Before getting into the SBA guidance published on May 15, 2020, we would like to point out the other welcomed announcement from SBA of a $2 million safe harbor, whereby a borrower whose combined PPP loan amounts (including its affiliates) are below this threshold will be deemed to have met the required certification on the necessity of the loan request and not be subject to further scrutiny on this certification. This is much welcomed news for most borrowers who were puzzled how SBA and Treasury might try to enforce this requirement in the statute on borrowers with smaller loan amounts after ominous language recently from Treasury Secretary Mnuchin.

Forgiveness Guidance in New Form Instructions

SBA issued on Friday, May 15th much awaited guidance on PPP loan forgiveness in the instructions to the newly issued forgiveness application form with schedules and worksheets required for borrowers to use in reporting to lenders in order to obtain forgiveness on PPP loan amounts. The form, schedules and instructions can be found here: https://www.sba.gov/about-sba/sba-newsroom/press-releases-media-advisories/sba-and-treasury-release-paycheck-protection-program-loan-forgiveness-application

This guidance seems to clarify SBA’s interpretation on a number of issues. However, some questions and issues may remain for some borrowers.

For example, the instructions seem to suggest that corporate owner-employees may be able to include health insurance and retirement plan payments for themselves in forgiveness amounts, whereas partners in partnerships and Schedule C filers cannot. This is the appearance for now at least by reference in the instructions for PPP Schedule A, Line 9 to the interim final reg on self-employed borrowers found here https://home.treasury.gov/system/files/136/Interim-Final-Rule-Additional-Eligibility-Criteria-and-Requirements-for-Certain-Pledges-of-Loans.pdf. This defies logic for many, where elsewhere under tax law >2% shareholders in S-Corporations are generally subject to the same rules and limitations on deductibility (but with different reporting mechanics for S-Corp owners) for these types of benefits as partners in partnerships and Schedule C filers, and it’s hard to see why the company’s tax structure should make any difference here for owners.

Also, the instructions fail to clarify the measurement period for inclusion of retirement contributions and the earned income upon which retirement contributions are based. For example, for profit-sharing contributions does the entire amount allowable based on 2019 earned income that is contributed during the “covered period” in 2020 qualify for forgiveness? Or is it limited to a pro-rata share of 2019 earned income and contributions? Or is the amount tied only to 2020 earned income, and if so for what period?

SBA states that additional guidance will be forthcoming. We hope that may clear up such issues.

First to recap, allowable costs for forgiveness under the CARES Act during the “covered period” discussed below include:

Payroll costs – Compensation to employees including salary, wages, commissions, or similar compensation, including:

  • Cash tips or the equivalent
  • Payments for leave
  • Allowance for separation or dismissal
  • Payments for employee benefits
  • Group health care coverage
  • Employer retirement contributions
  • Payment of state and local taxes (i.e. SUTA) assessed on the compensation of employees

Business Mortgage interest – Business interest on real or personal property for loans that were effect prior to 2/15/2020.

Business Rent – Business rent for real or personal property under a leasing agreement in effect prior to 2/15/2020.

Business Utilities – Includes payment for electricity, gas, water, transportation, telephone, or internet access where service was established prior to 2/15/2020.

EIDL – The borrower may include at their discretion certain SBA EIDL loan amounts.

The new form instructions provide detailed guidance on how to calculate forgiveness amounts for these costs along with additional rules and safe harbors.

Key provisions in this new guidance include:

  • Alternative Covered Period for Payroll Costs – The option for borrowers to calculate payroll costs using an “alternative payroll covered period” that aligns with borrowers’ regular payroll cycles. The instructions provide:

    Alternative Payroll Covered Period: For administrative convenience, Borrowers with a biweekly (or more frequent) payroll schedule may elect to calculate eligible payroll costs using the eight- week (56-day) period that begins on the first day of their first pay period following their PPP Loan Disbursement Date (the “Alternative Payroll Covered Period”).”

    Borrowers who elect to use the Alternative Payroll Covered Period must also measure employee health insurance, retirement plan contributions, and state and local taxes assessed on employee compensation during this same time period, but are required to track allowable nonpayroll costs such as rent, interest and utilities for the “Covered Period” (the first 56 days after the receipt of the first PPP loan amount).

  • Payroll Timing Flexibility – The instructions provide for flexibility to include eligible payroll and non-payroll expenses paid or incurred during the eight-week period after receiving their PPP loan as long as the same expenses are not counted more than once. The statute language previously posed significant problems for some borrowers based on how they handled payroll reporting periods relative to when earned amounts were paid.
    • Planning tip: Employers still may want to do some tactical payroll planning to increase payroll frequency if for example they are monthly or semi-monthly payers in order to squeeze more pay periods into their selected “covered period” for payroll.
    • Planning tip: Nothing in these instructions seems to limit bonus payments to employees. Thus, absent subsequent guidance to the contrary, employers may wish to consider accelerating bonus payments that might normally be paid later in the year or otherwise rewarding top-performing employees with bonuses during the “covered period” for payroll in order to maximize forgiveness while boosting retention for top employees.
  • FTE Clarification – The instructions address Full-Time Equivalent (“FTE”) rules used to determine forgiveness reductions and provide a safe harbor rule for simplification as follows:“Average FTE : This calculates the average full-time equivalency (FTE) during the Covered Period or the Alternative Payroll Covered Period. For each employee, enter the average number of hours paid per week, divide by 40, and round the total to the nearest tenth. The maximum for each employee is capped at 1.0. A simplified method that assigns a 1.0 for employees who work 40 hours or more per week and 0.5 for employees who work fewer hours may be used at the election of the Borrower.”Further, in the PPP Sch A instructions for line 11, the instructions state that “For each employee, follow the same method that was used to calculate Average FTE on the PPP Schedule A Worksheet”. The overriding intent seems to be consistency in the forgiveness calculation by measuring FTEs during the pre-COVID base period and the “covered period” for payroll purposes.
  • 75% Payroll Rule is not “all or nothing” – The ambiguous wording of the statute has left many perplexed with respect to the requirement that at least 75% of payments from loan funds must be used for payroll costs. This is addressed favorably in these new form instructions. The instructions resolve this by providing that “eligible nonpayroll costs cannot exceed 25% of the total forgiveness amount.” Thus, borrowers whose payroll costs expended during the “covered period” for payroll are less than 75% can still qualify for partial forgiveness.
  • Owner Compensation Limits – For PPP Schedule A, the Line 9 instructions state that “amounts paid to owners (owner-employees, a self-employed individual, or general partners)” are capped at $15,385 (the eight-week equivalent of $100,000 per year) for each individual or the eight-week equivalent of their applicable compensation in 2019, whichever is lower.” This rule seems to prevent business owners who took very little or zero compensation in 2019 from increasing amounts paid during their “covered period” for payroll purposes in 2020 to maximize forgiveness.
  • Payments in Arrears – The instructions allow for potential forgiveness inclusion on certain amounts of rent, utilities and interest paid in arrears, where such amounts are paid on or before the next regular billing date.
  • Rehiring – The instructions address the statutory exemptions from loan forgiveness reduction based on rehiring by June 30 and further provide for an exemption from loan forgiveness reduction where the employer makes a good-faith attempt to rehire workers who refuse to come back to work as follows:“FTE Reduction Exceptions: Indicate the FTE of (1) any positions for which the Borrower made a good-faith, written offer to rehire an employee during the Covered Period or the Alternative Payroll Covered Period which was rejected by the employee; and (2) any employees who during the Covered Period or the Alternative Payroll Covered Period (a) were fired for cause, (b) voluntarily resigned, or (c) voluntarily requested and received a reduction of their hours. In all of these cases, include these FTEs on this line only if the position was not filled by a new employee. Any FTE reductions in these cases do not reduce the Borrower’s loan forgiveness.”
    • Planning tip: Employers should document in writing as well as possible any attempts to rehire workers and any reply correspondence from prior employees who refuse to return to employment in order to support these attempts and help minimize any FTE-based reductions in forgiveness amounts.

Loan Forgiveness Documentation

Regarding documentation required to support forgiveness amounts, the form instructions provide as follows:

Documents that Each Borrower Must Submit with its PPP Loan Forgiveness Application

Payroll: Documentation verifying the eligible cash compensation and non-cash benefit payments from the Covered Period or the Alternative Payroll Covered Period consisting of each of the following:

    1. Bank account statements or third-party payroll service provider reports documenting the amount of cash compensation paid to employees.
    2. Tax forms (or equivalent third-party payroll service provider reports) for the periods that overlap with the Covered Period or the Alternative Payroll Covered Period:
      1. Payroll tax filings reported, or that will be reported, to the IRS (typically, Form 941); and
      2. State quarterly business and individual employee wage reporting and unemployment insurance tax filings reported, or that will be reported, to the relevant state.
    3. Payment receipts, cancelled checks, or account statements documenting the amount of any employer contributions to employee health insurance and retirement plans that the Borrower included in the forgiveness amount (PPP Schedule A, lines (6) and (7)).

FTE: Documentation showing (at the election of the Borrower):

    1. the average number of FTE employees on payroll per month employed by the Borrower between February 15, 2019 and June 30, 2019;
    2. the average number of FTE employees on payroll per month employed by the Borrower between January 1, 2020 and February 29, 2020; or
    3. n the case of a seasonal employer, the average number of FTE employees on payroll per month employed by the Borrower between February 15, 2019 and June 30, 2019; between January 1, 2020 and February 29, 2020; or any consecutive twelve-week period between May 1, 2019 and September 15, 2019.

The selected time period must be the same time period selected for purposes of completing PPP Schedule A, line 11. Documents may include payroll tax filings reported, or that will be reported, to the IRS (typically, Form 941) and state quarterly business and individual employee wage reporting and unemployment insurance tax filings reported, or that will be reported, to the relevant state. Documents submitted may cover periods longer than the specific time period.

Nonpayroll: Documentation verifying existence of the obligations/services prior to February 15, 2020 and eligible payments from the Covered Period.

    1. Business mortgage interest payments: Copy of lender amortization schedule and receipts or cancelled checks verifying eligible payments from the Covered Period; or lender account statements from February 2020 and the months of the Covered Period through one month after the end of the Covered Period verifying interest amounts and eligible payments.
    2. Business rent or lease payments: Copy of current lease agreement and receipts or cancelled checks verifying eligible payments from the Covered Period; or lessor account statements from February 2020 and from the Covered Period through one month after the end of the Covered Period verifying eligible payments.
    3. Business utility payments: Copy of invoices from February 2020 and those paid during the Covered Period and receipts, cancelled checks, or account statements verifying those eligible payments.

Documents that Each Borrower Must Maintain but is Not Required to Submit

PPP Schedule A Worksheet or its equivalent and the following:

    1. Documentation supporting the listing of each individual employee in PPP Schedule A Worksheet Table 1, including the “Salary/Hourly Wage Reduction” calculation, if necessary.
    2. Documentation supporting the listing of each individual employee in PPP Schedule A Worksheet Table 2; specifically, that each listed employee received during any single pay period in 2019 compensation at an annualized rate of more than $100,000.
    3. Documentation regarding any employee job offers and refusals, firings for cause, voluntary resignations, and written requests by any employee for reductions in work schedule.
    4. Documentation supporting the PPP Schedule A Worksheet “FTE Reduction Safe Harbor.”

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. 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 SBA, including representatives of its Office of Inspector General, to access such files upon request.”

    • Planning tip: While not required in the statute, regs or form instructions, it may be preferable for some borrowers to hold PPP loan funds in a separate bank account in order to more easily track funds spent and produce bank records for later submission and support.

Of course, it’s possible that some lenders may have additional documentation requirements, so borrowers should continue to check with their specific PPP lender for any additional guidance on what items they may require and how and when to submit those documents for forgiveness.

We will continue to update this PPP information on our website as more guidance becomes available.

Please contact our team of professionals if you would like assistance calculating or documenting PPP loan costs for maximum forgiveness.