The SBA released the long-awaited PPP loan forgiveness application form and instructions, as well as Formal Guidelines replacing previous guidance on loan forgiveness.
Loan Forgiveness Process
A borrower must submit the Loan Forgiveness Application (SBA Form 3508) to its lender, together with necessary documentation identified in the application. The lender will decide regarding loan forgiveness sixty (60) days from receipt of the application and submit to the SBA.
If the SBA determines that the borrower was ineligible for the PPP loan, the loan will not be eligible for forgiveness. Any portion not forgiven must be repaid by the borrower within two (2) years.
When must payroll costs be incurred and/or paid to be eligible for forgiveness?
In general, payroll costs paid or incurred during the 8-week covered period are eligible for forgiveness. Borrowers may seek forgiveness for payroll costs for the 8 weeks beginning on either: (i) the date of disbursement of the PPP loan proceeds from the Lender; or (ii) the first day of the first payroll cycle in the covered period (the “alternative payroll covered period,” or “APCP”). Because the 8-week covered period may not match a payroll cycle, borrowers may elect an APCP that begins beginning on the first day of the first payroll cycle in the covered period that continues for the following 8 weeks.
Payroll costs are considered paid on the day paychecks are distributed or a direct deposit made. For the last payroll of the covered period or APCP to be eligible for forgiveness, it must be paid on or before the next regular payroll date; otherwise, they must be paid during the covered period or APCP. For employees not performing work but still on the payroll, payroll costs are incurred based on the schedule that the employee would have performed work.
Are salary, wages, or commission payments to furloughed employees; bonuses; or hazard pay during the covered period eligible for loan forgiveness?
Yes. If a borrower pays furloughed employees their salary, wages, or commissions during the covered period, those payments are eligible for forgiveness if they do not exceed an annual salary of $100,000.
Are there caps on the amount of loan forgiveness available for owner-employees and self-employed individuals’ own payroll compensation?
Yes, the amount of loan forgiveness requested for owner-employees and self-employed individuals’ payroll compensation cannot exceed the lesser of 8/52 of 2019 compensation or $15,385 per individual in total across all businesses.
Nonpayroll Costs Eligible for Loan Forgiveness
When must nonpayroll costs be incurred and/or paid to be eligible for forgiveness?
A nonpayroll cost is eligible for forgiveness if it was 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.
Are advance payments of interest on mortgage obligations eligible for loan forgiveness?
Reductions to Loan Forgiveness Amount
The PPP provides for certain reductions in a borrower’s loan forgiveness amount based on reductions in full-time equivalent (“FTE”) employees or in employee salary and wages during the covered period, subject to an exemption for borrowers who have rehired employees and restored salary and wage levels by June 30, 2020. SBA also adopted an exemption to the reduction rules for borrowers who offered to rehire employees or restore employee hours, even if the employees did not accept the offer.
The SBA has defined FTE as “an employee who works 40 hours or more, on average, each week.” The hours of employees who work less than 40 hours are calculated as proportions of a single FTE employee and aggregated.
Will a borrower’s forgiveness amount be reduced if the borrower laid-off or reduced the hours of an employee, then offered to rehire the same employee for the same salary and same number of hours, or restore the reduction in hours, but the employee declined the offer?
No. A borrower may exclude any reduction in its FTE employee headcount occurring if: (i) the borrower made a good faith, written offer to rehire the employee (or restore reduced hours) during the covered period or APCP; (ii) the offer was for the same salary/wages and same number of hours earned by the employee in the last pay period prior to the separation or hours reduction; (iii) the offer was rejected by such employee; (iv) the borrower has maintained records documenting the offer and its rejection; and (v) the borrower informed the applicable state unemployment insurance office of the rejected offer within 30 days of the rejection.
What effect does a reduction in a borrower’s number of FTE employees have on the forgiveness amount?
A reduction in FTE employees during the covered period or APCP generally reduces the forgiveness amount by the same percentage as the percentage reduction in FTE employees. The borrower must first select a reference period: (i) February 15, 2019 through June 30, 2019; (ii) January 1, 2020 through February 29, 2020; or (iii) in the case of a seasonal employer, either of (i) or (ii),or a consecutive 12-week period between May 1, 2019 and September 15, 2019. If the average number of FTE employees during the covered period or the alternative payroll covered period is less than during the reference period, the total eligible expenses available for forgiveness is reduced proportionally by the percentage reduction in FTE employees. For example, if a borrower had 10.0 FTE employees during the reference period and this declined to 8.0 FTE employees during the covered period, the percentage of FTE employees declined by 20 percent and thus only 80 percent of otherwise eligible expenses are available for forgiveness.
How should a borrower calculate its number of FTE employees?
Borrowers seeking forgiveness must document their average number of FTE employees during the covered period (or APCP) and their selected reference period. For purposes of this calculation, borrowers must divide the average number of hours paid for each employee per week by 40, capping this quotient at 1.0. For example, an employee who was paid 48 hours per week during the covered period would be considered an FTE employee of 1.0.
For employees paid for less than 40 hours/week, borrowers may calculate the FTE in one of two ways: First, the borrower may calculate the average number of hours a part-time employee was paid per week during the covered period. [Example: an employee paid for 30 hours per week on average during the covered period could be an FTE employee of 0.75, and an employee paid for 10 hours/week on average could be an FTE employee of 0.25]. Second, borrowers may elect to use a full-time equivalency of 0.5 for each part-time employee.
Borrowers may select only one of these two methods and must apply that method consistently to all part-time employees. In either case, the borrower shall provide the aggregate total of FTE employees for both the selected reference period and the covered period or the APCP, by adding together all of the employee-level FTE employee calculations, and then divide the average FTE employees during the covered period (or APCP) by the average FTE employees during the selected reference period, resulting in the reduction quotient.
What effect does a borrower’s reduction in employees’ salary or wages have on the loan forgiveness amount?
A reduction of more than 25% of an employee’s salary or wages will result in a reduction in the forgiveness amount, unless an exception applies. Specifically, for each new employee in 2020 and each existing employee not paid more than the annualized equivalent of $100,000 in 2019, the borrower must reduce the total forgiveness amount by the total dollar amount of the salary/wage reductions over 25% of base salary/wages between January 1, 2020 and March 31, 2020, unless such reductions are restored. The reduction calculation is performed on a per employee basis.
How should a borrower navigate the reduction due to a reduction in the number of employees relative to the reduction relating to salary and wages?
To ensure that borrowers are not doubly penalized, the salary/wage reduction applies only to the portion of the decline in employee salary and wages that is not attributable to the FTE reduction.
If a borrower restores reductions made to employee salaries and wages or FTE employees June 30, 2020, can the borrower avoid a reduction in its loan forgiveness amount?
Yes. If certain employee salaries and wages were reduced between February 15, 2020 and April 26, 2020, but those reductions are eliminated by June 30, 2020 or earlier, the borrower is exempt from any reduction in the loan forgiveness amount. Similarly, if a borrower eliminates any reductions in FTE employees by June 30, 2020 or earlier, the borrower is exempt from any reduction in loan forgiveness amount that would otherwise be required due to reductions in FTE employees. Note: This does not reduce the requirement that at least 75% of the loan forgiveness amount must be attributable to payroll costs.
Will a borrower’s forgiveness amount be reduced if an employee is fired for cause, voluntarily resigns, or voluntarily requests a schedule reduction?
No. When an employee is fired for cause, voluntarily resigns, or voluntarily requests a reduced schedule during the covered period (or APCP), the employee may be counted at the same FTE level when calculating the FTE employee reduction penalty.