PPP Loan Forgiveness – The Application is Here!

On Friday, May 15^th, 2020, Treasury and the Small Business Administration (SBA) released both the Paycheck Protection Program Loan Forgiveness Application and new guidance. Although there has been a steady flow of updates dealing with application and repayment, regulators had been virtually silent on forgiveness leaving many with more questions than answers. At long last, borrowers now have the information needed to review spending policies and begin preparing the forgiveness application. There were a number of topics addressed including a new Alternative Covered Period, 75%/25% expense allocation update, documentation requirements, and a new FTE Reduce Safe Harbor. To help clients, prospects, and others, Wilson Lewis has provided a summary of key points below.

• New Alternative Covered Period – There is now an Alternative Covered Period which borrowers may leverage when calculating loan forgiveness. Since some companies issue payroll bi-weekly or even more frequently, they are now allowed to calculate eligible payroll costs using the 8-week period that begins on the first day of the first pay period following the loan disbursement date. This means if a borrower received funds on April 6^th, but the first day of the pay period following disbursement is April 10^th, then the first day of the Alternative Covered Period would be April 10^th and the last day would be June 11^th.
• Eligible Payroll Cost Determination – It is known that borrowers are generally eligible for forgiveness for payroll costs paid and incurred during the Covered Period. However, the guidance clarified that payroll costs are considered paid on the day paychecks are distributed or an ACH transaction is initiated. Since payroll costs are considered incurred on the day the pay is earned, costs incurred but not paid during the last pay period before the end of the Covered Period are also eligible for forgiveness if paid on or before the next regular payroll date. Otherwise, all payroll costs must be paid during the Covered Period.
• Eligible Non-Payroll Costs – It has been known that certain non-payroll costs including covered mortgage and rent obligations, as well as, utility payments are eligible for forgiveness. However, what is new is the requirement that expenses must be paid or incurred during the Covered Period and paid on or before the next regular billing date (even when the billing date is after the Covered Period).
• 75%/25% Expense Allocation – The new guidance confirms that borrowers applying for forgiveness must use no less than 75% of funds on payroll expenses and no more than 25% on eligible non-payroll costs. Since this was not specifically stated in the CARES Act, many have been waiting to see if the requirement would be maintained, which it has been.
• Required Payroll Expense Documentation – As part of the Loan Forgiveness Application, borrowers must submit the following payroll documentation including:
  • Bank statements or payroll service reports documenting the amount of cash compensation paid to employees.
  • Tax forms for the periods that overlap with the Covered Period including payroll tax filings (IRS Form 941), and state quarterly business and individual employee wage reporting and related unemployment insurance tax forms.
  • Any receipts canceled checks or account statements showing the number of employer contributions to health insurance and retirement plans included in the forgiveness amount.
• Required Nonpayroll Expense Documentation – Borrowers must also submit verification showing the existence of these expenses prior to February 15, 2020, and payments made including:
  • Business mortgage interest payments which should include a copy of the lender amortization schedule and canceled checks verifying payment.
  • Business rent or lease payments which should include a copy of the current lease agreement and receipts/canceled checks verifying payment.
  • Business utility payments including copies of invoices from February 2020 and evidence of payments made including canceled checks or payment receipts.
• $100K Salary Cap – The guidance also clarifies the $100K cap by stating the total amount of cash compensation eligible for forgiveness may not exceed an annual salary of $100,000, as prorated for the covered period. This means that loan forgiveness for cash compensation is limited to $15,385 per employee.
• FTE Reduction Safe Harbor – The Safe Harbor program is designed to provide relief to borrowers who were not able to maintain FTE for reasons outside their control. This includes any position for which a written offer to rehire an employee during the Covered Period that was rejected, those who were fired for cause, voluntarily resigned, or requested and received a reduction in work hours. In these situations, the new guidance makes it clear that such a reduction does not impact the borrower’s loan forgiveness amount.
• Required FTE Documentation – At the election of the borrower, the following FTE documentation showing the average number of FTE employees on the payroll per month between February 15, 2019, and June 30^th, 2019, or January 1, 2020, and February 29, 2020, should be provided. The selected time period must match the period used to complete PPP Schedule A, Line 1. Acceptable documentation includes payroll tax filings, state quarterly business, and individual employer wage reports and unemployment insurance tax filings.

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The information released on Friday by the SBA will help borrowers begin preparing for loan forgiveness.  Although more guidance will be issued in the coming weeks, this serves as an excellent starting point. If you have questions about the information outlined above or need assistance with loan forgiveness preparation, Wilson Lewis can help. For additional information call us at 770-476-1004 or click here to contact us. We look forward to speaking with you soon.