SBA Issues PPP Loan Forgiveness Application and Instructions

I’m going to need a new lede to these posts. The SBA has (finally) published the PPP Forgiveness Application (twenty days after the deadline imposed under Section 1106(k) of the CARES Act). There are now more than 4.4 million PPP borrowers trying to decipher the application and accompanying instructions.

We will follow up with a more detailed analysis tomorrow, and stay tuned for a webinar from us this coming week, but here are some highlights:

1.       Borrowers will self report whether they and their affiliates received PPP loans in excess of $2M. 

a. Note that that this threshold is $2M of original principal amount. Several of you have asked about paying down loans to come under $2M before applying for forgiveness, but that won’t work.

b. Also, we expect that SBA may review independently review these applications, the original loan applications and other data to see if there are other affiliates who should be considered. Do NOT assume that the self-reporting will end the inquiry.

2.       SBA is allowing borrowers to use a slightly different 8-week forgiveness period to perhaps simplify certain payroll calculations.  The “Alternative Covered Period” is the 8-week period starting on the first day of the first payroll period after the loan disbursement, in order to allow borrowers to more easily match and track payroll costs to the forgiveness period.

3.       SBA has tried to provide some clarity on the cash vs. accrual method, while the application also provides significant detail on how payroll costs are to be calculated and reported.

a. As for cash vs. accrual, it appears that payroll costs must be

i. incurred during the forgiveness period (incurrence date = “the day that the employee’s pay is earned”) AND

ii. paid during the forgiveness period or on or before the borrower’s FIRST regularly-scheduled payroll dateAFTER such forgiveness period.

(The drafting here is a little funky, but I think this is what SBA means.  This would appear not to allow inclusion of a payroll date during the forgiveness period that covers costs incurred prior to the forgiveness period. This leavesopen a question as to whether deferred pay from prior periods would  be includable.  It seems like it should be, but the application does not provide helpful instruction there.)

b. As expected, the application caps individual comp at $15,385 (8/52 of $100k) during the forgiveness period, which appears to apply even to bonus or one-time amounts.

c. The application unfortunately just parrots the CARES Act language re “allowances” for separation or dismissal, rather than expressly saying that severance payments are includable. (It seems the intent is to allow these, but they sure could help us out with some clarity.)

d. For the forgiveness reduction calculation based on FTE headcount (the “FTE Reduction”), borrowers are to use 40 hours per week to calculate FTE (NOT the 30 hours that many had expected), or they can simply use 1.0 for all employees above 40 hours and 0.5 for all below. (Borrowers should carefully run the math both ways to see which is more beneficial).

e. For the forgiveness reduction relating to compensation reductions in excess of 25%, the 25% measure is only applied to salary and to hourly wage. The application even refers to this as the “Salary/Hourly WageReduction” (emphasis added). Thus, hourly employees who have their hourly pay rate remain constant (or cut by <25%), but their hours cut by more than 25% will NOT be includedin this reduction calculation. That is good news for the employers (but less good news for those employees of course). Note that the number of hours is still a factor in two ways however:

i. For employees whose hourly pay is reduced by more than 25%, the amount of forgiveness reduction is equal to that excess reduction multiplied by their average number of hours from January 1 to March 31, 2020 (which thus ignores any later reduction in hours).

ii. A reduction in hours will reduce an employee’s FTE equivalency, thus impacting the FTE Reduction fraction …unless the borrower elects to use the simplified 1.0 & 0.5 method.

iii. That simplified method seems to open a large amount of flexibility (some might say loophole?) for borrowers with hourly workers. Borrowers now seem able to avoid at least some of what would otherwise be a reduction in forgiveness even if they reduce part time employee hours significantly, by:

1. Keeping hourly wage rates constant (or reducing them by <25%) for those employees; and

2. Count those as the same 0.5 FTE in both the numerator and denominator, irrespective of hours before or after any such reduction. (Stay tuned on this, as we need to revisit the math, and we may get more guidance.)

f. Also for the FTE Reduction, borrowers do not need to count unfilled positions for employees who:

i. Were offered their jobs back in writing on the same terms and who rejected such offer;

ii. Were fired for cause;

iii. Voluntarily resigned; or

iv. Voluntarily requested and received a reduction in hours.

g. Keep in mind that both the FTE Reduction and the Salary/Hourly Wage Reduction can be avoided if any applicable cuts made prior to April 26 are reversed by June 30.

4.       The application has a few notable points on non-payroll costs:

a. Non-payroll costs must be:

i. paid during the Covered Period OR

ii. incurred during the Covered Period and paid on before the next regular billing date for such costs, even if the billing date is after the Covered Period. (This seems to expressly ALLOW prepayments of rent and utilities).

A. The application reiterates the language from the CARES Act thatprepayments of interest cannot be included.

B. However, neither the CARES Act nor the application prohibit prepayments of rent or utility amounts. In fact, the language above appears to allow borrowers to prepay rent and utilities and include those in their forgiveness calculations. (Of course … there may be future guidance on this.)

C. Keep in mind, though, that these non-payroll costs cannot exceed 25% of the forgiveness amount.

b. The relevant time period for these non-payroll costs is the statutory 8-week “Covered Period” from loan disbursement, even if borrowers are using the Alternative Covered Period for payroll calculations. Borrowers should be sure to keep track of the potentially different timing for each of these periods.

c. The application again refers to mortgages of “real or personalproperty”, which is unclear at best. Is it possible that they mean traditional secured debt on personal property? We need guidance on that.

d. The application specifically allows inclusion of “real or personal property” leases (presumably including capital leases). This was not necessarily evident from the CARES Act and is a nice clarification, or perhaps addition, for borrowers.

e. Still no guidance on how “transportation” is a utility. If you know, please email me.

5. When submitting the application, borrowers must acknowledge and agree to provide any additional information that the SBA may request relating not only to forgiveness but also re “the Borrower’s eligibility for the PPP loan”. (All borrowers must agree to that, not just borrowers in excess of $2M.).

a. The application details what documents borrowers will be required to submit including payroll records and bank statements or copied checks, copies of statements for utilities from February (to show that they existed then) and during the covered period, lease and loan agreements and payment statements for those obligations.

b. Borrowers must agree to retain records relating to the PPP loan forsix years.

c. Borrowers also certify that the records submitted re loan forgiveness are “consistent with” those that the borrower will submit with its federal and state tax returns (and other state workforce reporting).

NOTE THAT NONE OF THIS IS LEGAL ADVICE, and all of it remains subject to further review of the application, including consulting in more detail with employment and tax colleagues.

We will do that over the next day or two and cover as soon as possible. I’m going to be largely off email the rest of the day, driving back from a dinner celebrating my daughter’s graduation from college (without any actual graduation ceremony of course), but will follow up on this tomorrow. Also, feel free to call on cell later today. Thank you.