SBA Publishes PPP Loan Forgiveness Application and Advice
For those who have received Paycheck Protection Program (PPP) loans, the process to get them forgiven may seem daunting. Fortunately, on May 15, 2020, the Small Business Administration (SBA) published the application for loan forgiveness of PPP loans, as well as some helpful guidance to shepherd recipients through the process and clarify answers to the most common borrower questions. We’ve collected some of the most important takeaways for you:
There is an eight-week “Covered Period” for each PPP loan. By default, the “Covered Period” begins on the date the loan is disbursed. However, borrowers with biweekly or more frequent payroll schedules may choose an “Alternative Payroll Covered Period” which begins on the first day of the borrower’s first pay period following the PPP loan disbursement. This is done to calculate forgiveness amounts based on spending for applicable payroll costs. This is important to borrowers, who can use it to calculate what loan proceeds were put towards payroll amounts, which affects their eligibility for forgiveness.
The following costs are eligible loan forgiveness if borrowers apply:
Eligible Payroll Costs: According to the SBA, payroll costs incurred but not paid during the Covered Period (or Alternative Payroll Covered Period) are eligible for forgiveness under the condition that they are paid on or before the borrower’s next regular payroll date. Payroll costs are counted as paid on the day that paychecks are distributed, or the borrower originates an ACH credit transaction. Payroll costs are incurred on the day that the employee earns wages.
Eligible Non-Payroll Costs: Non-payroll costs eligible for forgiveness include the following:
- covered mortgage obligations: interest payments (not including any prepayment or payment of principal) on any business mortgage obligation on real or personal property incurred before February 15, 2020;
- covered rent obligations: business rent or lease payments pursuant to lease agreements for real or personal property enforceable before February 15, 2020;
- covered utility payments: business payments for services for the distribution of electricity, gas, water, transportation, telephone, or internet access for which service began before February 15, 2020.
Eligible non-payroll costs must be 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 (essentially, you must pay it within the Covered Period even if it would be an early payment). Note that the Alternative Payroll Covered Period does not apply in this case.
Critically, the SBA reserves the right to direct a lender to disapprove the borrower’s loan forgiveness application if the SBA determines that the borrower was never eligible for the PPP loan in the first place.
Conditions for forgiveness:
- Borrowers must maintain the same number of employees they employed prior to obtaining the PPP loan.
- The SBA has set out the correct way to calculate the average full-time equivalency (FTE) during the applicable reference period and the Covered Period or Alternative Payroll Covered Period: for each employee, the borrower must enter the average number of hours paid per week, divide by 40, and round to the nearest tenth. The maximum for each employee is capped at 1.0.
- Borrowers may choose to use a simplified method, which assigns a 1.0 for employees who work 40 hours or more per week, and 0.5 for employees who work under 40 hours per week.
- There are several cases in which FTE reductions will not reduce a borrower’s loan forgiveness amount according to the SBE. These exceptions are, 1) any positions for which the borrower made a good-faith, written offer to rehire an employee during the Covered Period or Alternative Payroll Covered Period which was rejected by the employee, and 2) any employees who were fired for a cause, voluntarily resigned, or voluntarily requested and received a reduction of their hours during the Covered Period or Alternative Payroll Covered Period. The borrower must clearly indicate these FTE in their application to avoid a reduction of the loan forgiveness amount.
- The FTE Reduction Safe Harbor exempts borrowers from a reduction in the loan forgiveness amount resulting from a reduction in FTE employees if the following two 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 borrower’s pay period that included February 15, 2020.
- When borrowers apply for loan forgiveness, they will be required to certify that they understand that if the funds were knowingly used for unauthorized purposes, the federal government may pursue recovery of loan amounts and/or civil or criminal fraud charges. The borrower will also be required to certify that they understand that knowingly making a false statement to obtain forgiveness of an SBA-guaranteed loan is punishable by both fines and potential imprisonment.
When applying for loan forgiveness, borrowers must submit the following documentation along with their application:
- Payroll documentation: a) bank statements or third-party payroll service provider reports documenting the amount of cash compensation paid to employees; b) tax forms (or equivalent third-party payroll service provider reports) for the periods that overlap with the Covered Period or the Alternative Payroll Covered Period including payroll tax filings reported or that will be reported to the IRA (typically a form 941) and state quarterly business and individual employee wage reporting and unemployment insurance tax filings reported or that will be reported to the relevant state; and c) payment receipts, cancelled checks, or account statements documenting the amount of any employer contributions to employee health insurance and retirement plans that the borrower included in the forgiveness amount.
- Required FTE documentation must include: a) the average number of FTE employees on payroll per months employed by the borrower between February 15, 2019 and June 30, 2019; b) the average number of FTE employees on payroll per month employed by the borrower between January 1, 2020 and February 29, 2020; or c) in the case of a seasonal employer, the average number of FTE employees on payroll per month employed by the borrower between February 15, 2019, and June 30, 2019; between January 1, 2020 and February 29, 2020, or any consecutive 12-week period between May 1, 2019 and September 15, 2019.
- Borrowers applying for PPE loan forgiveness must also submit non-payroll documentation to verify the existence of obligations and services prior to February 15, 2020 and eligible payments from the Covered Period. This documentation includes: a) for business mortgage interest payments: copy of lender amortization schedule and receipts or cancelled checks verifying eligible payments from the Covered Period; or lender account statements from February 2020 and the months of the Covered Period through one month after the end of the Covered Period verifying interest amount and eligible payments; b) for business rent or lease payments: the borrower must provide a copy of the current lease agreement and receipts or cancelled checks verifying eligible payments from the Covered Period, or lessor account statements from February 2020 and from the Covered Period through one month after the Covered Period verifying eligible payments; and c) business utility payments: copies of invoices from February 2020 and those paid during the Covered Period and receipts, cancelled checks, or account statements verifying those eligible payments.
Borrowers are also required to maintain the following documentation, but they are not required to submit it with their application:
- Documents supporting the listing of each individual employee in PPP Schedule A Worksheet Table 1, including the “Salary/Hourly Wage Reduction” calculations, if necessary.
- Documents supporting the listing of each individual employee in PPP Schedule A Worksheet Table 2, specifically, that each listed employee received during any single pay period in 2019 compensation at an annualized rate of more than $100,000.
- Documents regarding any employee job offers and refusals, firings for cause, voluntary resignations, and written requests by any employee for reductions in work schedules.
- Documents supporting the PPP Schedule A Worksheet: “FTE Reduction Safe Harbor.”
The borrower must retain and keep records of all documentation demonstrating the borrower’s material compliance with PPP requirements, including the following:
- All records relating to the borrower’s PPP loan
- All documents submitted with the PPP loan application
- Documents supporting the borrower’s certification as to the necessity of the loan request and its eligibility for a PPP loan
- Documents necessary to support the borrower’s loan forgiveness application
The borrower must keep all of this documentation in its files for six years after the date the loan is forgiven or repaid in full, and permit authorized representatives of SBA to access these files upon request.
For more information regarding PPP loan forgiveness applications and all of its requirements, please contact Omar Khan at firstname.lastname@example.org or your typical contact at Procida Funding & Advisors.