Breakdown of the PPP Loan Forgiveness Application

On Friday, May 15, 2020, the SBA (Small Business Administration) released highly-anticipated guidance for borrowers seeking forgiveness for their Paycheck Protection Program (PPP) loans. The new Loan Forgiveness Application provides detailed instructions for those seeking loan forgiveness and additional insight on certain calculations and documentation requirements. As many businesses have already begun spending PPP loan funds, the application and accompanying instructions should be reviewed as soon as possible.

We’ve broken down the highlights of the application and guidance here.

The Application and instructions provide that the expenses are allowed for an eight-week period (56 days) beginning on the day the PPP Loan is disbursed.  The following example was provided:

For example, if the borrower received its PPP loan proceeds on Monday, April 20, the first day of the Covered Period is April 20 and the last day of the Covered Period is Sunday, June 14.

The instructions also permit borrowers with bi-weekly or more frequent payroll schedules to elect an Alternative Payroll Covered Period. Under this method payroll costs are determined by using the eight-week period that begins on the first day of the first pay period following the disbursement of PPP proceeds in lieu of the actual disbursement date. This may permit borrowers to more easily align payroll and reporting during the eight-week period and provides an opportunity to include the payroll for employees rehired between the date of disbursement and the first date of the eligible payroll period. The Alternative Payroll Covered Period applies only to payroll costs; therefore, non-payroll costs must use the standard Covered Period beginning with the date of disbursement.  The instructions provide the following example to determine the Alternative Payroll Covered Period:

If the borrower received their PPP loan proceeds on Monday, April 20, and the first day of its first pay period following the PPP loan disbursement is Sunday, April 26, then the first day of the Alternative Payroll Covered Period is April 26 and the last day is Saturday, June 20

Questions surrounding the timing of payroll costs eligible for forgiveness have been answered. For both the normal Covered Period or Alternative Payroll Covered Period, the payroll needs to be incurred or paid during the period. Paid is defined as the day the paychecks are distributed or the day the borrower originates an ACH credit transaction. Incurred is defined as when wages are earned by the employee. Payroll costs incurred during the last payroll of the eight-week period are eligible for forgiveness if they are paid on or before the next regular payroll date.

For example, an employer pays weekly on Friday for the prior Wednesday through Tuesday. Their loan is funded on Thursday. They can choose to include that payroll since it was paid during the covered period. That Employer’s covered period starts Thursday. Alternatively, an employer can choose to include the last Friday’s payroll, just beyond the eight-week timeframe, as long as it is paid in the regular pay cycle and the total payroll being included in the forgiveness calculation is for a maximum of eight weeks.

The CARES Act requires a reduction in the forgivable amount for certain reductions in number of staff or wages. The application provides a required step-by-step calculation to determine whether the loan forgiveness amount must be reduced due to decreases in salary or headcount. The salary reduction limitation occurs before any limitation for a decline in headcount and must be evaluated on an employee-by-employee-basis.

A safe harbor provides that where borrowers reduced their full-time equivalent (FTE)  employee level between February 15, 2020 and April 26, 2020, but restore their FTE employee level by June 30, 2020 to the level of FTE employees they had for the payroll period that covered February 15, the loan forgiveness reduction based on FTE count will not apply. Salary or hourly wage reductions of over 25% will still limit forgiveness.

FTEs are calculated on a 40 hour a week basis with each person capped as 1 person — relevant for employees who worked overtime. The guidance does provide a simplified calculation to count any employees working on average 40 hours or more as 1.0 FTE and anyone else as 0.5 FTE. The number of FTEs should be calculated the same way for all parts of the application.

Eligible Payroll Costs

For payroll costs, the bank account statements or payroll provider reports along with IRS forms for the period will be used. Canceled checks and account statements can be used for health insurance and retirement payments.

Eligible Non-Payroll Costs

For all non-payroll expenses, borrowers will need to provide proof that the agreement/services existed as of February 15, 2020 as well as proof of payment during the covered period. Generally, canceled checks or statements from outside providers showing payments are sufficient for proof of payment. Proof of agreement being in place before February 15, 2020 can be substantiated by providing invoices or agreements as of that date.

The Application requires that a borrower who, along with affiliates, received aggregate PPP loans over $2 million, check a box alerting the SBA of that status. In the most recent guidance issued on May 13, 2020, FAQ 46, the SBA and Department of Treasury provided that organizations that received loans under the $2 million threshold will be deemed as having demonstrated the necessity of the loan, without any further review. The SBA has previously stated all loans in excess of $2 million will be subject to review for compliance with the program. Read more about the PPP Loan Good-Faith Certification here.

This Safe Harbor does not negate the need to substantiate your expenses for loan forgiveness.

Before the SBA released the PPP forgiveness application form and instructions, the AICPA created a loan forgiveness calculator that reflected SBA guidance that existed at the time. The AICPA has since reconciled its calculator with the form, and the updated version with additional recommendations and directions is now available. Download the AICPA PPP Loan Forgiveness Calculator. It is unclear if the SBA will release additional guidance in the coming weeks. To ensure you are on course to obtain maximum loan forgiveness, it is recommended that you perform the calculations several times before the end of the eight-week period.

The entire Aldrich team is monitoring the PPP updates and guidance released from the SBA closely. We’ll be updating our COVID-19 Resource Center diligently to keep you apprised of changes as they happen. If you have any questions about the PPP loan forgiveness application, reach out to your Aldrich Advisor.

This article was written with the most current information as of May 19, 2020.