PPP Update #9 – Loan Forgiveness Application Released by SBA
As guidance in this area is being released regularly, we recommend you read all of our blogs on this subject.
Many hoped the delay in guidance regarding Payroll Protection Program (PPP) loan forgiveness meant SBA and Treasury were taking their time coordinating an application and associated guidance to provide borrower’s clarity. Regrettably, on Friday evening, May 15, the SBA released the PPP Forgiveness Application with no additional guidance issued by the Treasury. While we had a passing thought that maybe the application was so clear no further guidance was needed; we quickly awoke from that dream to the reality that, yet again, SBA and Treasury have left borrowers with more questions than answers. Today we will address some of the critical items the newly released application introduced.
What does the application contain?
The application has four components:
PPP Loan Forgiveness Calculation Form
PPP Schedule A
PPP Schedule A Worksheet
PPP Borrower Demographic Information Form (optional)
Like the Borrower Application to obtain the loan, the Forgiveness Application includes borrower certifications that should be reviewed with legal counsel.
How should the application be prepared?
Based upon the order in which the application is presented, ignoring the demographic information, the application should be prepared in reverse. The Schedule A Worksheet is used to collect the detailed information to perform the computations in Schedule A. Information from Schedule A is then utilized to complete the Forgiveness Calculation Form.
What is new?
Unfortunately, more than you might expect. Below is a summary of the issues we believe are most pertinent:
Covered Period – The Covered Period dictates the time frame for expenses that qualify for forgiveness. The law and regulations provided only one Covered Period that began on the date of the first loan disbursement. The Forgiveness Application provides an Alternative Payroll Covered Period for borrowers with a weekly or bi-weekly payroll These borrowers can elect to begin their covered period with the first day of the first pay period following loan disbursement. This option is for administrative convenience only and will not impact the overall loan forgiveness as outlined later in the costs incurred or payments made item.
Non-Cash Compensation for Owners Excluded – Non-cash compensation included in Payroll Costs comprises health insurance, retirement benefits and employer paid state and local unemployment compensation taxes. Throughout the application, there is a clear distinction between employees and owners. In addressing non-cash compensation, the application indicates only employee related non-cash compensation paid by the employer is included. While inconsistent with prior interpretations, this result provides consistency amongst the business types (S-Corporation, partnership, self-employed individuals) applying for forgiveness. Prior guidance clarified that partnerships and self-employed individuals are not eligible to include such non-cash compensation for themselves. This effectively removes owner related health insurance, retirement benefits and employer paid state and local unemployment compensation taxes from the definition of Payroll Costs.
Limitation on Owner’s Compensation – All eligible wages or self-employed income are limited to an annualized amount of $100,000. The Forgiveness Application adds another limitation specific to owners. An owner’s compensation includible in Payroll Costs is the lesser of $15,385 or the 8-week equivalent of their 2019 compensation.
Calculation of Reductions in Full-Time Equivalents and Wages – While some items were clarified, as noted in the next section, the associated calculations described in the Forgiveness Application will be onerous for most businesses. The hope is the process will either be simplified via regulations or payroll companies will determine a way to provide the information as seamlessly as possible.
What was clarified?
Below we outline clarifications we believe are most pertinent:
Cost incurred OR Payments Made – Recall the law caused confusion by indicating “costs incurred, and payments made” during the Covered Period qualified for forgiveness. The application clarifies that costs incurred OR payments made qualify for forgiveness. Both “incurred” and “paid” are defined for Payroll Costs but not defined for other eligible expenses. It is assumed the definition is the same for both pending further guidance. Payments made during the period will qualify for forgiveness and costs incurred, but not paid until after the period, will also qualify.
Forgiveness Limited to Principal – In our prior blogs we mentioned the confusion surrounding the first few interim final rules referencing principal and accrued interest were forgivable while the law indicated only principal was forgivable. The Forgiveness Application clarifies forgiveness is limited to principal only.
Definition of Compensation Included in $100,000 Cap – The forgiveness application clarifies compensation subject to the $100,000 limit includes gross salary, gross wages, gross tips, gross commissions, paid leave (vacation, family, medical or sick leave), and allowances for dismissal or separation. Some initial interpretations indicated the last two items may be excluded from the $100,000 cap.
Ordering of Forgiveness Limitations/Reductions – No priority was listed in the law or interim final rules relative to the order in which the forgiveness limitations applied. There are four potential limitations/reductions: (1) forgiveness is limited to the principal amount of the loan, (2) any forgiveness applied for must consist of at-least 75% payroll costs, (3) potential reduction for change in full-time equivalents (FTEs), and (4) potential reduction for decrease in employee salaries exceeding 25%. The application clarifies the payroll reduction is applied first followed by the change in FTEs to determine the adjusted forgiveness amount. Forgiveness is then limited to the lesser of: (1) the adjusted forgiveness amount, (2) the principal amount of the loan, or (3) the quotient of payroll costs divided by 75%.
Calculation of Wage Reduction – As noted above, one reduction to forgiveness is based upon wage reductions for employees earning $100,000 or less in 2019 if that reduction exceeds 25% during the Covered Period. The Forgiveness Application confirms you determine the employees subject to the test by reviewing 2019 wages but also includes individuals who were not employed during 2019. The application also confirms you compare the annualized wages for the 1st quarter of 2020 (multiply Q1 2020 by 4) to the annualized wages for the 8-week Covered Period (divide by 8 & multiply by 52) to determine if a reduction of 25% or more occurred.
Calculation of Full-Time Equivalents (FTEs) – The Forgiveness Application clarifies the borrower must determine the average weekly hours for the various periods described for each individual employee. The average weekly hours are then divided by 40 hours to determine the full-time equivalent with the quotient rounded to the nearest tenth and limited to 1.0. A simplified method, at the election of the borrower, is also offered whereby employees averaging greater than 40 hours count as 1.0 with all others being assigned 0.5. The method chosen must be used consistently throughout the application. Note, owners are not included as FTEs.
What is the biggest issue with the application?
Data collection and documentation requirements. The application contains various nuanced computations that will differ from borrower to borrower. The volume of data to be analyzed is significant and borrower’s and their advisors should coordinate with their payroll company to determine what reports could simplify the process. Also, significant documentation must be assembled and maintained for at-least 6 years to satisfy the record keeping requirements outlined within the application.
It seems safe to assume there will be more guidance forthcoming. To put it simply, there must be. The challenging and frustrating issue for borrowers is the guidance, in most instances, is too little too late. Many borrowers are more than half-way through the Covered Period, which, as noted above, was redefined for forgiveness purposes just a few days ago.
We will continue providing updates when relevant information becomes available. If you have questions about how to navigate the PPP Forgiveness