What to Know for Businesses Completing the PPP Loan Forgiveness Application

Schwabe, Williamson & Wyatt PC

On May 18, 2020, Schwabe published an article about the Paycheck Protection Program (“PPP”) Loan Forgiveness Application. Today we’re walking through some of the basic items to help businesses identify what to look out for as they complete the PPP Loan Forgiveness Application (“Application”) and follow the accompanying instructions (“Instructions”). In another article, we will set out some information relating to documents and record keeping that businesses seeking forgiveness should gather and maintain. We expect the Small Business Administration (“SBA”) to issue further guidance in the coming weeks and answer some of the other open questions related to the loan forgiveness process. Schwabe will continue to monitor any developments and will update this and other resources as appropriate.

What to know about the covered period and the alternative payroll period: The “covered period” remains defined as the eight-week period starting with the PPP loan disbursement date. However, the Application and Instructions provide for an alternative eight-week covered period, which would commence on the first day of the first pay period following disbursement of PPP loan proceeds. These will make it easier to capture payroll costs for the full eight weeks, especially for borrowers with bi-weekly (or more frequent) pay periods.

What to know about payroll costs: PPP borrowers are generally eligible for forgiveness for payroll costs paid and payroll costs incurred during the selected covered period. This is a clarification. To calculate, (a) payroll costs are considered paid on the day that paychecks are distributed or the day that the borrower initiates an ACH credit transaction, and (b) payroll costs are considered incurred on the day that an employee’s pay is earned. For forgiveness purposes, payroll costs must either be paid during the selected covered period, or, for payroll costs incurred but not paid during the borrower’s last pay period of the selected covered period, paid on or before the next regular payroll date. For each individual employee, the total amount of cash compensation eligible for forgiveness may not exceed an annual salary of $100,000, as prorated for the covered period. Count payroll costs that were both paid and incurred only once.

What to know about annual payments of retirement and pension benefits that are not due during the covered period: These are still open questions. 

How rent and lease obligations and interest on covered mortgage obligations factor into the PPP Loan Forgiveness Application: The Instructions clarify that business lease and business mortgage obligations may relate to real or personal property. The arrangements should be in writing and must be entered into and in force prior to February 15, 2020. The documents will need to be provided with the Forgiveness Application together with evidence of payments. The payments must be paid during the covered period or incurred during the covered period and paid on or before the next regular billing date (even if the billing date is after expiration of the covered period).

What are covered utility payments: Business payments for a service for the distribution of electricity, gas, water, transportation, telephone, or internet access, in each case, for which service commenced prior to February 15, 2020, are considered covered utility payments. There is no further guidance on what these terms mean.

For forgiveness purposes, eligible non-payroll costs are not permitted to exceed 25% of the total PPP loan forgiveness amount.

What to know about forgiveness reductions for workforce reductions: Per the Instructions, the borrower must calculate its total average weekly full-time equivalency (“FTE”) during the chosen reference period, which may be either (a) February 15, 2019, to June 30, 2019, (b) January 1, 2020, to February 29, 2020, or (c) in the case of seasonal employers, either of the preceding periods or a consecutive 12-week period between May 1, 2019, and September 15, 2019, in each case at the borrower’s option. The loan forgiveness amount must be reduced based on reductions in full-time equivalent employees, as required by the statute. Specifically, the actual loan forgiveness amount that the borrower will receive may be reduced if the borrower’s average number of weekly FTE employees during the covered period is less during the borrower’s chosen reference period. There are still open questions on how this workforce reduction calculation works.

  • Full-time equivalent employees: To calculate average FTE, borrowers take the average number of hours paid per week per individual employee, divided by 40, and round the total to the nearest tenth, capped at 1.0. A borrower may also elect a simplified method that assigns 1.0 for employees who work 40 hours or more per week and 0.5 for employees who work fewer hours per week.
  • FTE reduction exceptions: Any FTE reductions in the following cases do not reduce the borrower’s loan forgiveness: (a) any position for which the borrower has made a good-faith, written offer to rehire an employee during the selected covered period, which was rejected by the employee, or (b) any employee who, during the selected covered period, (1) was fired for cause, (2) voluntarily resigned, or (3) voluntarily requested and received a reduction of their hours.
  • FTE reduction safe harbor: There is a safe harbor for those borrowers that restore FTE levels by June 30, 2020. Essentially, a borrower will be exempt from PPP loan forgiveness reductions based on FTE employees if both of the following conditions are met: (a) the borrower reduced its FTE employee levels in the period beginning February 15, 2020, and ending April 26, 2020, and (b) the borrower then restores its FTE employee levels by not later than June 30, 2020, to its FTE employee levels in the borrower’s pay period that included February 15, 2020.

What to know about forgiveness reductions for compensation reductions: The borrower’s loan forgiveness amount must be reduced due to a statutory requirement concerning reductions in employee salary and wages. Borrowers are eligible for loan forgiveness for certain expenditures during the covered period. However, the actual amount of loan forgiveness the borrower may receive may be less, depending on whether the salary or hourly wages of certain employees during the covered period were less than during the period from January 1, 2020, to March 31, 2020. If the borrower restores salary/hourly wage levels, the borrower may be eligible for elimination of the salary/hourly wage reduction amount. Borrowers count employees whose salaries or hourly wages were reduced by more than 25% during the covered period as compared to the period of January 1, 2020, through March 31, 2020. In the event that salary/hourly wage levels are ultimately restored, then the applicable reduction may be eliminated. There are still open questions on how this compensation reduction calculation works.

What are the consequences for making a false statement to obtain forgiveness of a PPP: The Instructions set out the potential civil penalties and/or criminal fraud charges for the unauthorized use of PPP funds.

Which additional certifications are required for the Forgiveness Application: In submitting the Application, an authorized representative of the borrower must certify that the requested forgiveness amount (a) was used to pay costs that are eligible for forgiveness (payroll costs to retain employees, business mortgage interest obligations, business rent or lease payments, or business utility payments), (b) includes all applicable reductions due to decreases in the number of full-time equivalent employees and/or salary/hourly wage reductions, (c) does not include non-payroll costs in excess of 25% of the forgiveness amount requested, and (d) does not exceed eight weeks of 2019 compensation for any owner-employee or self-employed individual or general partner, in each case capped at $15,385 per individual.

What to know about document retention: Borrowers are required to retain PPP loan supporting documents for a period of six years after the date that the loan is forgiven or repaid in full. Such information includes payroll documentation, documentation supporting the borrower’s certifications, documentation delivered in connection with, and in support of, the borrower’s Loan Forgiveness Application, and any other records demonstrating material compliance with PPP requirements. We will provide further information regarding documents, retention, and record keeping in a separate article.

What to know about the PPP borrower demographic information: This information is optional.

Conclusion: Schwabe is committed to providing our clients with up-to-date resources to understand the CARES Act and navigate the COVID-19 pandemic. 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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