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PPP Loan Forgiveness Application Released

5/18/20 – Emir Hodzic

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The Small Business Administration (SBA) released its long anticipated Paycheck Protection Program (PPP) Loan Forgiveness Application on May 15th. The application, along with the press release from the SBA and instructions on completing the application, can be found here.  

Over the coming weeks, lenders participating in the program will focus on adapting their systems to match the application requirements, and borrowers will have some of their long standing questions answered. However, as has been the ongoing trend with the program, the SBA promises more guidance and regulation will be coming “soon.”

Key Takeaways from the Application Form

The application provides for an alternative payroll covered period, referring to the eight weeks borrowers have to spend the PPP funds in order for them to be considered for forgiveness. The default covered period starts with the day of loan disbursement and further defines eight weeks as 56 days. Those businesses with a biweekly or more frequent payroll cycle can elect for a start to their covered period to align with the first day of their first pay period following their PPP loan disbursement. While this is welcome news to many, as it simplifies the tracking of loan spending and assures borrowers they will get the full benefit of eight weeks’ worth of payroll, it does not provide any relief to those businesses who have been closed or unable to operate due to COVID restrictions, to have their covered periods start when they are able to open and rehire employees.  It will be nearly impossible to achieve full loan forgiveness, and the funds will eventually have to be paid back with deferred interest charges for businesses who have been funded weeks ago and haven’t been able to operate or rehire employees.

Those businesses who have received PPP loans in excess of $2 million will be required to confirm this via a check a box on the application. They will need to consider their affiliated businesses in determining the total amount of the loans. The SBA has previously issued guidance that loans over $2 million will be audited by the SBA prior to their applications for forgiveness being approved. Those under $2 million will go through a less rigorous process with their lender and won’t face any scrutiny of their needs certification.

The application also answers the question many borrowers have asked regarding the definition of incurred or paid, and whether or not it is cash basis or accrual. We recommend you contact a consultant or your VonLehman advisor surrounding the nuances of cash basis vs. accrual as each businesses situation is unique. Payroll costs are considered paid on the day the paychecks are distributed or an ACH credit transaction is initiated by the borrower to its payroll service provider. Payroll costs are considered incurred when the employees earn wages, therefore the treatment is along the lines of accrual basis of accounting and allows for the borrower’s last incurred pay period to be paid and eligible for forgiveness. This is the case even if the payment falls outside of their covered period as long as paid before the next regular payroll date. To be clear, payroll costs that were both paid and incurred can only be counted once. The same holds true for other eligible costs such as rent, utilities, and mortgage interest.

Although many businesses have expressed concerns over their ability to spend their loan monies on at least 75% payroll cost while still incurring occupancy and other expenses, the SBA has doubled down on the requirement. Therefore, any other eligible costs will not be considered for forgiveness unless the 75% threshold is met, despite no such language being a part of the actual CARES Act.

Otherwise, the PPP Loan Forgiveness Calculation Form follows the language of the CARES Act. Borrowers should use the calculation form to forecast their spending and hiring plans to determine how much of their loan can be forgiven.

Business owners who are also employees of the business, self-employed individuals, or general partners are capped at $15,385 of eligible payroll cost (the eight-week equivalent of $100,000 per year). This is true unless their compensation in 2019 was lower, thus preventing an increase in wages to owners in order to maximize the benefit.  

The application information further defines Full Time Equivalent (FTE) as 40 hours and instructs borrowers on how to calculate the average FTE for purposes of loan forgiveness reductions based on headcounts. Prior to this, many borrowers and their advisors were using the 30-hour threshold set by the Affordable Care Act.  Borrowers must calculate the Average FTE for their eight-week covered period and measure it against the borrower’s chosen historical reference period. Loan forgiveness is reduced for any reductions of FTEs over the eight-week covered period.  There is a FTE reduction safe harbor for those borrowers who previously reduced FTE employee levels but restore them prior to June 30, 2020. Additionally, if a borrower makes a good-faith, written offer to rehire an employee during the eight-week covered period and, that offer is rejected by the employee, that FTE reduction will not reduce the borrower’s loan forgiveness.

The SBA previously issued FAQ #40 on this issue, but one bit of positive news is that an exception also exists if any employees are fired for cause during the eight-week covered period or have voluntarily resigned, or voluntarily requested and received a reduction of their hours.  This addresses many concerns businesses have about their ability to rehire employees during the pandemic, where many have been left without child care providers or are fearful to return to work due to safety concerns, among other reasons. However, it’s important to know that the Borrower must retain all such documentation in its files for six years after the date the loan is forgiven or repaid in full, and permit authorized representatives of the SBA, including representatives of its Office of Inspector General, to access such files upon request.

VonLehman experts have compiled a COVID-19 Resource Center to keep you up-to-date with breaking developments. Here, you can find resources to help you navigate these difficult times. For any questions related to this article, contact Emir Hodzic at ehodzic@vlcpa.com or 800.887.0437