On Friday, May 15, the SBA, in consultation with the Department of the Treasury, released an application and instructions for PPP loan forgiveness. While it does not answer all of our questions, and creates a few new questions, the 11 pages of application and instructions are certainly better than the sparse details we’ve been living with since March 27th. The application is available for download here:
We are certain this is not the end and expect additional guidance will continue to be released in the coming days and weeks. We’ve itemized a summary of some of the important details included in the application and instructions below.
- Payroll Costs. Payroll costs are eligible for forgiveness if (a) paid during the 8 week period or if (b) incurred at the end of the 8 week period and paid on the next pay date after the 8 week period ends. Thus, payroll costs do not have to be both incurred and paid during the 8 week PPP period. Payroll costs are considered paid on the date employees are paid (via check or ACH) and are incurred on the day they are earned.
As written, we believe this means you could have more than 8 weeks (or 56 days) of payroll costs eligible for forgiveness. We would like to see this matter specifically addressed in future guidance. Eligible payroll costs for any employee can not exceed $15,385 ($100,000 divided by 52 weeks times 8 weeks).
- Alternative Payroll Period. Borrowers who normally pay on a weekly or bi-weekly pay cycle may elect a 56-day period that aligns with regularly scheduled pay periods. Example: Borrower received PPP loan proceeds on Monday April 20th, and the next regular pay period following its PPP loan disbursement begins Sunday, April 26th. The first day of the Alternative Payroll Covered period is April 26th and the last day of the Alternative Payroll Covered Period is Saturday June 20. Borrowers will need to evaluate and decide if this is a better result than the default 8 weeks beginning on the loan disbursement date. It appears that the alternative payroll period is limited to 56 days whereas the default method may provide the opportunity include more than 56 days, as described above.
- Owner Compensation. An additional limitation was added that provides owner compensation cannot exceed the lesser of $15,385 or the 8 week average of the 2019 compensation amount for each owner. Thus, an owner cannot pay himself or herself a higher pay rate during the 8 week period than they did in 2019.
- Nonpayroll costs. Rent, mortgage interest, and utilities are also eligible for forgiveness if (a) paid during the 8 week period or if (b) incurred during the 8 week period and paid by next regular due date of each specific bill. All of these type costs must have been incurred or in force before February 15, 2020. For example, a power bill paid after the 8 week period for service during the 8 week period qualifies for forgiveness. Like payroll costs, we interpret this to mean you could have more than 8 weeks (or 56 days) of non-payroll costs eligible for forgiveness. The Alternative payroll period does not apply to non-payroll costs, which will follow the default 8 weeks from the date of the loan.
- Rent. The application clarifies that both real and personal property rent or leasing arrangements are eligible for forgiveness. This means copy machines, vehicles, and leases of business equipment are eligible. For PPP purposes, we do not believe it matters if the lease is treated as a capital or operating lease for accounting purposes.
- Mortgage Interest. The application also clarifies that interest (not principal) on any real or personal property mortgage obligations is eligible for forgiveness. We believe interest paid on equipment and/or vehicle notes payable are intended to qualify, even if those financing instruments are not technically the same as a mortgage.
- Utilities. Utilities include electricity, gas, water, transportation, telephone, and internet. We believe cellular telephone counts. Additional guidance is needed to clarify exactly what is meant by “transportation”.
- Employee Benefits and State Taxes. The employer portion of health insurance and retirement plan contributions are eligible for PPP forgiveness, along with state unemployment insurance premiums. These three expenses are the only expenses that appear to be eligible only if “paid” during the 8 weeks. There is no special language addressing if these expenses are incurred during the 8 weeks but paid after the 8 weeks. We do not know if this was the intent and would like to see additional clarification. It is also not clear if a 2019 annual retirement plan contribution paid during the 8 weeks is eligible.
- Salary/Hourly Wage Reduction Safe Harbor. Borrowers may avoid the forgiveness reduction for a 25% or more reduction in compensation during the 8-week period by restoring compensation by June 30, 2020.
- FTE Reduction Safe Harbor. Borrowers may also avoid the forgiveness reduction related to a reduction in FTEs during the 8 week period by restoring FTE levels by June 30, 2020. In addition, FTE reductions will not count against the borrower related to (a) terminations for cause, (b) voluntary resignations, (c) voluntary request for reductions in hours, or (d) positions for which the borrower made a good faith effort to rehire an employee which was rejected by the employee.
- Full Time Equivalent Calculations. Full time equivalents will be calculated based on a 40-hour week, which is different from most other widely used methods for calculating FTEs. A simplified method is also available where you use 1.0 for every employee who worked 40 hours per week and .5 for every employee who did not. All borrowers should recalculate their FTE counts using these new guidelines.
If you want to take a deep dive into the details Forbes contributor Tony Nitti has written an excellent summary with examples: SBA Releases Paycheck Protection Program Loan Forgiveness Application: A Deep Dive
We will be analyzing the application and guidance in greater detail in the coming days – look for us to announce a webinar within the next week or so. As always, if you have questions or need assistance please reach out to us.