The SBA issued the 1st version of the PPP loan forgiveness application. Unfortunately, this 11-page application is not a simple application and there are many calculations needed along with the required paperwork to receive forgiveness. It does appear that there is momentum within the SBA, Treasury Department, and Congress to make changes to the PPP program. These changes may include extending the time past 8 weeks that the loan can be used, relaxing the 75% payroll cost requirement, and increasing the loan payback period to greater than 2 years. Some of these changes can be done through SBA rules but some need legislative action.
What this means is there is still uncertainty about the PPP and the loan forgiveness rules and application may be revised in addition to the many unanswered questions that we are awaiting guidance from the SBA on.
For now, we will review what is in place.
Key Points of the Application
1) The Covered Period is the 8 week period that starts on the day the PPP funds are deposited into the borrowers bank account. The application allows for an "Alternative Payroll Covered Period" that begins on the first day of the first pay period following PPP loan disbursement. This will make it easier to track payroll. If you pay monthly, you will need to start paying more frequently to take advantage of the alternative period.
Also, the cash outlay of the last payroll in the covered period will be eligible for forgiveness as long as it is paid no later than the next regular payroll date. So this means that employers don't have to move up their payroll pay date to be within the covered period.
2) Recall that loan forgiveness may be reduced if salaries or wages of any employee are reduced greater than 25% compared to the previous full quarter. The determination of salary and wage reduction of >25% is required on an employee by employee basis. There was some question as to whether this >25% reduction was an aggregate total change. The application requires the calculation to be completed for each employee on the Schedule A Worksheet.
However, the reduction amount can be restored if the annual salary was restored to what it was on February 15, 2020 by June 30, 2020.
3) The other potential reduction for loan forgiveness is if the average FTE's (full time equivalent) employees are reduced during the covered period. Per the application, you can determine FTE's 2 ways - determine the average # of hours worked divided by 40 or use .5 for any worker who did not work 40 hours per week and 1.0 for every worker that did average 40 hours per week.
However, the reduction amount can be restored if the FTE's were restored to what it was on February 15, 2020 by June 30, 2020.
In order to calculate #2 and #3 there are at least 5 date ranges where FTE counts and/or employee annual salaries are needed. I will review this in a future email or webinar.
4) As we have discussed previously, 75% of loan forgiveness must be spent on payroll costs. The calculations on the form allow that this is not an all or nothing calculation. There was some question if a business fell below the 75% rule that they would lose all forgiveness but this is not the case. The form language says "eligible non payroll costs cannot exceed 25% of the loan forgiveness amount."
5) Independent contractors, sole proprietors, or partners in a partnership:
a) are NOT allowed to include any forgiveness related to the costs of their own retirement plan or health insurance contributions. Only the employer paid portion for their employees can be forgiven. As written, S Corps and C Corps can get the full benefit but others can not.
b) Amounts paid as compensation are capped at either $15,385 (8 weeks of a $100,000 annual salary) OR the 8 week equivalent of their 2019 applicable compensation, whichever is lower. This is a new rule and requires further clarification.
6) The Payroll Costs cap of $100,000 per employee ($15,385 for the 8 week period) is only for cash compensation; employer paid retirement and healthcare costs can be added on top of this amount.
7) The application will be submitted to your lending bank along with all required documentation (payroll records, check stubs, rent / mortgage utility receipts, and any additional info the bank requires.) The lender has 60 days from the date of receiving the application to provide a decision on loan forgiveness to the borrower.
The Borrower must retain all records for 6 years after the date the loan is forgiven or paid in full.
Crystal clear right? There are still many open questions that the SBA will be issuing guidance on soon (hopefully.) Rest assured, the EDGe team is reviewing this application and guidance closely and we will continue to provide updates and clarifications. We have just started reviewing the application ourselves and how it all works together. There are many more details on how this application works (assuming it doesn't change) that I will cover in additional emails this week.
The EDGe team of experts now offers PPP loan forgiveness tracking for your business. If you need to talk through specific options for your business, Molly, Paula, and I are here to help. Schedule a 30 minute consultation via Zoom where we will discuss your specific business situation for only $49. If you have any questions, feel free to reach out to any of us. And keep checking our emails, blog, and social media for updates.
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