SBA Clarifies Rules for PPP Loan Forgiveness

The SBA has finally released the detailed PPP Loan Forgiveness Application.  You can find the SBA Application here. Below are some clarifications and highlights.

Some of the key items clarified include:

  • The creation of a new Alternate Covered Period allowing employers to align their 8 Week Period with the beginning of the next Pay Period following loan disbursement
  • Definition of a Full-Time Equivalent Employee using a 40 hour per week threshold
  • Rent expenses include both real and personal property
  • Calculation rules for the Wage/Salary Reduction Provisions

Computing Payroll Costs

Employers have been grappling with how to neatly fit their pay periods and pay Dates within the 8 Week Covered Period which was to begin on the Loan Disbursement Date.   The SBA has finally provided flexibility to employers.  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”)

The Cares Act legislation states that “costs incurred and payments made” during the Covered Period are eligible for forgiveness.   The SBA clarifies that:

  • Payroll costs are considered paid on their pay date
  • 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 are eligible for forgiveness if paid on or before the next regular payroll date.

The above clarifications eliminate the need for employers to change their pay date for their last pay period to try to squeeze it into their 8 Week Covered Period.

The SBA also provides the prorated limit for employees who have wages in excess of an annual salary of $100,000.  This prorated amount per employee for the 8 Week Covered Period is a total of $15,385.

Special Rules for Owner-Employees

There is a special limit on the amount of payroll costs for owner-employees.   Owner’s payroll costs cannot exceed eight weeks’ worth of 2019 compensation or $15,385, whichever is lower.  This is presumably intended to limit the ability of a company to add in a bonus for the owner to reach the $15,385 maximum. Additionally, owner-employees are not included in the FTE and Wage Reduction Rules Applicable to Loan Forgiveness Reduction.  Notably, there is no definition of what constitutes an “Owner-employee.”  

Computing Non-Payroll Costs

The SBA provides a listing of non-payroll costs eligible for loan forgiveness and further clarifies that rent and payments of interest on mortgages apply to both real and personal property.  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 cycle, even if it is after the end of the Covered Period.  

The instructions also clarify that the 75% rule (limiting nonpayroll costs to no more than 25% of the total forgiveness amount) is not an “all or nothing rule.”  Some feared that if an employer’s nonpayroll costs exceeded 25% of the total forgiveness amount then none of the loan would be forgiven.   The instructions limit the 75% payroll cost test to apply only to the maximum loan forgiveness amount. 

Loan Forgiveness Reduction:  Calculating FTEs

The SBA provides detailed steps within its worksheet to calculate Loan Forgiveness Reduction due to a reduction of FTEs. Employers may use the Alternative Payroll Covered Period for the Calculation (meaning you may start with your first pay period after loan disbursement).  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. The instructions also state that employers may use a more 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. 

The SBA points out some additional FTE reduction exceptions which will not reduce the employer’s loan forgiveness.   Any positions for which an employer made a good faith written offer to rehire the employee for the same hours and rate during the Covered/Alternate Period which was rejected by the employee may be excluded so long as the position was not filled by a new employee.  Additionally, employees who were fired for cause, voluntarily resigned or voluntary requested and received a reduction of hours during the Covered/Alternate Period may be excluded so long as their position was not filled by a new employee.

Loan Forgiveness Reduction: Calculating Wage Reductions

The SBA has implemented some employer friendly rules with respect to the wage reduction calculation.  First, employees who did not work for the employer during the Covered/Alternate Period are excluded from the calculation.  Employers were concerned they would be penalized for employees who were employed in 1stQuarter 2020 but no longer work for the employer during the Covered Period.  Second, the SBA used a commonsense approach to compare the 8-Week Covered Period to the 12-Week quarter one wages.   The SBA allows employers to annualize the salaries and wage rates to more accurately compare the two periods.  The SBA Application Worksheets provide tables and detailed instructions to calculate the wage reduction by employee.  

Loan Forgiveness Supportive Documentation

The SBA lays out a listing of documentation that should be submitted along with the loan forgiveness application including:

  • Third-party payroll service provider reports showing cash compensation paid to employees
  • Tax Forms (or equivalent third-party payroll service provider reports) for the periods that overlap the Covered/Alternate Period. This would include 941s, state quarterly wage and unemployment tax filings
  • Payment receipts, cancelled checks, or account statements documenting the amount of any employer contributions to employee health insurance and retirement plans included in the forgiveness amount
  • Documentation showing FTES for the relevant application periods
  • For non-payroll costs the employer should retain loan amortization schedules, lease agreements, and receipts and cancelled checks verifying eligible payments for the Covered Period, and invoices and payments for business utilities during the Covered Period

The instructions also provide a list of items that do not need to be submitted with the application for forgiveness but must be maintained by the employer in the event the SBA may request that they be produced.   The SBA indicates that all supporting documentation for the loan and loan forgiveness must be retained by the employer for six years after the date the loan is forgiven or repaid in full. 

 How can CTR assist?

We have been anxiously awaiting these clarifications from the SBA so that we may provide you with accurate tools to assist you with your loan forgiveness calculations and supporting documentation.  We will be working with the isolved Development team to incorporate these changes into a Loan Forgiveness report that will assist you with completing this application.  

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