Client Alert: More Questions Answered in the PPP Loan Forgiveness Application
In the evening on Friday, May 15, 2020, the SBA issued the long-awaited Paycheck Protection Program Loan Forgiveness Application and its instructions
(the “Application”). The Application provides a step-by-step process that will ultimately lead borrowers to a determination of the amount of their PPP loan that can be forgiven. The presentation of information in the Application may help borrowers conceptualize the forgiveness process, and we encourage all borrowers to review the Application and ask questions of their attorneys, accountants and other professional advisors.
The Application has four components: (1) the PPP Loan Forgiveness Calculation Form; (2) PPP Schedule A; (3) the PPP Schedule A Worksheet; and (4) an (optional) PPP Borrower Demographic Information Form. Borrowers are required to submit items (1) and (2) to their lender and to keep item (3) in their records. The PPP Schedule A Worksheet must be completed on an employee-by-employee basis, so borrowers with greater numbers of employees will want to start preparing the PPP Schedule A Worksheet sooner rather than later.
In addition to providing a roadmap of the forgiveness calculation, the Application provides quite a bit of additional guidance that the SBA has not yet released in an FAQ or Interim Final Rule:
- A New Payroll Cost Measuring Period.
Borrowers with a bi-weekly (or more frequent) payroll period are permitted to use an “Alternative Payroll Covered Period,” which addresses the concern of payroll periods split up by the default 8-week covered period. Such borrowers 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. This Alternative Payroll Covered Period only applies for payroll costs, and not for the non-payroll costs included as part of the forgiveness calculation.
- Clarification of “Incurred and Paid” for Payroll Costs.
The Application provides clarity on the definition of “incurred and paid,” including an ability to include amounts that may not be paid during the 8-week period. Payroll costs are considered incurred on the day that the employee’s pay is earned. Payroll costs are considered paid on the day that paychecks are distributed or the Borrower originates an ACH credit transaction. 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. Otherwise, payroll costs must be paid during the Covered Period (or Alternative Payroll Covered Period).
- Clarification of “Incurred and Paid” for Non-Payroll Costs.
An eligible non-payroll 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. Note that non-payroll costs must be determined based on the typical 8-week covered period and not an Alternative Payroll Covered Period.
- Expanded Scope of Non-Payroll Costs.
The Application states that covered mortgage obligations include any business mortgage obligation on real or personal property. This appears to mean that any secured debt obligation on real or personal business property may give rise to non-payroll costs that are eligible for forgiveness, for interest payments only.
The Application also makes clear that “covered rent obligations” include not only real property rent agreements, but also lease agreements for personal property. Based on this, for example, equipment leases in effect prior to February 15, 2020, are an eligible use for PPP loan proceeds and a cost eligible for forgiveness.
- An Explanation for Calculating FTEs.
The Application provides firm guidance on how borrowers should calculate FTEs: For each employee, on the PPP Schedule A worksheet, borrowers will enter the average number of hours paid per week, divide by 40, and round the total to the nearest tenth. A simplified method may be used at the election of the Borrower that assigns a 1.0 for employees who work 40 hours or more per week and 0.5 for employees who work fewer hours.
For example, say Simpsons Co. borrowed a $100,000 PPP loan on April 10, 2020, and incurred $100,000 of costs eligible for forgiveness over the next 8 weeks. For the 8-week period beginning April 20, Simpsons Co. had the following employees:
- Marge, who averaged 45 hours per week during the period,
- Lisa, who averaged 40 hours per week during the period,
- Maggie, who averaged 28 hours per week,
- Homer, who averaged 16 hours per week, and
- Bart, who averaged 12 hours per week.
For the 8-week covered period, Simpsons Co. had 3.4 FTEs:
- Marge: 45/40 capped at 1.0
- Lisa: 40/40 = 1.0
- Maggie: 28/40 = .7
- Homer: 16/40 = .4
- Bart: 12/40 = .3
If Simpsons Co. chose instead to use the simplified method, it would have 3.5 FTEs:
- Marge: 45/40 capped at 1.0
- Lisa: 40/40 = 1.0
- Maggie: 28/40 = .5
- Homer and Bart: 20/40 = .5 each
Whichever method Simpsons Co. chooses to use, it must continue to use throughout the Application.
- New Reduction in FTEs Safe Harbors
The amount of loan forgiveness may be reduced if the borrower reduces FTE headcount during the covered period, which may be ignored if a safe harbor is satisfied. A borrower’s forgiveness is reduced if its average number of FTEs during the covered period is less than the average number of FTEs for any of the following periods, at the borrower’s election:
- The period beginning on February 15, 2019, and ending on June 30, 2019,
- The period beginning on January 1, 2020, and ending on February 29, 2020, or
- For a seasonal employer, as determined by the SBA, either of the two previous periods or any 12-week period between May 1, 2019, and September 15, 2019.
A borrower may ignore the required reduction, however, if a safe harbor is met. To satisfy the safe harbor, the borrower must first use the methodology described above to determine FTEs for two additional periods:
- The period from February 15, 2020, through April 26, 2020, and
- For the pay period that includes February 15, 2020.
If the average FTEs for the first period is less than the FTEs for the second period, the borrower must then compare the average FTEs for the second period to the total FTEs as of June 30, 2020. If the FTEs on June 30, 2020, are greater than the FTEs on February 15, 2020, the safe harbor is met and no reduction is required.
As another exception, if the borrower can return its number of FTEs at June 30, 2020, to the level it had at February 15, 2020, the forgiveness will not be reduced, even if the February 15, 2020, numbers are less than they were in 2019 or the average of the first two months of 2020.
There are final safe harbors where the exit of a specific employee is disregarded. If an employer can show that it made a good-faith, written offer to rehire an employee during the covered period but was rejected by the employee, then that reduction in headcount will not result in a reduction in forgiveness. The same is true if an employee was fired for cause, voluntarily resigned, or voluntarily requested and received a reduction in hours. In each of these cases, so long as that employee was not replaced, that employee counts as a “1.0” in the FTE calculation.
- Identification of Required Documentation
The Application groups the documentation borrowers are required to provide into four categories, Payroll, FTE, Non-Payroll and "Maintained but not Submitted."
Payroll documentation includes documentation to verify the eligible cash compensation and non-cash benefit payments from the covered period or the Alternative Payroll Covered Period consisting of:
- Bank account statements or third-party payroll service provider reports documenting the amount of cash compensation paid to employees.
- Tax forms (or equivalent third-party payroll service provider reports) for the periods that overlap with the Covered Period or the Alternative Payroll Covered Period: payroll tax filings reported, or that will be reported, to the IRS (typically, Form 941); and state quarterly business and individual employee wage reporting and unemployment insurance tax filings reported, or that will be reported, to the relevant state.
- Payment receipts, cancelled checks, or account statements documenting the amount of any employer contributions to employee health insurance and retirement plans that the Borrower included in the forgiveness amount.
FTE documentation includes documentation verifying the number of full-time equivalent employees on payroll and pay rates for (at the election of the borrower): (i) the average number of FTE employees on payroll per month employed by the Borrower between February 15, 2019, and June 30, 2019; (ii) the average number of FTE employees on payroll per month employed by the Borrower between January 1, 2020, and February 29, 2020; or (iii) in the case of a seasonal employer, the average number of FTE employees on payroll per month employed by the Borrower between February 15, 2019, and June 30, 2019; between January 1, 2020, and February 29, 2020; or any consecutive twelve-week period between May 1, 2019, and September 15, 2019. Documents may include payroll tax filings reported, or that will be reported, to the IRS (typically, Form 941) and state quarterly business and individual employee wage reporting and unemployment insurance tax filings reported, or that will be reported, to the relevant state. Documents submitted may cover periods longer than the specific time period.
Non-payroll documentation must verify the existence of the obligations or services prior to February 15, 2020, and eligible payments from the covered period.
- Business mortgage interest payments: Copy of lender amortization schedule and receipts or cancelled checks verifying eligible payments from the covered period; or lender account statements from February 2020, and the months of the covered period through one month after the end of the covered period verifying interest amounts and eligible payments.
- Business rent or lease payments: Copy of current lease agreement and receipts or cancelled checks verifying eligible payments from the covered period; or lessor account statements from February 2020, and from the covered period through one month after the end of the covered period verifying eligible payments.
- Business utility payments: Copy of invoices from February 2020, and those paid during the covered period and receipts, cancelled checks, or account statements verifying those eligible payments.
The documentation maintained but not submitted includes
- PPP Schedule A Worksheet or its equivalent.
- Documentation supporting the listing of each individual employee in PPP Schedule A Worksheet Table 1, including the “Salary/Hourly Wage Reduction” calculation, if necessary.
- Documentation supporting the listing of each individual employee in PPP Schedule A Worksheet Table 2; specifically, that each listed employee received during any single pay period in 2019 compensation at an annualized rate of more than $100,000.
- Documentation regarding any employee job offers and refusals, firings for cause, voluntary resignations, and written requests by any employee for reductions in work schedule.
- Documentation supporting the PPP Schedule A Worksheet “FTE Reduction Safe Harbor.”
- All records relating to the Borrower’s PPP loan, including documentation submitted with its PPP loan application, documentation supporting the Borrower’s certifications as to the necessity of the loan request and its eligibility for a PPP loan, documentation necessary to support the Borrower’s loan forgiveness application, and documentation demonstrating the Borrower’s material compliance with PPP requirements.
- The Application provides that borrowers must retain all their non-submitted documentation in their files for six years after the date the loan is forgiven or repaid in full, and permit authorized representatives of SBA, including representatives of its Office of Inspector General, to access such files upon request.
Further, the Application requires a certification signed by the authorized representative for the borrower attesting to the accuracy of the information in the Application, and the documentation provided and that the PPP loan proceeds were used for eligible purposes. Thus, any errors in the form, if made knowingly, or with reckless disregard for the truth, could subject the borrower to False Claims Act liability, or, in serious cases of intentional falsity, wire fraud or major fraud against the United States that carry criminal penalties.
One area where the Application does not provide additional guidance is the scope of “utilities” payments which give rise to loan forgiveness. Because borrowers will be required to document any expenses for which they claim forgiveness, borrowers may want to include any utility payments for gas, electric, water, transportation, telephone and Internet services, so long as the borrower has a reasonable basis for doing so, so that the lender or the SBA can make that final determination. As mentioned above, however, the borrower must certify that the PPP loan proceeds were used for eligible purposes, so borrowers should continue to monitor SBA releases for additional clarifications regarding the scope of forgivable utilities costs and carefully consider their reasonable basis for taking any aggressive positions on expenditures including in their forgiveness application.
The information contained here is not intended to provide legal advice or opinion and should not be acted upon without consulting an attorney. Counsel should not be selected based on advertising materials, and we recommend that you conduct further investigation when seeking legal representation.