On Friday, May 15, 2020, the Small Business Administration (“SBA”) and the Department of the Treasury released the Paycheck Protection Program (“PPP”) Loan Forgiveness Application (“Application”), along with step-by-step instructions on how to perform the calculations required by the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) to confirm eligibility for loan forgiveness. The SBA stated that it will also issue regulations and guidance to further assist borrowers as they complete their Applications and to provide lenders with guidance on their responsibilities.
The Application guides borrowers seeking to apply for forgiveness of their PPP loans at the conclusion of the eight-week (56-day) Covered Period, which begins with the disbursement of the loan funds. The Application also gives borrowers with bi-weekly payrolls the option to choose an Alternative Payroll Covered Period, which is an eight-week (56-day) period that begins on the first day of a borrower’s first pay period following the PPP loan disbursement date.
Costs Eligible for Forgiveness
Borrowers are generally eligible for forgiveness for the payroll costs paid and incurred during the Covered Period or Alternative Payroll Covered Period. 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.
Eligible non-payroll costs must be paid during the Covered Period (the Application leaves out “Alternative Payroll Covered Period” here) 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.
Cap on Owner Compensation
The Application requires borrowers to certify that the dollar amount for which forgiveness is requested does not exceed eight weeks’ worth of 2019 compensation for any owner-employee or self-employed individual/general partner, capped at $15,385 per individual. This requirement acts as a bar on using bonuses to owner-employees to fill shortfalls in expenses eligible for forgiveness.
Borrowers must maintain records relating to their PPP loans, including documentation submitted with their PPP loan applications, documentation supporting their certifications as to the necessity of the loan request and their eligibility for a PPP loan, documentation necessary to support the their loan forgiveness applications, and documentation demonstrating their material compliance with PPP requirements. Borrowers must retain all such documentation for six years after the date the loan is forgiven or repaid in full. Borrowers must permit authorized representatives of the SBA, including representatives of its Office of Inspector General, to access such files upon request.
FTE Reduction Exceptions
The Application defines average full-time equivalency (FTE) during the Covered Period or the Alternative Payroll Covered Period and provides FTE reduction exceptions for:
(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 (a) were fired for cause, (b) voluntarily resigned, or (c) voluntarily requested and received a reduction of their hours during the Covered Period or the Alternative Payroll Covered Period.
FTE Reduction Safe Harbor
The Application provides a FTE Reduction Safe Harbor that exempts certain borrowers from loan forgiveness reduction based on FTE employee levels. Specifically, the borrower is exempt from the reduction in loan forgiveness based on FTE employees if both of the following conditions are met:
(1) the borrower reduced its FTE employee levels in the period beginning February 15, 2020, and ending April 26, 2020; and
(2) the borrower then restored its FTE employee levels by no later than June 30, 2020, to its FTE employee levels in the Borrower’s pay period that included February 15, 2020.
To visit our COVID-19 Business Resource Center, including our previous Tax Law Alerts, click here