Many Paycheck Protection Program (PPP) loan borrowers are more than halfway through their eight-week forgiveness period (the “covered period,” beginning on the date of loan disbursement) yet there are still many unanswered questions concerning how a PPP loan is forgiven. On May 15, 2020, the Small Business Administration (SBA) answered some of these questions with the release of the PPP loan forgiveness application and accompanying instructions.
How to maximize PPP loan forgiveness
The basic framework for PPP loan forgiveness involves summing eligible expenditures made during a covered period to produce a forgivable loan amount.
Eligible Payroll Costs
The 60% rule
Eligible payroll expenses are the key to maximizing loan forgiveness because at least 60% of eligible expenditures giving rise to forgiveness during the covered period must relate to payroll. Fortunately, the new application confirms that failing to meet this 60% threshold only results in a proportionate reduction of the forgiveness amount, rather than total loss of forgiveness.
One issue for many borrowers is aligning their payroll periods with the eight-week covered period. Recognizing that borrowers could begin their covered period during the middle of a payroll period, the new application gives borrowers several choices.
These two rules will help many borrowers ensure that their full amount of eligible payroll expenses can be counted towards the PPP loan forgiveness amount. The alternate payroll covered period may only be applied to eligible payroll costs. Eligible nonpayroll costs are measured using the covered period.
Another issue is whether a bonus paid to entice employees to return to work counts as an eligible payroll expense for forgiveness purposes. The new application appears to permit bonus payments so long as the total payroll for an employee does not exceed $100,000 at an annualized rate (meaning no single employee can make more than $15,385 during the eight-week covered period). However, the eligible payroll for “owner employees” or “self-employed individuals/general partners” cannot exceed “eight weeks’ worth of 2019 compensation” for those individuals, likely precluding the payment of any special bonusses to these individuals. The terms “owner employees” and “self-employed individuals/general partners” are not further defined and there are no stated related party rules.
Employer Contributions to Benefits
The new application appears to require that employer contributions for health insurance and retirement plans be paid during the covered period in order to count as eligible payroll expenses. Employers accustomed to making year-end retirement plan contributions may have to adjust and pay a pro-rated portion of the retirement plan contributions during the covered period in order for those contributions to count towards forgiveness.
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Eligible Nonpayroll Costs
Up to 40% of the eligible costs resulting in forgiveness can relate to non-payroll expenses. Eligible non-payroll costs include:
The new application further defines rent obligations to include “business rent or lease payments” for “real or personal property” in force before February 15, 2020. The inclusion of personal property is a welcome addition for many borrowers.
The PPP loan statute confusingly uses the terms “costs incurred” and “payments” made during the covered period. The new application states eligible nonpayroll 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 that billing date falls after the covered period). Allowing for eligible expenditures to be paid but not necessarily incurred during the covered period could allow for some borrowers to include extra eligible nonpayroll costs in their forgiveness calculation.
FTE and Salary Reduction
A borrower’s forgiveness amount can be reduced if they do not maintain the average number of full time equivalent (FTE) employees during the covered period (or alternative covered period) as compared to the borrower’s chosen reference period (generally, for non-seasonal employers, February 15, 2019, to June 30, 2019, or January 1, 2020, to February 29, 2020). The new application defines one FTE to equals 40 hours per week. A single employee can not count for more than a single FTE, and borrowers can either compute the average FTE for each employee working less than 40 hours, or adopt a simplified method assigning one FTE for employees working 40 hours or more per week and .5 FTE for employees working less than 40 hours per week.
Borrowers can avoid any forgiveness reduction if they restore their FTE averages by June 30 or if the borrower (who reduced FTE levels in the period between February 15 and April 26, 2020) restores its FTE levels by not later than June 30 to its FTE level on February 15, 2020. Also, borrowers making a “good faith” written offer to rehire an employee that is rejected by the employee will not have to take that employee’s position into account for purposes of the FTE reduction calculation.
A borrower’s forgiveness amount can also be reduced by any salary reductions for specific employees (generally employees making less than $100,000 at an annualized rate) during the covered period. Generally, a borrower computes an employee’s average annual salary or hourly wage during the covered period (or alternative covered period) and compares the result to the average annual salary for the period between January 1 and March 31, 2020. Borrowers restoring any salary or wage reductions by certain time periods can avoid the forgiveness reduction.
Importantly, “owner employees” and “self-employed individuals/general partners” are not included in either the FTE or salary reduction calculations.
Finally, the new application adopts a borrower friendly ordering rule by applying the salary reduction amount before the FTE reduction amount.
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The new application also includes a documentation list that a borrower must submit to its lender along with its forgiveness application:
Learn More About PPP Forgiveness
This new application provides important additional details on the PPP loan forgiveness stage. As always, though, there are still many unanswered questions, and commentators expect additional guidance (in the form of questions and answers and interim rules) to provide further clarity on how PPP loans are forgiven.
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