SBA Introduces PPP Loan Forgiveness Application
Two months ago, when the CARES act was passed, small businesses could apply for the Paycheck Protection Program (PPP) loan if they needed assistance to continue paying employees. Small businesses AND self-employed individuals could use the loan for certain business expenses like payroll, rent, and utilities. The program allowed for the loan to be forgiven if at least 75 percent of the loan amount was applied to payroll expenses.
On May 15, 2020, the Small Business Administration (SBA) announced the application process for forgiveness of the Paycheck Protection Program (PPP) loan. The application helps clarify some aspects of loan forgiveness that have been generating questions and concerns from loan recipients. Borrowers will be happy to see flexibility in some areas and better definition in others. The application also resolves some qualification questions from companies with a reduction in headcount during the loan period.
NOTE: This article provides some important clarifications to PPP loan clauses. If you have questions or need assistance on completing the loan forgiveness application process for the PPP loan program, please reach out to your SBA lender, your tax advisor, or feel free to contact me at Lance@128financial.com.
Important Clarifications
“Incurred” versus “Paid” Expenditures
The application instructions indicate that incurred or paid expenditure’s are still “eligible for forgiveness if paid on or before the next regular payroll date.”
For Payroll costs only, borrowers with a biweekly (or more frequent) payroll schedule may elect to calculate eligible payroll costs using the eight-week (56-day) period that begins on the first day of their first pay period following their PPP loan disbursement date.
For example:
April 20: PPP loan funded
April 26: First day of first pay period following PPP loan disbursement
April 26: First day of Alternative Payroll Covered Period
June 20: Last day of Alternative Payroll Covered Period
For non-payroll expenses, “cost 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 the Covered Period.”
Eligible Utilities
This has been another big topic of debate. The loan forgiveness application language clarifies eligible utilities for forgiveness, stating that you may include “business payments for a service for the distribution of electricity, gas, water, transportation, telephone or internet access for which service began before February 15, 2020.” “Transportation” includes gas expenses from operating your business vehicle as supported by previous regulations issued to clarify the PPP.
Note that security systems or credit card processing, full Common Area Maintenance (CAM) charges and waste removal are NOT included in the SBA clarification. Forgiveness should be considered for certain CAM charges provided detail of the underlying permissible “utility” expenditures are bifurcated and documented, and agreed upon, by lessee and lessor.
Calculating Full-time Equivalents (FTEs)
While the CARES act generally defined an FTE as an employee working 30 hours per week, the SBA calculation for loan forgiveness is based on a 40-hour work week.
The PPP forgiveness application instructions state the borrower should calculate the average number of hours paid per week for each employee during the “Covered period,” divide by 40 and round to the nearest tenth. For example, if an employee worked an average of 32 hours per week, the average FTE will be 0.8. The maximum for each employee is capped at 1.0.
A simplified method is that employees who work 40 hours or more per week are assigned an average FTE 1.0. Employees who work fewer hours are assigned 0.5. Employees working more than 40 hours cannot count for more than one FTE.
Borrowers/Applicants elect either the regular or simplified method when calculating average FTEs.
Pay Decreases or Reduced Headcount
The SBA’s Schedule A worksheet provides the calculation for pay reduction that will apply to borrowers who have reduced headcount by more than 25%. It also provides the calculation for your full-time equivalent reduction.
That said, there are certain safe harbors available. The SBA will not reduce loan forgiveness of FTE reductions if the Borrower made a good-faith written offer to rehire an employee and the offer was rejected by the employee. The other FTE reduction scenario that falls under safe harbor is if employees were fired for cause, voluntarily resigned, or voluntarily requested a reduction of their hours during the 8-week period.
Safe harbor also exists if the borrower rectifies the reduction in pay by June 30, 2020. Specifically, if the average annualized salary (or hourly wage) as of June 30, 2020 is equal to or greater than the annual salary or hourly wage as of February 15, 2020, the reduction will be deemed to have been eliminated and they may still be eligible for loan forgiveness.
We have been in an unprecedented season of hardship in many ways. And the landscape is ever changing. I am available to discuss any of the matters above or other financial matters that have arisen for you, your families and loved ones and your businesses over the last few months. I hope you and your families stay safe and healthy.
Helpful links:
Paycheck Protection Program Loan Application