Summary of SBA’s PPP Loan Forgiveness Application and Instructions Issued May 15, 2020

May 16, 2020 - William R. Johnson
The Small Business Administration issued the long-awaited Paycheck Protection Program Loan Forgiveness Application (the “Application”) together with instructions (the “Instructions”), on May 15, 2020. 
 
The Application consists of four parts: (1) the PPP Loan Forgiveness Calculation Form, (2) PPP Schedule A, (3) PPP Schedule A Worksheet, and (4) Optional Demographic Information Form. Items (1) and (2) must be submitted to the applicable lender. See Haynsworth Sinkler Boyd’s guidance for PPP lenders as to loan forgiveness here. The Application and Instructions answer some questions that had previously been unclear as to loan forgiveness.
 
Covered Period vs. Alternative Payroll Covered Period
 
Prior guidance provided that the eight-week period in which eligible expenses are forgivable begins on the date the lender disburses PPP loan funds to the borrower. The Application provides that for administrative convenience, borrowers with a biweekly or more frequent payroll schedule may elect to calculate payroll costs within an alternative eight-week period beginning on the first day of the first pay period after the loan disbursement date. This alternative period that would be used for payroll costs is referred to as the “Alternative Payroll Covered Period.” Borrowers electing to use the Alternative Payroll Covered Period should review the Application and Instructions carefully in each place that the applicable eight-week period is referenced to determine whether it should use the eight-week period beginning on the loan disbursement date (i.e., for nonpayroll costs) or the alternative period (i.e., for payroll costs).
 
Covered Payroll Costs
 
Much confusion had centered on the CARES Act’s requirement that eligible expenses be both incurred and paid within the covered eight-week period. The Instructions provide that payroll costs are (A) incurred on the day the employee’s pay is earned and (B) paid on the day the borrower distributes paychecks or originates an ACH transaction. Addressing concerns of borrowers as to payroll costs incurred but not yet paid as of the last day of the eight-week period, the Instructions provide that payroll costs incurred but not paid as of the last day of the eight-week period are nevertheless eligible for forgiveness if they are paid on or before the next regular payroll date.
 
Non-cash payroll costs include employee health insurance, employer contributions to employee retirement plans, and employer state and local taxes assessed on employee compensation (i.e., state unemployment tax). Unfortunately, the Application and Instructions do not elaborate on the application of the “incurred and paid” requirement for non-cash payroll costs, but borrowers should keep in mind that any such costs must satisfy both requirements of having been incurred and paid within the relevant eight-week period.
 
Limitations on Cash Compensation
 
The Instructions confirm prior guidance that cash compensation is limited to $100,000 per employee on an annualized basis, or $15,385 per employee. Under the SBA interim final rule issued April 20, 2020, special rules apply for self-employed individuals, who must use “2019 owner compensation replacement,” essentially equal to 8/52 of 2019 net profit (with net profit capped at $100,000 for this purpose).
 
Many questions have centered on whether borrowers can pay bonuses to employees within the covered period and include such bonus payments as eligible payroll expenses. The Application and Instructions do not specifically address this rule. However, borrowers should consider the requirement that eligible expenses must be both incurred and paid (as described above) within the eight-week period. Thus, a bonus that is attributable to work performed within the eight-week period is clearly eligible up to the $15,385 cap per employee. Accelerated bonuses not associated with work performed during the eight-week period may not be eligible.
 
Covered Nonpayroll Costs
 
The Instructions confirm the CARES Act’s inclusion of covered mortgage interest payments, rent obligations, and utility payments provided that the mortgage obligations, rent, or utility payments were incurred or in place before February 15, 2020. As to rent payments, the Instructions importantly provide that rent payments include payments pursuant to lease agreements for real or personal property.  Previously, it was not clear that payments for personal property leases would be eligible. As to utility payments, the Instructions clarify that covered utilities include electricity, gas, water, transportation, telephone, and internet. 
 
Nonpayroll costs must be paid during the covered period or incurred and paid during the covered period and paid on or before the next regular billing date, even if the payment date is after the last day of the covered period. As a reminder, nonpayroll costs are limited to 25% of the total forgiveness amount.
 
Certifications
 
The Applications requires numerous borrower certifications. Specifically, the borrower must certify that the requested forgiveness amount was used for eligible expenses and takes into account all applicable reductions due to decreases in headcount, salary, or hourly wages and does not include nonpayroll costs in excess of 25%. For owner-employees or self-employed individuals and general partners, the borrower must certify that the forgiveness amount does not exceed eight weeks of 2019 compensation, capped at $15,385 per individual. The certifications further provide that the borrower has verified the payments and understands that knowingly using loan funds for unauthorized purposes subjects the borrower to civil and criminal fraud charges.
 
Reduction in Full-Time Equivalents
 
The CARES Act provided that the potential loan forgiveness amount is subject to reduction if the borrower reduces the number of full-time equivalents (FTEs) during the covered period as compared to the base FTEs during a period chosen by the borrower (either February 15 to June 30, 2019 or January 1 to February 29, 2020, and seasonal employers can additionally elect to use any consecutive 12-week period between May 1 and September 15, 2019). If this rule results in a reduction, the borrower may nevertheless avoid the reduction if the borrower qualifies for the “FTE Reduction Safe Harbor,” which is confusingly measured using totally different time periods. To qualify for the FTE Reduction Safe Harbor, (A) the borrower must have reduced the number of FTEs between February 15 and April 26, 2020, and (B) the borrower must have eliminated that reduction no later than June 30, 2020. The Instructions provide that the February 15 FTE figure will be determined by measuring the FTEs for the borrower’s pay period that included February 15. Presumably, the borrower would need to restore its FTE level to that threshold for any pay period beginning on or before June 30.
 
The Application and Instructions reflect these rules, but confusingly, Schedule A of the Application provides “If you have not reduced the number of employees or the average paid hours of your employees between January 1, 2020 and the end of the Covered Period,” check a box and skip the lines that would otherwise evaluate whether an FTE reduction occurred. This language seemingly provides an additional, alternative exemption for the FTE reduction rule.
 
Further, the Instructions implement and expand upon an additional exception previously described in the Treasury Department FAQs. Specifically, FTE reductions will not be taken into account for positions vacated but not filled by a new employee where (A) within the covered period, the borrower made a good-faith, written offer to rehire any employee who rejected such offer, or (B) where an employee was fired for cause, voluntarily resigned, or voluntarily requested and received a reduction in hours.
 
Calculating Full-Time Equivalents
 
While the CARES Act imposed requirements tied to the number of FTEs, it provided no clarity on how the number of FTEs would be calculated. The Instructions address this point by assigning an FTE value to each employee. The FTE value is the average number of hours paid per week, divided by 40, and rounded to the nearest tenth, but not to exceed 1.0. Borrowers may use a simplified method of assigning 1.0 to each employee who works 40 hours or more each week and 0.5 to each employee who works less than 40 hours.
 
Salary/Hourly Wage Reductions
 
The CARES Act provided an additional reduction in eligible loan forgiveness if the borrower reduces salaries or hourly wages by more than 25% for any employee other than an employee who received $100,000 or more in annualized compensation in any 2019 pay period. In order to apply this test, the borrower must first designate which employees (A) received $100,000 or more in annualized compensation in any 2019 pay period and (B) did not receive $100,000 or more in annualized compensation in any 2019 pay period. Only employees described in (B) are relevant for this item.
 
The CARES Act stated that the reduction applied if borrowers reduced such pay within the eight-week period as compared to such pay during the first quarter. The Application and Instructions recognized the difference in the length of the time periods being compared and helpfully apply this test by comparing average annual pay during the applicable periods, although the Instructions do not provide specific guidance on how to calculate “average annual pay” as of a given date. Absent further guidance to the contrary, the most reasonable interpretation would appear to be annualizing each employee’s pay for the payroll period that includes the applicable measurement date.
 
As with the headcount/FTE reduction, a safe harbor applies such that a borrower otherwise subject to a reduction in loan forgiveness due to salary/hourly wage reductions is exempt from such reduction if it satisfies the safe harbor conditions, which again look confusingly to totally different time periods. To qualify for the Salary/Hourly Wage Reduction Safe Harbor, (A) the borrower must have reduced salaries/wages between February 15 and April 26, 2020, and (B) the borrower must have eliminated the reduction no later than June 30, 2020. The Application and Instructions apply these tests on an employee-by-employee basis, meaning that a borrower may qualify for the Salary/Hourly Wage Reduction Safe Harbor for some or all employees.
 
Documentation
 
The borrower must submit the following documentation to substantiate its request for loan forgiveness:

1.  PPP Loan Forgiveness Calculation Form

2.  PPP Schedule A

3.  Payroll Documentation
     a.  bank statements or third-party payroll service provide reports documenting payroll
     b.  tax forms or third-party payroll service reports
          i.  payroll tax filings reported or that will be reported on IRS Form 941
          ii.  state quarterly business and individual wage reporting (state income tax withholding)
          iii.  state unemployment tax filings
     c.  receipts, cancelled checks, or statements documenting health insurance payments
     d.  receipts, cancelled checks, or statements documenting retirement payments

4.  Full-Time Equivalent (FTE) Documentation (time period elected by borrower, must match period used for Schedule A, Line 11)
     a.  Determination of number
          i.  average FTEs per month 2/15/19-6/30/19, or
          ii.  average FTEs per month 1/1/20-2/29/20, or
          iii.  if seasonal employer, average FTEs per month 2/15/19-6/30/19, 1/1/20-2/29/20, or any consecutive 12-week period 5/1/19-9/15/19
      b. Documents may include payroll tax filings reported or that will be reported on IRS Form 941 and state quarterly business and individual employee wage reporting and unemployment tax filings reported or that will be reported

5.  Nonpayroll Documentation (establishing existence of obligations/services prior to 2/15/20 and eligible payments within covered period)
      a.  For business mortgage interest, copy of lender amortization schedule and receipts or cancelled checks verifying payments made; 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
      b.  For business rent or lease payments, copy of current lease agreement and receipts or cancelled checks verifying eligible payments from covered period; OR lessor account statements from February 2020 and the months of the covered period through one month after the end of the covered period verifying eligible payments
      c.  For business utility payments, copy of invoices from February 2020 and covered period and receipts, cancelled checks, or account statements verifying eligible payments

The borrower is not required to submit but must maintain the PPP Schedule A Worksheet and documentation supporting the FTE and salary/wage reduction calculations, any job offers and refusals, firings for cause, voluntary resignations, and voluntary requests and reductions in hours as well as the safe harbor calculations. The borrower should maintain these documents together with its entire file relating to the PPP loan, including documentation as to the good-faith necessity certification, for six years after the date the loan is forgiven or repaid in full.

See HSB's proposed checklist for loan documentation here
 
PPP Borrower Demographic Information Form
 
The Application includes an optional demographic information form that would be used for program reporting purposes only.

Please contact Will Johnson for additional information.