SBA Releases Paycheck Protection Program Forgiveness Application
By: Timothy Lynn
SBA has released the Paycheck Protection Program Loan Forgiveness Application — available here.
Costs Eligible for Forgiveness
The application provides the following instructions:
Eligible payroll costs.
- Payroll costs paid and payroll costs incurred during the eight-week (56-day) Covered Period (or Alternative Payroll Covered Period) (“payroll costs”).
- Payroll costs are considered paid on the day that paychecks are distributed or the Borrower originates an ACH credit transaction.
- Payroll costs are considered incurred on the day that the employee’s pay is earned.
- Payroll costs incurred but not paid during the Borrower’s last pay period of the Covered Period (or Alternative Payroll Covered Period) are eligible for forgiveness if paid on or before the next regular payroll date.
- For each individual employee, the total amount of cash compensation eligible for forgiveness may not exceed an annual salary of $100,000, as prorated for the covered period.
Eligible nonpayroll costs. Nonpayroll costs eligible for forgiveness consist of:
- covered mortgage obligations: payments of interest;
- covered rent obligations; and
- covered utility payments: business payments for a service for the distribution of electricity, gas, water, transportation, telephone, or internet access for which service began before February 15, 2020 (“business utility payments”).
An eligible nonpayroll cost 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. Eligible nonpayroll costs cannot exceed 25% of the total forgiveness amount. Count nonpayroll costs that were both paid and incurred only once.
It is notable that forgiveness includes costs pair or incurred during the 56-day Covered Period.
Covered Period and Alternative Covered Period
The Covered Period is the 56 day period commencing on the date that the PPP Loan was funded. For employers who have biweekly or more frequent pay periods, the employer may elect to use a 56 day period commencing on the first day of the payroll period commencing after the date the PPP Loan was funded.
The Alternative Covered Period is intended to provide administrative convenience to the employer so that it does not need to split up pay periods. However, it may also provide some limited relief to employers affected by mandatory shutdowns by providing up to a 12 day delay in the commencement of the 56 day period (12 days being the maximum for an employer who has biweekly pay periods and closes the loan on the second day of the pay period).
Eligible Payroll Costs
The instructions count payroll costs incurred during the 56 day period, including wages paid during the 56 day period and wages for days worked within the 56 day period but paid later, so long as paid on or before the next regular payroll date. For employers using the Covered Period, an analysis should be performed to maximize the benefits of the forgiveness. Those using the Alternative Covered Period should not have any adjustments to make.
It appears that the Covered Period must be used for non-payroll costs (the Alternative Covered Period is only used for payroll costs). It is notable that eligible non-payroll costs includes costs incurred but not yet billed that occur during the 56 day covered period.
Utility costs include electricity, gas, water, transportation, telephone, and internet access. With the disruptions in the workplace and employees working remotely, businesses might consider whether there are additional costs that might be paid by the business for employee costs that might trigger forgiveness.
It appears that non-payroll costs are calculated as follows: rent paid during the Covered Period is an eligible expenditure, together with rent for any “tail period” if paid in arrears.
Limitations for Reductions in Employee Counts or Compensation
Borrowers calculate any limitations on forgiveness on Schedule A to the Application for Loan Forgiveness. The Worksheet provided with Schedule A provides the calculations for any limitations.
A few items of note:
- The worksheet is completed for any employee whose average salary/hourly wage is reduced by more than 25% during the Covered Period or Alternative Covered Period as compared to the period from January 1, 2020 to March 31, 2020.
- The Safe Harbor is met if annualized salary/hourly wage for either the period between February 15, 2020 and April 26, 2020 or as of June 30, 2020 is greater than annualized salary/hourly wage as of February 15, 2020.
- Hourly wage reductions is based upon reduction in hours worked. Salaried employees are calculated on a 52 week basis.
- For the average full-time equivalent (FTE) employee limitation, the calculation is based upon a 40 hour work week. Employers may elect to assign a 1.0 to every employee who works 40 hours per week and 0.5 for any employee who works less than 40 hours. Otherwise, the ratio is the number of hours worked divided by 40. The maximum for any employee is a 1.0 (even if they work more than 40 hours).
An exception is provided with respect to lost employees if:
- if the employer made a good faith, bona fide written offer to rehire an employee during the Covered Period or Alternative Covered Period, as the case may be, and the employee rejected that offer;
- Employees fired for cause;
- Employees who voluntarily resigned; or
- Employees who voluntarily requested and received a reduction in hours.
For the reduction due to reductions in Average FTEs, the June 30th safe harbor is satisfied if the employer restores employment levels by June 30th to the levels at the time of the employer’s pay period that included February 15, 2020.