Highlights: Paycheck Protection Program Loan Forgiveness Application and Instructions

In Coronavirus by Phyllis Ludwig

By far the most intriguing, and often confusing, aspect of the Paycheck Protection Program (PPP) has been the loan forgiveness. When the PPP program was first announced many businesses yearned for support but were wary about taking on debt. The loan forgiveness aspect of the PPP transformed the program into the lifeline businesses sought.

The Small Business Association (SBA) recently released the first piece of the forgiveness guidance by revealing the Paycheck Protection Program Loan Forgiveness Application and Instructions. While the SBA admits more guidance is still to be released, the application and instruction provided an enormous amount of insight regarding the forgiveness process.

Here are some of the highlights:

Covered Period & Alternative Payroll Covered Period

Borrowers should already know the loan forgiveness covers expenses during the eight-week “Covered Period” which begins the same day as the loan disbursement date. However, the latest guidance provides an additional optional measurement period for payroll costs referred to as the “Alternative Payroll Covered Period”.

The instruction describes the Alternative Payroll Cost Covered Period as, “For administrative convenience, 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 will be extremely helpful in simplifying reporting and documentation of payroll costs for many businesses. It is important to note that this Alternative Payroll Covered Period is only applicable to payroll costs.  Non-payroll costs must adhere to the traditional Covered Period requirements.

Incurred and Paid Expenses

The original CARES Act stated that forgivable expenses needed to be incurred and paid during the Covered Period. This led to numerous debates and turmoil concerning how to expedite payments to ensure expenses are paid within the covered period.

The loan forgiveness instructions provided relief on this topic stating, “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.”

There is similar guidance regarding nonpayroll cost instructing, “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.”

This guidance is more in line with traditional accrual accounting and relieves a significant burden from business owners.

Business Mortgage Interest & Rent Payments – Real or Personal Property

It has been already widely understood that within the guidelines of the PPP, mortgages interest payments and rent payments for office space or buildings would be forgivable. The instructions expanded upon this by stating forgiveness can include business mortgage interest payments “for any business mortgage obligation on real or personal property”. The instructions continued by also including, “business rent or lease payments for real or personal property […] pursuant to lease agreements in force before February 15, 2020.”

The inclusion of “personal property” expands forgiveness beyond simply buildings and office space. Payments of leases or mortgages interest on business-use personal property, such as company vehicles, potentially expands forgiveness calculations for many businesses.

Business Utilities – Transportation

Within the definition of eligible nonpayroll costs has always been business utility payments. What has caused some confusion is the definition of business utilities.

The loan forgiveness instructions define covered utility payments as, “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”.

Electricity, gas, water, telephone, even internet access have all been commonly known as utilities. Few business owners recognize transportation as a utility. Businesses with freight agreements or that have company vehicles with fuel purchase agreements should consider if those agreements qualify as forgivable expenses.

Full-time Equivalency and Wage Reduction Calculation

Reductions in staffing and/or wages have been a frustrating recent reality. The SBA provided a comprehensive worksheet on how to calculate the effects of full-time equivalency (FTE) and wage reductions. We could easily write an entire article on this worksheet, but instead we wanted to highlight several aspects that impact the majority of businesses.

The mechanics of FTE calculations have been widely speculated. The instruction provides an authoritative answer by directing, “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.” This definitive response allows for businesses to finally known how to calculate their FTE.

Many borrowers expressed concerned regarding changes in employment not caused by COVID-19 which were out of the business owner’s control. The instructions provided an important exemption by including the FTE Reduction Exception. The instructions direct that if, “any employees who during the Covered Period or the Alternative Payroll Covered Period (a) were fired for cause, (b) voluntarily resigned, or (c) voluntarily requested and received a reduction of their hours […] in these cases do not reduce the Borrower’s loan forgiveness.”

This will provide relief for the natural fluctuations in employment that are a typical aspect of any business, even during the best economic conditions. The FTE Reduction Exception also allows for employees who were offered their previous position and choose not to return to the company.

In the SBA’s press release announcing the Paycheck Protection Program Loan Forgiveness Application and Instructions they recognized that more regulations and guidance is still forthcoming. The application and instruction are just the first step, but it is a massive push forward. To view the entire application and instructions click here.

Currently, there is no need to rush the forgiveness application process. The SBA appears to be softening their stance on many issues and more aspects will likely change in the coming weeks. Continue to check back to get the latest information and reach out to us for a more in depth, individualized conversation. Together we will build the confidence you and your business need to thrive.