SBA Releases PPP Loan Forgiveness Application – With Instructions and Changes

This article was updated on May 17, 2020.  Updates to this article will be made as new information becomes available.

Schneider Downs continues to track the evolving landscape of federal financial programs offered due to the disruption of the coronavirus crisis (COVID-19).  On May 15, 2020, the U.S. Small Business Administration (SBA), in consultation with the Department of the Treasury, released the Paycheck Protection Program (PPP) Loan Forgiveness Application (Application) and detailed instructions for the Application.

The forms and instructions (collectively, the Application) include several measures to reduce compliance burdens and simplify the process for borrowers.  The following summarizes the key points of the Application and the changes in the forgiveness calculation.

Alternative Payroll Covered Period

Previous regulations stated that the covered period began on the date the lender made the first disbursement of the PPP loan to the borrower (Covered Period).

The Application now provides an “Alternative Payroll Covered Period” in addition to the Covered Period.  Borrowers with a biweekly (or more frequent) payroll schedule may elect to calculate eligible payroll costs using an Alternative Payroll Covered Period: “the eight-week (56-day) period that begins on the first day of their first pay period following their PPP Loan Disbursement Date.”  This alternative is specific to payroll costs.

Incurred and Paid vs. Incurred or Paid

As we discussed in a previous article "Forgiveness Thoughts", there was confusion regarding terminology in the CARES Act and the use of loan proceeds for costs that were “incurred and payments made.”

The Application now defines the following:

  • For eligible payroll costs, 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 paid on or before the next regular payroll date.
  • Eligible non-payroll costs must be paid during the Covered Period 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.

Any costs that were both paid and incurred should only be counted once.

Interest on any other debt obligations that were incurred before the Covered Period remains an allowable use, however, is not a forgivable use. 

Full-Time Equivalents Reduction

Prior to the release of the Application, the full-time equivalency (FTE) definition for loan forgiveness was not specifically addressed in the CARES Act.

The Application now defines Average FTE as follows: For each employee, enter the average number of hours paid per week, divide by 40, and round the total to the nearest tenth.  The maximum for each employee is capped at 1.0.  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. 

FTE Reduction Exceptions

The Application provides additional exceptions in which FTE reductions do not reduce loan forgiveness:

  • Any positions for which the Borrower made a good-faith, written offer to rehire an employee during the Covered Period or the Alternative Covered Period that was rejected by the employee; or
  • Any employees who during the Covered Period or Alternative Covered Period were fired for cause, voluntarily resigned or voluntarily requested and received a reduction of their hours.

FTE Reduction Safe Harbor

The Application also provides additional details on how to determine if the safe harbor is met.  Specifically, the Borrower is exempt from the reduction in loan forgiveness, based on FTE employees, if both of the following conditions are met: (1) the Borrower reduced its FTE employee levels in the period beginning February 15, 2020, and ending April 26, 2020; and (2) the Borrower then restored its FTE employee levels by no later than June 30, 2020 to its FTE employee levels in the pay period that included February 15, 2020.

Salary/Hourly Wage Reduction By Employee

Prior to the release of the Application, it was unclear in the forgiveness calculation, how reductions in wages in excess of 25% should be analyzed and calculated.

The Application now clarifies the salary/hourly wage reduction by providing PPP Schedule A and Schedule A Worksheet, which analyzes wage reductions in excess of 25% by employee and compares:

  • the average annual salary or hourly wage for each employee during the Covered Period or the Alternative Payroll Covered Period to:
  • the average annual salary or hourly wage between January 1, 2020 and March 31, 2020.

If the average salary or wages during the Covered Period or the Alternative Payroll Covered Period is less than 75% of the average salary or wages during the previous quarter, a reduction in forgiveness may apply.  The PPP Schedule A and Schedule A Worksheet provide separate calculations of the reduction for hourly and salary workers.

Salary/Hourly Wage Reduction Safe Harbor

The application provides a Safe Harbor if salary/hourly wages were reduced during the Covered Period or Alternative Payroll Covered Period but then restored to prior levels as of June 30, 2020.

The SBA also will soon issue regulations and guidance to further assist borrowers as they complete the Application and to provide lenders with guidance on their responsibilities.

If you need more information or assistance regarding the PPP or the forgiveness calculations for PPP loans, please reach out to any of your contacts at Schneider Downs or contact Joel Rosenthal ([email protected]).

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The Schneider Downs Our Thoughts On blog exists to create a dialogue on issues that are important to organizations and individuals. While we enjoy sharing our ideas and insights, we’re especially interested in what you may have to say. If you have a question or a comment about this article – or any article from the Our Thoughts On blog – we hope you’ll share it with us. After all, a dialogue is an exchange of ideas, and we’d like to hear from you. Email us at [email protected].

Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.

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