As we communicated earlier, the SBA recently released its PPP loan forgiveness application, which you can access here. This 11-page document includes filing instructions that answer many but not all the questions borrowers have on the calculation of forgiveness. Knowing questions remain, the SBA continues to promise the release of additional guidance soon. In addition, several bills are circulating in Congress that promise to change significant provisions of the PPP. Until one of these bills becomes law, we are stuck with the current guidance.

Borrowers will submit their applications for forgiveness to their lender. The lender has 60 days to review the application and forward it on to the SBA who has 90 days to review. Prepare to wait for a decision on your loan forgiveness due to this long lead time.

Because of the continued uncertainty regarding certain parts of the application, we are not recommending you rush to file for forgiveness, particularly given the rumors circulating that Congress may extend the current forgiveness period to 24 weeks, and is considering other borrower-friendly provisions. In addition, the application form itself has an expiration date of October 31, 2020. We are taking this to mean that is the deadline to apply for forgiveness.

The application confirms that the 8-week covered period for costs eligible for forgiveness begins on the date the loan proceeds were received by the borrower. You may recall costs eligible for forgiveness include payroll, mortgage interest, rent and utilities.

Eligible Payroll Costs

Payroll costs eligible for forgiveness are those that are paid and those that are incurred during the 8-week covered period. Payroll costs incurred but not paid during the borrower’s last pay period of the covered period are eligible for forgiveness if they are paid on or before the next regular payroll date. This favorable provision could allow a borrower to include more than 8 weeks of expense in their forgiveness calculation.

In another favorable twist, a borrower with a bi-weekly, or more frequent, payroll period may choose to calculate their eligible payroll costs using an eight-week period that begins on the first day of the first payroll period following receipt of the PPP proceeds. This provision allows borrowers to change the forgiveness period to align to their pay cycle. This change only applies to payroll costs.

In follow-up guidance released this weekend, the Treasury advised that hazard pay and bonuses count as payroll costs. It is important to remember that each employee’s earnings are capped at $15,385 ($100,000 averaged over 8 weeks).

While it is clear Congress intended costs for employee health insurance and retirement contributions to be free of the annual wage cap, the Treasury is not following suit for owner-employees. Compensation (including health insurance and retirement contributions) paid to owner-employees, self-employed individuals and general partners is subject to the $15,385 cap; whereas only cash compensation paid to employees is subject to this cap.

In addition, owner-employee compensation has now been limited to the lesser of 8/52 of 2019 compensation or $15,385, in total, across all businesses.

Eligible Non-payroll Costs

Recall non-payroll costs include mortgage interest on real and personal property, rent on real and personal property and utilities (electricity, gas, water, transportation, telephone and internet access). Each of these items must have been in effect before February 15, 2020. This will need to be proven with the forgiveness application by providing a copy of the relevant lease or utility bill covering the February 15th date.

To qualify as a forgivable expense, these non-payroll costs must be paid or incurred during the covered period. For expenses incurred, the amount must be paid on or before the next regular billing date. Here again, we may find expenses covering more than an 8-week period.

The only item we know to be included in transportation expenses is fuel for business vehicles. Total non-payroll costs cannot exceed 25% of the total forgiveness amount.

Full-Time Equivalency (FTE) Reduction Calculation

The amount of loan forgiveness may be reduced if the borrower’s average FTE employee count during the covered period was less than that during the borrower’s chosen reference period. The chosen reference period is at the borrower’s election either (a) February 15, 2019 to June 30, 2019 or (b) January 1, 2020 to February 29, 2020.

The application provides guidance on the definition of FTE. For purposes of this calculation, you are comparing the employee’s average hours to a 40-hour work week.

The borrower can be exempt from this reduction in forgiveness if they meet a safe harbor. Basically, if they (a) reduced their FTE employee levels in the period February 15, 2020 to April 26, 2020 and (b) they then restored their FTE counts by no later than June 30, 2020, an exemption from loan forgiveness reduction applies.

 A second exception exists to eliminate the need to reduce the loan forgiveness amount for reduced employee head counts. The following positions can be excluded from the calculation: (a) any positions for which the borrower made a good-faith, written offer to rehire an employee during the covered period which was rejected by said employee and (b) any employees who during the covered period were (1) fired for cause, (2) voluntarily resigned, or (3) voluntarily requested and received a reduction in hours.

What to do when you extend an offer of rehire to an employee and it is rejected

With regard to the exemption for offering to rehire an employee and being turned down, the Treasury has indicated that the employer must report said employee to the state unemployment office within 30 days in order to qualify for the exemption. Here in Pennsylvania, the Department of Labor requires this notification within 7 days. Click here to download the form and instructions on how to complete and submit it.

Wage Reduction

A borrower’s forgiveness amount may be further reduced if employees’ salaries were reduced by more than 25% during the covered period as compared to the first calendar quarter of 2020. This analysis must be performed on an employee-by-employee basis.

Here, too, a safe harbor exists to provide an exemption from the loan forgiveness reduction. If the average annual salary of employees is restored by June 30, 2020 to its level as of February 15, 2020, no reduction is necessary.

We recommend you review the application on page 4 regarding the certifications you as a borrower must make to your lender and the SBA as well as page 10 regarding all of the documentation that is required to either be submitted with your application for forgiveness or maintained in your records for at least 6 years.

While you await the end of your 8-week covered period, now is also a good time to begin gathering support for your non-payroll costs. Remember you must prove these items were in existence as of February 15, 2020. Plan to pull a copy of all relevant leases and mortgages as well as utility bills covering this period.

If you need assistance please reach out to your DunlapSLK team member. As always, we are ready to help!