Paycheck Protection Program Loan Forgiveness: SBA Releases Application

There is a continual flow of news regarding the Paycheck Protection Program (PPP) from the Treasury Department (Treasury) and the Small Business Administration (SBA), and last week was a busy one. This past Thursday, the SBA updated its FAQ list to address a safe harbor for PPP loans under $2M. On the evening of May 15, 2020, the SBA and Treasury released the PPP Loan Forgiveness Application for borrowers to apply for forgiveness of their loans.

The application contains a bevy of updates and new guidance, including the introduction of an Alternative Covered Period, Full-Time Equivalent (FTE) Reduction Safe Harbor, clarification on the $100,000 payroll costs cap, forgiveness documentation requirements, and much more. The latest guidance comes just in time as many borrowers have been struggling to make sense of how the loan forgiveness will work, including how and when to making qualifying expenses. To help clients, prospects, and others, Klatzkin has provided a summary of the key details below.

• New Alternative Covered Period – There is now an Alternative Covered Period which borrowers may leverage when calculating loan forgiveness. Since some companies issue payroll bi-weekly or more frequently, they are now allowed to calculate eligible payroll costs using the 8-week period that begins on the first day of the first pay period following the loan disbursement date. This means if a borrower received funds on April 20, but the first day of the pay period following disbursement is April 26, then the first day of the Alternative Covered Period would be April 26, and the last day would be June 20,  or 56 days later.
• Eligible Payroll Cost Determination – It is known that borrowers are generally eligible for forgiveness for payroll costs paid and incurred during the Covered Period. However, the guidance clarified that payroll costs are considered paid on the day paychecks are distributed, or an ACH transaction is initiated. Since payroll costs are considered incurred on the day the pay is earned, costs incurred but not paid during the last pay period before the end of the Covered Period are also eligible for forgiveness if paid on or before the next regular payroll date. Otherwise, all payroll costs must be paid during the Covered Period.
• Required Payroll Expense Documentation – As part of the Loan Forgiveness Application, borrowers must submit the following payroll documentation, including:
  • Bank statements or payroll service reports documenting the amount of cash compensation paid to employees.
  • Tax forms for the periods that overlap with the Covered Period including payroll tax filings (IRS Form 941), and state quarterly business and individual employee wage reporting and related unemployment insurance tax forms.
  • Any receipts canceled checks or account statements showing the amount of employer contributions to health insurance and retirement plans included in the forgiveness amount.
• Required Non-Payroll Expense Documentation – Borrowers must also submit verification showing the existence of these obligations/services before February 15, 2020, and payments made including:
  • Business mortgage interest payments should include a copy of the lender amortization schedule and canceled checks verifying payment.
  • Business rent or lease payments which should include a copy of the current lease agreement and receipts/canceled checks verifying payment.
  • Business utility payments including copies of invoices from February 2020 and evidence of payments made including canceled checks or payment receipts.
• $100K Salary Cap – The guidance clarifies the $100K cap by stating the total amount of cash compensation eligible for forgiveness may not exceed an annual salary of $100,000, as prorated for the covered period. This means that loan forgiveness for cash compensation is limited to $15,385 per employee.
• FTE Reduction Safe Harbor – The Safe Harbor program is designed to provide relief to borrowers unable to maintain FTE for reasons outside their control. This includes any position for which a written offer to rehire an employee during the Covered Period that was rejected, those who were fired for cause, voluntarily resigned, or requested and received a reduction in work hours. In these situations, the new guidance clarifies that such a reduction does not impact the borrower’s loan forgiveness amount.
• Average FTE – Average FTE’s are determined by the average number of hours paid per week, divided by 40 and rounded to the nearest tenth.  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 may be used at the election of the borrower

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Another piece to the PPP puzzle is now in place, and borrowers can finally begin to plan their loan forgiveness efforts. Although more guidance will likely be issued in the coming days and weeks, there is a lot of useful information that can now be used. If you have questions about the information outlined above or need assistance with a PPP-related issue, Klatzkin can help. For additional information, click here to contact us. We look forward to speaking with you soon.

The above represents our best understanding and interpretation of the material covered as of the date of this post. Things are moving at a rapid pace, and as such, information is subject to change. This information is provided for informational purposes only and is not intended to be a substitute for obtaining accounting, tax, or financial advice from an accountant.