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PPP Changes Ease Loan Forgiveness

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(Updated  June 24, 2020)

UPDATE:  The deadline to apply for a PPP loan is June 30, 2020. 

  • As of June 20th, approximately $100 Billion remains in the program and available for loans.
  • The modified forgiveness terms makes it much easier to ensure your loan is forgiven.

In an effort to address limitations of the Payroll Protection Program (PPP) loans, the Senate passed, and the President sigened, a House version of the legislation to update the program.

As a PPP borrower:

  • You can optionally extend the eight-week period to 24 weeks, making it easier to reach full forgiveness.
  • Your payroll expenditure requirement changes to 60% from 75%, but is now “all or nothing” instead of scaled based on percentages.
  • You can use the 24-week period to restore staffing and wages to the levels needed for full forgiveness. The deadline is also extended to December 31, 2020 from June 30, 2020.
  • You may be able to invoke one of three exceptions if unable to fully restore the workforce.
    1. You can exclude employees who turned down good faith offers to be rehired at the same hours and wages as before the pandemic.
    2. You can adjust calculations if you cannot find qualified employees
    3. You can adjust calculations if you are unable to restore business operations to Feb 15, 2020 levels due to on-going COVID-19 operating restrictions.
  • You now have five years to repay the loan instead of two years
  • Your interest rate remains at 1.00%
  • You are now eligible to defer payroll taxes under the CARES Act, even though you are a PPP borrower.

PPP Loan Forgiveness Application and Guidance

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(Published 5/18/20)

The Small Business Administration published the Loan Forgiveness Application and instructions for Payroll Protection Program (PPP) loans. Like the original PPP loan and program information, the guidance provided in the instructions is not fully defined or clear.

Here is some guidance collated from multiple sources including Forbes, AICPA, and several accounting firms.

Application

The application has four components:

  1. PPP Loan Forgiveness Calculation Form;
  2. PPP Schedule A;
  3. PPP Schedule A Worksheet;
  4. (Optional) PPP Borrower Demographic Information Form.

Borrowers are required to submit items (1) and (2) to their lender, a long with a list of supporting documents. You lender may require additional supporting documentation.

You must attest to certain certifications on the forgiveness application.  Note that while some are similar to the PPP loan applications, there are new, specific certifications. Read and understand these certifications before your Authorized Representative signs the application.

The application requires that borrowers who, along with its affiliates, received aggregate PPP funds over $2 million, check a box alerting the SBA to the size of the aggregate loan. If this may apply to you, seek legal guidance with respect to your loans and the affiliation rules.

Forgivable Costs

The Covered Period for forgiveness is the eight-week (56 day) period beginning with receipt of funds.

The SBA’s guidance provides for four broad categories of costs that are eligible for forgiveness, as covered below. With some exceptions, these costs are forgivable as incurred, or paid, during this period provided that at least 75% of incurred costs are attributable to payroll costs. Costs must incurred or paid during your Covered Period.

1. Payroll costs

The SBA guidance allows you to request forgiveness for payroll costs “incurred” or “paid” during your Covered Period, or an Alternate Payroll Covered Period aligned with the start of the first payroll period after receipt of PPP funds.  Incurred costs are recognized on the day they are earned; paid costs are recognized on the day paychecks are distributed or the ACH transaction is made. If your pay periods do not line up with your Covered Period, you may included incurred payroll costs not yet paid if they are paid on the next pay date.

Payroll costs include:

    • Cash Compensation, such as:
      • Gross salary / gross wages (Up to $15,385 — the equivalent of $100,000 per year — per employee)
      • Gross tips
      • Gross commissions
      • Paid leave (excepting leave covered by the FFCRA)
      • Allowances for dismissal or separation
    • Non Cash Compensation, per SBA guidance, includes the total amounts of:
      • Employer contributions for employee health insurance, excluding pre- or post tax employee contributions
      • Employer contributions to employee retirement plans, excluding pre- or post tax employee contributions
      • State and local taxes assessed on employee compensation, excluding taxes withheld from employee earnings

Payroll costs include compensation to owners at the lower of the $15,385 or the 8-week equivalent of owners’ compensation during 2019.

2. Business Mortgage Interest

The SBA guidance allows for forgiveness of business mortgage interest payments during the Covered Period for any mortgage obligation in place before February 15, 2020.

3. Business Rent or Lease

The SBA guidance allows for forgiveness of business rent or lease payments on real or personal property during the Covered Period for any lease agreements in place before February 15, 2020.

4. Business Utility Payments

SBA guidance allows forgiveness of business utility payments for services in place before February 15, 2020, including:

    • Electricity
    • Gas
    • Heating Oil
    • Water
    • Telephone
    • Internet Access
    • Transportation

Limitations

In addition to payroll limitations and the required payroll cost percentages, the CARES Act limits forgiveness if you reduce the average number of full-time equivalents (FTEs) during your Covered Period as compared with your past reference period (per your application).  The SBA guidance provides for an exception if a new FTE Reduction Safe Harbor applies.

Calculating FTEs

Per the SBA, you can calculate your FTEs in one of two ways:

    1. Enter the average number of hours paid per week for each employee during the Covered Period or the Alternative Payroll Covered Period, divide by 40, and round the total to the nearest tenth.  The maximum for each employee, however, is capped at 1.0.
    2. Assign a 1.0 for employees who work 40 hours or more per week; 0.5 for employees who work less than 40 hours.
FTE Reduction Exceptions

The SBA allows for exceptions and does not penalize your for FTE reductions due to one of the following conditions:

    1.  Reduction related to any positions for which you made a good-faith, written offer to rehire an employee during your Covered Period or Alternate Payroll Covered Period that was rejected by the employee.
    2. Reductions during your Covered Period or Alternate Payroll Covered Period for employees who (a) were fired for cause, (b) voluntarily resigned, or (c) voluntarily requested and received a reduction in hours.
FTE Reduction Safe Harbor

The SBA also recognizes a safe harbor that may keep you from losing loan forgiveness based on a reduction in your FTE level.  You are exempt under Safe Harbor if (1) you reduced your FTE levels in the period beginning February 15, 2020, and ending April 26, 2020; AND (2) no later than June 30, 2020, you restored your FTE level to that in place for the pay period including February 15, 2020.

Salary / Hourly Wage Reductions

The CARES Act reduces your loan forgiveness amount if you reduced certain employee salary and wages by more than 25% during your Covered Period or Alternate Payroll Covered Period when compares with the period from January 1, 2020 to March 31, 2020.

Additional Guidance

Prepayments

  • You may not include prepayment of costs not yet incurred in your forgiveness calculations.

EIDL Advances

  • Any Economic Injury Disaster Loan (EIDL) advances, typically $1,000 per employee up to a maximum of $10,000, will be a direct reduction from your final PPP loan forgiveness.

Loan Interest

  • While the CARES Act includes as an allowable use of the loan to be ““interest on any other debt obligations that were incurred before the covered period,” the SBA guidance does not include this on the forgiveness application.
  • While you may use PPP funds for this purpose, you should not include these costs on your forgiveness application without specific professional guidance.

Health Insurance

  • The definition of “health insurance” is not clear.
  • Obtain professional guidance with respect to including or excluding dental, vision, and other insurance expenses from the forgivable cost calculation.

As you plan your COVID-19 response and recovery, our Recovery Road Map Assessment can help you plan and execute your next steps. Contact us for more information.

 

SBA Clarifies “Good-Faith” Certification for PPP Loans

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(Published 5/13/20)

The US Small Business Administration, today, published and update to the PPP Frequently Asked Questions (PDF) to clarify confusion regarding loan audits and the “Good Faith” certification of need signed as part of the loan application process and form. The SBA added Question 46 as, “How will SBA review borrowers’ required good-faith certification concerning the necessity of their loan request?”

To summarize the impact

  • PPP loans under $2 million will not be audited.
  • Affiliated PPP loans will be consolidated for audit purposes.
  • The term “current economic uncertainty which makes the PPP loan request necessary to support the ongoing operations” was not clearly defined. Audits will most likely be based on individual facts and circumstances for each borrower.
  • Borrowers and affiliated borrowers with loans in excess of $2 million should be prepared to support their need of a PPP loan with documentation.

The full content of the question and answer is quoted as follows:

Question: How will SBA review borrowers’ required good-faith certification concerning the necessity of their loan request?

Answer: When submitting a PPP application, all borrowers must certify in good faith that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” SBA, in consultation with the Department of the Treasury, has determined that the following safe harbor will apply to SBA’s review of PPP loans with respect to this issue: Any borrower that, together with its affiliates, received PPP loans with an original principal amount of less than $2 million will be deemed to have made the required certification concerning the necessity of the loan request in good faith.

SBA has determined that this safe harbor is appropriate because borrowers with loans below this threshold are generally less likely to have had access to adequate sources of liquidity in the current economic environment than borrowers that obtained larger loans. This safe harbor will also promote economic certainty as PPP borrowers with more limited resources endeavor to retain and rehire employees. In addition, given the large volume of PPP loans, this approach will enable SBA to conserve its finite audit resources and focus its reviews on larger loans, where the compliance effort may yield higher returns.

Importantly, borrowers with loans greater than $2 million that do not satisfy this safe harbor may still have an adequate basis for making the required good-faith certification, based on their individual circumstances in light of the language of the certification and SBA guidance. SBA has previously stated that all PPP loans in excess of $2 million, and other PPP loans as appropriate, will be subject to review by SBA for compliance with program requirements set forth in the PPP Interim Final Rules and in the Borrower Application Form. If SBA determines in the course of its review that a borrower lacked an adequate basis for the required certification concerning the necessity of the loan request, SBA will seek repayment of the outstanding PPP loan balance and will inform the lender that the borrower is not eligible for loan forgiveness. If the borrower repays the loan after receiving notification from SBA, SBA will not pursue administrative enforcement or referrals to other agencies based on its determination with respect to the certification concerning necessity of the loan request. SBA’s determination concerning the certification regarding the necessity of the loan request will not affect SBA’s loan guarantee.