PPP Loan Forgiveness Overview

by | May 22, 2020 | Blog, COVID-19 Resources | 0 comments


The Small Business Administration (SBA) released the form of application allowing borrowers in the Paycheck Protection Program Loan (PPP) to apply for loan forgiveness. The application includes instructions and formulas to calculate the amount of loan forgiveness to which each borrower is entitled to receive; however, additional guidance and clarification is expected from the SBA. The loan forgiveness application may change based on pending legislative action which could potentially extend loan repayment, adjust rehiring guidelines, and eliminate some of the current restrictions on loan forgiveness. Below is an overview of the key components of the current application.

The SBA loan forgiveness application includes (1) the PPP Loan Forgiveness Calculation Form; (2) PPP Schedule A; (3) the PPP Schedule A Worksheet; and (4) the (optional) PPP Borrower Demographic Information Form. All Borrowers must submit (1) and (2) to their Lenders. Notably, the PPP Schedule A Worksheet or its equivalent is to be retained by the borrower but does not need to be submitted with the application. There are a number of similar worksheets and automated spreadsheets being developed for borrowers to input data and calculate the numbers to be placed on Schedule A. At this time, we cannot verify that any of them are accurate.

Maximum Forgiveness Amount: The full principal amount of the loan, not including interest, is eligible for forgiveness.

Covered Period: The first day of the eight week “Covered Period” is the same as the PPP Loan Disbursement Date unless a borrower has a biweekly (or more frequent) payroll schedule. In this case, the borrower can elect to use the “Alternative Payroll Covered Period” for calculating “Eligible Payroll Costs” but may not use it to calculate the “Eligible Nonpayroll Costs.”

Alternative Payroll Covered Period: The first day of the eight week “Alternative Payroll Covered Period” starts on the first day of the pay period following the borrower’s PPP Loan Disbursement Date, but only for borrowers with bi-weekly or more frequent payroll schedules. This means that those borrowers with monthly and semi-monthly payrolls will not be eligible for the Alternative Payroll Covered Period and they may ignore this.

Forgiveness Amount: The amount of loan forgiveness that a borrower is eligible for depends on the calculation of Eligible Payroll Costs, plus Eligible Nonpayroll Costs, minus the adjustment made for employers that have reduced pay for employees greater than 25 percent or have not brought back the same number of full-time equivalent employees. Further, at least 75% of the loan forgiveness amount must be comprised of Eligible Payroll Costs, while 25% of the loan forgiveness amount can be comprised of Eligible Nonpayroll Costs.

Eligible Payroll Costs: Payroll costs that can be used to calculate loan forgiveness must have been paid and incurred during the Covered Period (or Alternative Payroll Covered Period). However, payroll costs incurred but not paid during the borrower’s last pay period of the Covered Period (or Alternative Payroll Covered Period) are eligible for forgiveness if paid on or before the next regular payroll date. Therefore, the borrower has the potential to include payroll for work which was done before the Covered Period if paid in the Covered Period, plus work done in the Covered Period but paid after the Covered Period. Payroll costs of cash compensation to employees eligible for forgiveness may not exceed an annual salary of $100,000, as prorated for the Covered Period ($15,385 for the eight-week period, which amount does not include health insurance and retirement contributions paid by the business).

Payroll Costs Include:

  1. Salary, wages, commissions, or similar compensation;
  2. Cash tips or the equivalent (based on employer records of past tips or, in the absence of such records, a reasonable, good-faith employer estimate of such tips);
  3. Payment for vacation, parental, family, medical, or sick leave;
  4. Allowance for separation or dismissal;
  5. Payment for the provision of employee benefits consisting of group health care coverage, including insurance premiums, and retirement;
  6. Payment of state and local taxes assessed on compensation of employees; and
  7. For an independent contractor or sole proprietor, wages, commissions, income, or net earnings from self-employment, or similar compensation.

Payroll Costs Do Not Include:

  1. Any compensation paid to an independent contractor;
  2. Any compensation of an employee whose principal place of residence is outside of the United States;
  3. The compensation of an individual employee in excess of an annual salary of $100,000, prorated as necessary;
  4. Federal employment taxes imposed or withheld between February 15, 2020 and June 30, 2020, including the employee’s and employer’s share of FICA (Federal Insurance Contributions Act) and Railroad Retirement Act taxes, and income taxes required to be withheld from employees; and
  5. Qualified sick and family leave wages for which a credit is allowed under sections 7001 and 7003 of the Families First Coronavirus Response Act.

Eligible Nonpayroll Costs: Eligible Nonpayroll Costs that can be used to calculate loan forgiveness must have been incurred during the Covered Period and must be paid on or before the next regular billing date, even if the billing date is after the Covered Period. The amount of Eligible Nonpayroll Costs may not exceed 25% of the total loan forgiveness amount.

Nonpayroll Costs Include: Nonpayroll Costs include mortgage interest obligations, rent obligations, and utility payments incurred during the Covered Period. These obligations must have existed prior to February 15, 2020.

  1. Covered Mortgage Interest Obligations: Eligible mortgage interest obligation payments consist of interest (not including any prepayment or payment of principal) on any business mortgage obligation on real or personal property incurred before February 15, 2020.
  1. Covered Rent Obligations: Eligible payments of business rent or lease payments must be pursuant to lease agreements for real or personal property in force before February 15, 2020. This includes payments for leases of personal property, so payments on automobile leases, copier leases and the like are allowed to be paid from PP funds and are counted toward forgiveness. This is a new concept introduced by way of the form.
  1. Covered Utility Payments: Eligible utility payments consist of a service for the distribution of electricity, gas, water, transportation, telephone, or internet access for which service began before February 15, 2020.

Reduction of Forgiveness Amount: The loan forgiveness amount may be adjusted based on a reduction in employees or wages/salary to employees. The adjustment, based on a reduction in employees, is determined by calculating the borrower’s average number of full-time equivalent employees (FTEs) per month during the Covered Period, compared to the period of February 15, 2019, through June 30, 2019, or the period of January 1, 2020, through February 29, 2020. The adjustment, based on a reduction in hourly wages or salary paid to employees, is dependent on whether there was a reduction by more than 25% in the total salary or hourly wages of an employee who was paid $100,000 or less in 2019. If the employee was not employed in 2019, the reduction is compared to the total salary or wages the employee received during the most recent full quarter in which the employee was employed before the Covered Period.

There are step by step instructions on the application to determine the calculation for the Salary/Hourly Wage Reduction and the average FTE’s. In total, a borrower will need to calculate FTE and total employees for several time periods and points in time: at the time of loan application (total employees); at the time of forgiveness application (total employees); during the Covered Period or Alternative Covered Period (average); average FTE between February 15 and April 26, 2020; total FTE during the borrower’s pay period inclusive of February 15, 2020; and as of June 30, 2020.

There is an additional safe harbor for FTE reduction which appears between Line 10 and Line 11 of the PPP schedule A. If a borrower has not reduced the number of employees or paid hours of its employees between January 1, 2020 and the end of the Covered Period, the instructions permit it to check the box and skip the FTE reduction quotient calculation.

The representations and certifications do not include any new certification about entitlement to the loan, despite the recent controversies about repayment by those borrowers who are not in obvious financial distress. Borrowers are required to acknowledge that if the SBA determines the borrower was not eligible for the loan, the SBA can direct the bank not to forgive the loan.

Page 10 of the application lists the documents which must be submitted with the application, and a list of documents that must be maintained but are not required to be submitted.

There are still many questions left unanswered by the SBA’s Loan Forgiveness guidance, but the SBA’s May 15 guidance provides borrowers a critical first-step in understanding how their PPP Loans will be forgiven. It is important that borrowers continually check with their lenders, tax advisors and CPAs, and legal counsel as they navigate the ever-changing waters of the CARES Act and the PPP Loan Forgiveness program.