If you are one of the many small businesses that received a Paycheck Protection Program (PPP) loan, you’ve likely been wrestling with questions about how to make sure your loan is forgiven. We blogged several days ago about the unanswered questions on forgiveness and the need for guidance from the SBA.
The SBA has now provided additional guidance on PPP forgiveness in its Loan Forgiveness Application, which you can find by clicking here. You will submit this Application (or an online version of it) to your bank, or the holder of your loan, to apply for PPP forgiveness.
The Application and its instructions provide significant clarification on what is required for forgiveness and what documents and certifications you will need to provide to your bank. Here are some of the highlights:
In general, how is forgiveness calculated?
In general, forgiveness is calculated by adding your qualifying payroll costs to your qualifying non-payroll costs, and reducing that amount by “FTE” and “Salary/Hourly Wage Reductions” (if you did not maintain or restore levels of compensation and employment as required). Once you do that calculation, if you spent at least 75% of your PPP loan on qualifying payroll costs, the total you spent on qualifying payroll costs and qualifying non-payroll costs (up to the total amount of your loan) can be forgiven. (Then, obviously, if you spent more than 75% of the loan amount on qualifying payroll costs, the loan will also be 100% forgiven.)
What are the major changes to PPP loan forgiveness guidance?
The Application and its instructions provide significant new guidance on PPP loan forgiveness which changes and expands previous guidance. Here are some of the major changes:
- Period you look at for forgiveness: Previously the SBA had issued guidance that PPP funds were to be spent and forgiveness was to be measured during the 8 weeks following the distribution of the funds to the borrower. This is defined as the “Covered Period.” The Application allows for a “Alternative Covered Period” for some purposes for borrowers with a biweekly, or more frequent, payroll schedule. The Alternative Covered Period begins on the first day of the borrower’s first pay period following their PPP loan disbursement date. If you are eligible for and choose to use the Alternative Covered Period, make sure you read the instructions closely as you fill out the Application, required PPP Schedule A to the Application, and the Schedule A worksheet. Even if you choose the Alternative period, some calculations still require you to use the Covered Period.
- When payroll is measured: The Application clarifies that qualifying payroll costs include those paid as well as those incurred during the 8-week Covered Period or the Alternative Covered Period. So, for example, if you incur payroll costs prior to the end of the 8-week period, but those incurred amounts are not paid until your normal payroll date after the 8-week period, they still count in the forgiveness calculation. The Application makes clear, however, that payroll costs incurred and paid in the 8 weeks can only be counted once.
- Expansion of qualifying non-payroll costs: The Application confirms that only 25% of PPP funds can be used for qualifying non-payroll costs, and that those qualifying costs include mortgage interest, rent, and utilities. The Application, however, expands the definitions of mortgage interest and rent to include not only interest and rent on real estate mortgages and leases, but also to “mortgage” interest and rent or lease payments on personal property. Covered non-payroll costs count in the calculation of forgiveness if they are paid or incurred during the Covered Period (the Alternative Covered Period is not applicable to the calculation of qualifying non-payroll costs), and are on obligations that were in place prior to February 15, 2020.
- Calculation of reduction of loan forgiveness if employee and/or compensation levels are not maintained as required: The Application provides tables to complete and detailed instructions on how to calculate the reduction in your loan forgiveness if, in general, you do not maintain your full time employee level or you decrease salaries and wages by more than 25% for any employee that made less than $100,000 annualized in 2019. These calculations require you to analyze levels on an employee by employee basis during certain defined time periods and then compare those periods. The Application also confirms safe harbors for those who restore their employees and salary levels by June 30, 2020.
Although the Application and its instructions provide a great deal of guidance on PPP loan forgiveness, more guidance is still needed. We anticipate that the SBA will, over the next several days and possibly weeks, issue further guidance. Finney Law Firm will stay on top of the latest and will update you though this blog. And, if you have questions or need guidance on the Application or on the PPP in general, please contact Rebecca Simpson Heimlich at 513.797.2856.