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SBA Releases PPP Loan Forgiveness Application


On Friday, May 15th, the SBA released its PPP loan forgiveness application, a copy of which is available here. The SBA’s stated intent with this forgiveness application is to reduce the compliance burden and simplify the forgiveness application process for borrowers. The press release accompanying the release of the application indicates that the SBA will “soon” be issuing additional regulations and guidance on the forgiveness of PPP loans. 

Below is a summary of the updates covered in the PPP loan forgiveness application. 

Alternative Payroll Covered Period

For purposes of calculating payroll costs during the eight-week covered period, Borrowers will be permitted to start the eight-week period from either (a) the date the PPP loan proceeds were first disbursed or (b) for borrowers with a biweekly (or more frequent) payroll schedule, the first day of their first pay period following the first loan disbursement. 

Please note that the payment of non-payroll costs must still be counted during the eight-week period starting from the date of the first loan disbursement regardless of whether or not the Alternative Payroll Covered Period is used. 

Calculation of Costs During Covered Period 

Payroll Costs

The application provides that “payroll costs paid and payroll costs incurred” during the Covered Period or the Alternative Covered Period will be eligible for forgiveness. 

The SBA will consider payroll costs to be paid on the day that checks are distributed or the ACH transaction is originated and will consider payroll costs to be incurred on the day that the employee’s pay is earned. Payroll costs must generally be paid during the Covered Period (or Alternative Covered Period) to count, except that “payroll costs incurred but not paid during the Borrower’s last pay period of the Covered Period (other Alternative Payroll Covered Period) are eligible for forgiveness if paid on or before the next regular payroll date.” 

The language in the application does not specifically require the costs be both incurred and paid during the Covered Period. Additional guidance from the SBA could clarify whether this means that payroll costs incurred for periods before the Covered Period, but paid during the covered period would be included in the payroll costs calculation for purposes of forgiveness. The application is also silent on whether bonuses or pay raises can be included. 

Non-Payroll Costs

Similarly, the application provides that non-payroll costs “must be paid during the Covered Period or 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” to be eligible for forgiveness. The same analysis applies here as with payroll costs, the language here could suggest that the costs only have to be paid or incurred during the covered period, not both. 

The application does not specify whether the prepayment of future obligations could be considered “paid during the Covered Period” for purposes of the forgiveness application, but the application does provide that borrowers must submit documentation verifying “eligible payments from the Covered Period”—this could mean the SBA may permit regularly scheduled payments only. 

There has otherwise been no change to or clarification on the definitions in the CARES Act as to what constitute eligible non-payroll costs. 

Wage Reduction Penalty

The application clarifies that only the amount of an employee’s wage reduction over the 25% threshold will be included in the forgiveness reduction penalty (i.e., if an employee’s wages were reduced by 30%, only the 5% portion above 25% would be deducted from the total forgiveness amount). The application provides a worksheet with step-by-step instructions on how to calculate this for each employee. 

Owner Payments

The instructions provide that the amounts paid to owners, including payments to “owner-employees” are capped at the lower of the eight-week equivalent of a $100,000 annual salary or the eight-week equivalent of their applicable compensation in 2019. This would seem to prevent owners from increasing their salaries above pre-existing rates. 

Note that the SBA had previously issued guidance or regulations allowing individuals with self-employment income to include their 1040 Schedule C or K-1 income from self-employment (this includes the net income of the general active partners/members for entities taxed as a partnership) within the definition of payroll costs for purposes of both calculating the loan amount and the forgiveness amount. The SBA also recently (May 13, 2020) issued an additional Interim Final Rule providing that partnerships may receive additional loan amounts, even if the initial loan has already been disbursed, if the original loan amount did not include any amount for partner compensation. 

FTE Reduction Exceptions

In addition to the FTE Reduction Safe Harbor that had already been publicized (restoring FTE levels prior to June 30, 2020), the following FTE reductions will be excluded from the penalty calculation:

  1. Any position for which the borrower made a good-faith, written offer to rehire an employee during the Covered Period or Alternative Covered Period which was rejected by the employee; and
  2. Any employees during the Covered Period or Alternative Covered Period who were fired for cause, voluntarily resigned or voluntarily requested and received a reduction in hours. 

The SBA also clarified that the FTE calculations are to be made based on 40 hour work weeks, with each employee being capped at 1.0 FTE. 

Required Documentation

The application also lists the required accompanying documentation that must be either submitted to the lender when applying for forgiveness or maintained by the borrower. 

Submitted to Lender

  1. PPP Loan Forgiveness Application
  2. PPP Schedule A
  3. Documentation verifying eligible payroll costs, including bank account statements or third-party payroll service provider reports, tax forms for the periods overlapping the Covered Period/Alternative Covered Period and payment receipts, cancelled checks and account statements documenting employer contributions to health insurance and retirement plans.
  4. Documentation showing FTEs for the relevant periods used for completing the FTE calculations in the application, which can include payroll tax filings, state quarterly business and individual wage reporting and unemployment insurance tax filings.
  5. Documentation supporting the eligible payments of non-payroll costs, including (a) lender amortization schedules and receipts or cancelled checks verifying eligible payments or lender account statements from February 2020 and thereafter verifying interest amounts and eligible payments; (b) copies of current lease agreements and receipts or cancelled checks verifying eligible payments or lessor account statements from February 2020 and thereafter verifying eligible payments; and (c) copies of invoices for utility expenses from February 2020 and thereafter and receipts, cancelled check or account statements verifying payment. 

Maintained by Borrower (not required to be submitted to the lender)

  1. PPP Schedule A Worksheet and documentation supporting the Salary/Hourly Wage Reduction and showing the employees that received during any single pay period in 2019 compensation at an annualized rate of more than $100,000.
  2. Documentation regarding any employee job offers and refusals, firings for cause, voluntary resignations and written requests by any employee for reductions in work schedules.
  3. Documentation supporting the FTE Reduction Safe Harbor (restoring FTEs prior to June 30) 

Borrowers must also retain all records relating to the Borrower’s PPP loan, including documentation submitted with its PPP loan application, documentation supporting the Borrower’s certifications as to the necessity of the loan request and its eligibility for a PPP loan, documentation necessary to support the Borrower’s loan forgiveness application, and documentation demonstrating the Borrower’s material compliance with PPP requirements for a period of 6 years after the date the loan is forgiven or repaid in full.  Borrowers must also permit the SBA and the Office of Inspector General to access such files upon request.

* The information contained in this document is provided for informational purposes only. It should not be construed as business, legal, accounting, tax, financial, investment or other advice on any matter and should not be relied upon for such.

The information in this document may not reflect the most current developments as the subject matter is extremely fluid and may change daily. The content and interpretation of the issues addressed herein is subject to revision. Koley Jessen, P.C., L.L.O. disclaims any and all liability with respect to actions taken or not taken based on any or all of the contents of this document to the fullest extent permitted by law. Do not act or refrain from acting upon the information contained in this document without seeking professional or other advice.


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