40 hours or more per week between February 15, 2019, and June 30, 2019, and (b) five employees who worked 40 hours or more per week between January 1, 2020, and February 29, 2020. Corporation Z employs five employees who worked 40 hours or more per week during its Covered Period. Corporation Z can elect (b) as its testing period, and all of its loan can be forgiven.
Example 5: Same facts as above, except Corporation Z employs four employees who worked 40 hours or more per week during its Covered Period and employs two employees who worked 10 hours per week during its Covered Period. Corporation Z can elect the simplified method, (b), as its testing period, and all of its loan can be forgiven.
5. FTE Reduction Safe Harbor. A borrower who reduced, terminated or furloughed any employees between February 15, 2020, and April 26, 2020, can: (a) rehire those employees prior to June 30, 2020, and have the rehired employees count in the borrower’s numerator for purposes of the FTE reduction calculation explained above; (b) hire new employees prior to June 30, 2020, and have the newly hired employees count in the borrower’s numerator for purposes of the FTE calculation reduction explained above; or (c) allocate additional work hours to part-time employees to convert them into FTEs that can be included in the numerator for purposes of the FTE reduction calculation explained above. There is no requirement for a borrower to issue backpay to a rehired employee.
Example 6: Corporation Z furloughed four employees who worked 40 or more hours per week between February 15, 2020, and April 26, 2020. During its Covered Period, Corporation Z employed six employees who worked 40 or more hours per week. Corporation Z employed (a) 15 employees who worked 40 hours or more per week between February 15, 2019, and June 30, 2019; and (b) 10 employees who worked 40 hours or more per week between January 1, 2020, and February 29, 2020. Corporation Z can rehire the four furloughed employees prior to June 30, 2020, and those employees will qualify for the safe harbor. Accordingly, by hiring the four furloughed employees and adding them to the six who worked during the Covered Period, Corporation Z will not have its forgivable amount affected by any FTE reduction calculation because it had the same number of employees as it did between January 1, 2020, and February 29, 2020.
6. FTE Reduction Exceptions. Employees who (a) were terminated for cause, (b) voluntarily resigned employment, (c) voluntarily requested and received a reduction in their hours, or (d) declined a good-faith written offer for rehire will not disrupt a borrower’s FTE reduction calculation. All employees who fall within any of the foregoing exceptions will be counted in the borrower’s numerator for purposes of the FTE reduction calculation.
Example 7: Corporation Z terminated four employees who worked 40 or more hours per week between February 15, 2020, and April 26, 2020. During its Covered Period, Corporation Z employed six employees who worked 40 or more hours per week. Corporation Z employed (a) 15 employees who worked 40 hours or more per week between February 15, 2019, and June 30, 2019; and (b) 10 employees who worked 40 hours or more per week between January 1, 2020, and February 29, 2020. Corporation Z offers in writing to rehire all four of the employees on the same terms prior to their termination, but only two employees accept the offer. In this example, the two employees who declined to be rehired will be counted in Corporation Z’s FTE numerator calculation. Accordingly, the total forgiveness amount requested by Corporation Z will not be affected by the two employees who rejected the offer.
7. Reduction in Forgiveness for Salary/Hourly Wage Reductions. Loan forgiveness can be reduced if (a) the wage rate or annual salary is reduced in excess of 25% of the rate in effect during the period from January 1, 2020 through March 31, 2020 (Reference Period), or (b) the total wages or salary paid is in excess of 25% less than the amount paid in the Reference Period. The amount of loan forgiveness will be reduced dollar for dollar by the amount of the excess reduction in total salary or wages of any employee other than an employee who, during any single pay period in 2019, was paid wages or salary at an annualized rate in excess of $100,000. An excess reduction is equal to the reduction in wages or salary paid during the eight-week Covered Period in excess of 25% of the salary or wages paid to the employee during the defined Reference Period. The same is true for the rate of pay calculation – the question is whether the rate is less than what the individual employee was paid in the Reference Period. This is an employee-by-employee analysis and is not an analysis of the compensation paid to the workforce as a whole.
8. Salary/Hourly Wage Reduction Safe Harbor. If a borrower has reduced an employee’s salary or hourly wages by more than 25% and that employee had total annualized wages or salary of less than $100,000 during any single pay period in 2019, then the borrower has an opportunity to eliminate the resulting forgiveness reduction by restoring salary/hourly wage levels in accordance with a Salary/Hourly Wage Reduction Safe Harbor (Safe Harbor). However, the Safe Harbor cannot be used unless the employee’s salary or hourly rate was reduced after February 15, 2020, and before April 26, 2020. If such a reduction occurred and the effected employee’s average annual salary or hourly wage rate as of June 30, 2020, is greater than or equal to his/her annual salary or hourly wage rate as of February 15, 2020, then the safe harbor will have been met and there will be no resulting reduction in the amount of PPP loan forgiveness for that employee. However, the safe harbor may not be applied if the only reduction in salary or hourly rate occurred after April 26, 2020, and there was no such reduction before April 26, 2020, and after February 15, 2020.
9. Documentation Requirements. The Forgiveness Application provides a list of documentation that borrowers will be required to submit with their Forgiveness Application and documentation that will have to be maintained on file with the borrower.
a. Documents That Must Be Submitted With the Forgiveness Application. The list of documents that must be submitted with the Forgiveness Application includes:
i. Payroll Documentation. Documentation verifying qualifying payroll expenses, including (1) bank statements and/or third-party payroll service provider reports documenting the amount of cash compensation paid to employees; (2) tax forms (or equivalent third-party payroll service provider reports) for the periods that overlap with the Covered Period or the Alternative Payroll Covered Period, including but not limited to payroll tax filings reported or that will be reported to the IRS (typically a form 941) and state quarterly business and individual employee wage reporting and unemployment insurance tax filings reported or that will be reported to the relevant state; and (3) payment receipts, cancelled checks or account statements documenting the amount of any employer contributions to employee health insurance and retirement plans that the borrower included in the forgiveness amount.
ii. Non-Payroll Documentation. Documentation verifying the existence of the obligations/services prior to February 15, 2020, and eligible payments from the Covered Period, including but not limited to the following: (1) for mortgage interest payments: a copy of the lender amortization schedule and receipts or cancelled checks verifying eligible payments paid or incurred during the Covered Period, or lender account statements from February 2020 and the months of the Covered Period through one month after the end of the Covered Period verifying interest amounts and eligible payments; (2) for rent or lease payments: a copy of the current lease agreement and receipts or cancelled checks verifying eligible payments from the Covered Period; or lessor account statements from February 2020 and from the Covered Period through one month after the end of the Covered Period verifying eligible payments; and (3) for utility payments: copies of invoices from February 2020 and those paid or incurred during the Covered Period, along with receipts, cancelled checks or account statements verifying eligible payments.
iii. FTE Documentation. Documentation showing (at the election of the borrower) (1) the average number of FTE employees on payroll per month employed by the borrower between February 15, 2019, and June 30, 2019; (2) the average number of FTE employees on payroll per month employed by the borrower between January 1, 2020, and February 29, 2020; or (3) in the case of a seasonal employer, the average number of FTE employees on payroll per month employed by the borrower between any of the following periods: (A) February 15, 2019, and June 30, 2019, (B) January 1, 2020, and February 29, 2020, or (C) any other consecutive 12-week period between May 1, 2019, and September 15, 2019.
b. Documents to Be Maintained but Not Submitted: The list of documentation that does not have to be submitted with the Forgiveness Application, but must be maintained on file with the borrower for purposes of supporting the borrower’s certification that it materially complied with PPP requirements, includes the following: (i) documentation supporting the listing of each individual employee in PPP Schedule A Worksheet Table 1, including the Salary/Hourly Wage Reduction calculation, if necessary; (ii) documentation supporting the listing of each individual employee in PPP Schedule A Worksheet Table 2 – specifically that each listed employee received during any single pay period in 2019 compensation at an annualized rate of more than $100,000; (iii) documentation regarding any employee job offers and refusals, firings for cause, voluntary resignations, and written requests by any employee for reductions in work schedule; and (iv) documentation supporting the PPP Schedule A Worksheet FTE Reduction Safe Harbor.
c. Document Retention Requirements. All documentation (whether submitted with the Forgiveness Application or maintained on file with the borrower) must be retained by the borrower for six years after the date the loan is forgiven or repaid in full, and the borrower will be required to permit authorized representatives of the SBA, including representatives of its Office of Inspector General, to access such files upon request.
Additional SBA guidance is forthcoming, and such guidance may modify the information presented above. Such further guidance may also clarify some of the PPP loan forgiveness issues noted above that remain unclear at this time. Each borrower should be aware that the information included in its Forgiveness Application may be materially inaccurate or incomplete unless and until the Forgiveness Application fully and properly incorporates the information required by the SBA, including any information to be noted in forthcoming SBA guidance. Additionally, the list of acceptable supporting documentation that is required to be submitted, maintained and retained by borrowers in order to remain in compliance with their PPP loan obligations may be substantial for some borrowers. As noted above, borrowers should consult with legal counsel for help with the preparation and review of their Forgiveness Applications and all applicable supporting documentation requirements.
