The CARES Act’s Paycheck Protection Program (PPP) provides emergency relief to businesses in the form of forgivable loans. Businesses welcomed the more than $500 billion in loans that have already been disbursed, but clear guidelines on how to use those funds and plans for forgiveness have been missing.

On May 15, 2020, the SBA and Department of Treasury released the PPP Loan Forgiveness Application with instructions to provide more clarity. The Treasury Department also provided additional, but still limited commentary in an associated press release. While there are still questions that will hopefully be addressed in additional releases by the SBA, today’s communication is intended to provide you with an overview of what we’ve learned in this latest release.

Summary of Key Takeaways

  • In determining the payroll costs a borrower may include in its forgiveness amount, the borrower may choose either the eight weeks following loan disbursement or eight weeks (56 days) beginning on the first day of its first pay period following loan disbursement. While the application indicates this alternate calculation period is “for administrative convenience” and can be used only for certain pieces of the application, it may enable borrowers to have more of their loan amount forgiven.

  • Despite some hopes that perhaps new rules would relax the 75/25 split, the application requires that the borrower confirm that at least 75% of the forgiveness amount is for payroll costs.

  • The borrower will have flexibility to include expenses paid or incurred during the applicable period. This will enable the borrower to include payroll costs paid and/or incurred (and not yet paid) during the period. This also clarifies earlier questions about whether borrowers might consider accelerating payroll dates to fall within the applicable covered period – we believe this would be ill-advised given the new clarity that “incurred” but not yet paid payroll costs count.

  • The borrower’s forgiveness amount will not be reduced for headcount reductions related to employees: to whom the borrower has made a written offer in good faith to rehire and the employee declined (as previously provided in FAQ 40); whose employment was terminated for cause; or who voluntarily resigned.

  • The application requires the borrower to maintain certain documentation related to its PPP loan for at least six years after the loan is forgiven or repaid in full, including documentation supporting the necessity certification and eligibility.

More Detailed Information

The Forgiveness Application - Like the PPP Application to obtain the loan, the Forgiveness Application includes borrower certifications that you may want to review with your loan officer, accountant and legal advisor. The application has four components:

  1. PPP Loan Forgiveness Calculation Form
  2. PPP Schedule A
  3. PPP Schedule A Worksheet
  4. PPP Borrower Demographic Information Form (optional)

Based on our initial review of the application, we suggest you start by preparing the Schedule A Worksheet. This worksheet is used to collect the detailed information needed to perform the computations in the application (Schedule A). 

Covered Period and Payroll Costs – The Covered Period is the 8-week period that starts on the day the PPP loan funds were received and it dictates the time frame for expenses that qualify for forgiveness. The previous guidance on PPP forgiveness provided only one Covered Period that began on the date of the first loan disbursement. The SBA is now permitting an Alternative Payroll Covered Period for borrowers with a weekly or bi-weekly payroll.  

Under the guidance, payroll costs are considered paid on the day that paychecks are distributed or that the borrower originates an ACH credit transaction. Payroll costs are considered incurred on the day that the employee earned the pay. This distinction allows employers some flexibility in timing their use of PPP funds. 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. The Alternative Payroll Covered 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 the borrower pays them by its next regular payroll date. Otherwise, the SBA’s guidance requires that payroll costs must be paid during the Covered Period (or Alternative Payroll Covered Period) to qualify.

The SBA provides for an Alternative Payroll Covered Period that caters to borrowers with a biweekly or other payroll schedule, allowing them to elect to calculate eligible payroll costs using the eight-week period that begins on the first day of their first pay period following the disbursement of PPP proceeds. Borrowers who opt for the Alternative Payroll Covered Period are still required to use the standard Covered Period for other costs. 
Cash Compensation - Under the SBA’s guidance, the total amount of cash compensation that is eligible for forgiveness for each individual employee cannot exceed an annual salary of $100,000, as prorated for the Covered Period; that is, it cannot exceed $15,385. For these purposes, “cash compensation” includes the sum of gross salary, gross wages, gross tips, gross commissions, paid leave (vacation, family, medical or sick leave, not including leave covered by the Families First Coronavirus Response Act), and allowances for dismissal/separation paid or incurred during the Covered Period or the Alternative Payroll Covered Period.

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.

Non-Cash Compensation Payroll Costs - The SBA’s guidance distinguishes between cash compensation payroll costs (discussed above) and non-cash compensation payroll costs. Eligible non-cash compensation payroll costs include the following costs that are paid or incurred during the Covered Period:

  • Health Insurance: The total amount paid by the borrower for employer contributions for employee health insurance, including employer contributions to a self-insured, employer-sponsored group health plan, but excluding any pre-tax or after-tax contributions by employees. It appears that accrued costs paid during the 8-week period will count toward forgiveness. Additional SBA guidance is needed to clarify this interpretation.

  • Retirement: The total amount paid by the borrower for employer contributions to employee retirement plans, excluding any pre-tax or after-tax contributions by employees. There does not appear to be any limitation on retirement contributions, including accrued costs, paid during the 8-week period. This may allow payment of 2019 accrued retirement contributions during the Covered Period, which may count toward the 75% payroll cost threshold. This is another area where some additional SBA guidance is needed. 

  • State & Local Taxes: The total amount paid by the borrower for employer state and local taxes assessed on employee compensation (e.g., state unemployment insurance tax), but not including any taxes withheld from employee earnings.

Calculation of Reductions in Full-Time Equivalents and Wages – While some items were clarified regarding the calculation of FTE and wages, 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. We strongly advise that you work closely with your accountant. Here is what we know:

Calculation: The Forgiveness Application instructions provide rules for calculating the average full-time equivalency (FTE). The borrower enters the average number of hours paid per week for each employee during the Covered Period or the Alternative Payroll Covered Period, divides by 40, and rounds the total to the nearest tenth. The maximum for each employee, however, is capped at 1.0. The guidance also provides a simplified method, that assigns a 1.0 for employees who work 40 hours or more per week and 0.5 for employees who work fewer hours, that may be used at the borrower’s election. 

FTE Reduction Exceptions: The SBA’s guidance provides several exceptions to the forgiveness-limitation rules. One exception provides that a borrower is not penalized for FTE reductions that result from the following circumstances: (1) reductions related to any positions for which the borrower made a good-faith, written offer to rehire an employee during the Covered Period or the Alternative Payroll Covered Period that was rejected by the employee; and (2) reductions related to any employees who during the Covered Period or the Alternative Payroll Covered Period (a) were fired for cause, (b) voluntarily resigned, or (c) voluntarily requested and received a reduction of their hours.

FTE Reduction Safe Harbor: The SBA’s guidance also recognizes a safe harbor that exempts some borrowers from losing loan forgiveness based on reduced FTE levels. Under this safe harbor, a borrower is exempt from the reduction in loan forgiveness based on FTEs if both of the following conditions are met: (1) the borrower reduced its FTE levels in the period beginning February 15, 2020, and ending April 26, 2020; and (2) the borrower, by no later than June 30, 2020, restored its FTE level to the FTE level that existed during the borrower’s pay period that included February 15, 2020.

Salary/Hourly Wage Reduction: The CARES Act reduces a borrower’s loan forgiveness amount when the employer reduces certain employee salary and wages. Under this rule, the actual amount of loan forgiveness may be reduced if the salary or hourly wages of certain employees were less during the Covered Period or the Alternative Payroll Covered Period compared to the period from January 1, 2020 to March 31, 2020. This reduction applies only for employees whose salaries or hourly wages were reduced by more than 25% during the Covered Period or the Alternative Payroll Covered Period as compared to the period of January 1, 2020 through March 31, 2020. While not referenced in the new guidance, this reduction generally does not apply to employees with compensation in excess of $100,000.  

Eligible Nonpayroll Costs. The SBA’s guidance further provides that an eligible nonpayroll cost must either be “paid” 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. Moreover, the SBA provides that eligible nonpayroll costs cannot be more than 25% of the total forgiveness amount. Nonpayroll costs eligible for forgiveness consist of the following categories:

  • Mortgage Obligations: The amount of business mortgage interest payments during the Covered Period for any business mortgage obligation on real or personal property in force before February 15, 2020. The guidance defines “business mortgage interest payments” as payments of interest (not including any prepayment or payment of principal) on any business mortgage obligation on real or personal property that was in force before February 15, 2020.

  • Rent Obligations: The amount of business rent or lease payments for real or personal property during the Covered Period pursuant to lease agreements that were in force before February 15, 2020. 

  • Utility Payments: The amount of payments during the Covered Period for business utilities for which service began before February 15, 2020. The guidance defines “business utility payments” as business payments for the distribution of electricity, gas, water, transportation, telephone, or internet access for which service began before February 15, 2020. 

Data collection and documentation requirements – are perhaps the greatest challenges for borrowers. 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.

What’s Next? The PPP Loan Forgiveness Application does provide borrowers with further clarity regarding the use of their loan proceeds. However, it’s seems safe to assume there will be more guidance forthcoming. To put it simply, there must be. The most frustrating issue for borrowers is that guidance, in many 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’ve been working diligently to digest and interpret all information published by the Treasury Department and the SBA. In some cases, we simply don’t have the answers until further guidance is provided. We strongly suggest that you continue to work proactively with your bank loan representatives, payroll company, and business advisors/accountants. We will continue providing updates when relevant information becomes available.

The pandemic has presented numerous and ongoing challenges to small businesses, families and individuals. And, as we are finding out, the CARES Act's Paycheck Protection Program, although much needed and greatly appreciated, is presenting its own set of challenges. We want to do everything in our power to ensure you are in the best position to benefit from PPP. Please do not hesitate to reach out to us to address questions regarding PPP or any aspect of your financial plan and / or investment strategy.

Warm Regards,

Rick W. Campbell
Financial Independence
931 Jefferson Blvd
Suite 2005
Warwick, RI 02886

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