Treasury releases form of application for PPP loan forgiveness
On May 15, Treasury released the long-awaited form of forgiveness application (as seen here) that will be required of borrowers who took loans under the Paycheck Protection Program (PPP) and are now seeking forgiveness of their loans. Completing the application, with its 11 pages and four separate sections, will be complicated and time-consuming for many of the small business PPP recipients. Careful attention to detail and accurate documentation will be critical to accurately completing the application. The four parts of the application are: (1) the Loan Forgiveness Calculation Form, (2) PPP Schedule A, (3) the Schedule A Worksheet and (4) the optional Borrower Demographic Information Form.
How do I calculate my costs that are eligible for forgiveness? PPP loans were intended to fund eight weeks’ worth of covered payroll costs, utilities, rent and interest on covered mortgages. The starting point to determine the actual amount of the loan to be forgiven is to calculate your total costs that are eligible for forgiveness. This is done in Lines 1 through 4 of the Loan Forgiveness Calculation Form. The costs eligible for forgiveness consist of:
- Eight weeks of payroll costs. This may be based on one of two eight-week periods, at the borrower’s election.
- The “Covered Period”: This is the eight-week period beginning on the funding date. The application provides, as an example, that if your loan was disbursed on April 20, your “Covered Period” runs from April 20 through June 14.
- The “Alternative Payroll Covered Period”: As a convenience, Treasury is allowing borrowers with a biweekly (or more frequent) payroll schedule to calculate eligible payroll costs using the eight-week period that begins on the first day of their first pay period following their PPP loan disbursement date. For example, if you received your PPP loan proceeds on April 20, and the first day of its first pay period following your PPP loan disbursement was April 26, the first day of the Alternative Payroll Covered Period is April 26 and the last day of the Alternative Payroll Covered Period is June 20.
- Eight weeks of non-payroll costs (rent, utilities, covered mortgages). These must be calculated using the Covered Period, not the Alternative Payroll Covered Period.
My payroll dates do not match up exactly with the specified eight-week periods. How do I calculate my eligible payroll costs for forgiveness? Payroll costs “incurred” or “paid” during one of the covered periods are eligible for forgiveness. Payroll costs are considered “paid” on the day that paychecks are distributed or the date you originate an ACH credit transaction. Payroll costs are considered “incurred” on the day that the employee’s pay is earned. Payroll costs that are incurred but not paid during the covered period must be actually paid by the next regular payroll date. You may not double-count payroll costs that are both incurred and paid during the applicable covered period.
My payment dates for rent, utilities and interest payments do not match up exactly with the Covered Period. How do I calculate my eligible non-payroll costs for forgiveness? Similar to the instructions for payroll costs, you may count non-payroll expenses that are either paid or incurred in the Covered Period. You may not double count expenses that are both paid and incurred in the Covered Period. To the extent you include costs that are incurred but not paid in the Covered Period, they must be paid not later than the next regular payment date.
Are non-payroll expenses still limited to 25 percent of the forgivable amount? Yes. Despite criticism that this limitation was not in the CARES Act statute, Treasury has retained this limit.
What happens if my non-payroll expenses exceed the 25 percent limit? You may still seek forgiveness for an amount that complies with this limit. The instructions to lines 2-4 provide that you should only include the amount of non-payroll expenses for which you are seeking forgiveness. This amount may not exceed 25 percent of the total forgiveness amount.
For example, assume you borrowed $100,000, of which you spent $70,000 on eligible payroll expenses and $30,000 on eligible non-payroll expenses. You may seek forgiveness of $93,333 ($70,000 / .75). This would constitute $70,000 of payroll costs and $23,333 of non-payroll costs.
I’m self-employed or my business has owner employees or partners who receive compensation. Are there limits on forgivable payroll costs for these persons? Yes. Consistent with previous guidance, the application instructions limit forgivable payments to owner-employees, self-employed individuals or general partners to eight weeks’ worth of 2019 compensation for any individual, capped at $15,385 per individual. In short, you may not seek forgiveness of amounts used to give pay raises to owner-employees, general partners or to yourself if you are self-employed.
How do I calculate FTEs for purposes of the FTE-based reduction of the forgiveness amount? The definition of “full time equivalent” (FTE) is based on a 40-hour standard work week. Employees working 40 or more hours per week count as one FTE. For each employee working less than 40 hours per week you may elect one of two methods to assign these FTE equivalent values:
- Divide the average number of hours worked per week during the applicable period by 40, and round to the nearest tenth (this result may not exceed 1.0); or
- You may elect to use a simplified method and assign each employee who works fewer than an average of 40 hours per week an FTE value of 0.5.
How do I apply the safe harbor for employees terminated before April 26, 2020, but re-hired by June 30, 2020? As provided in the CARES Act, if you reduced FTEs between Feb. 15, 2020, and April 26, 2020, the amount of loan forgiveness will not be reduced due to the reduction if you have restored these FTEs by June 30, 2020. You will need to submit proof of the re-hire or replacement of these positions with your application.
The application’s “PPP Schedule A Worksheet” provides step-by-step instructions on applying the Safe Harbor FTE Reduction for employees terminated before April 26, 2020, and re-hired by June 30, 2020. If as of June 30, 2020, your FTE total has been restored, you will be deemed to have no reduction in FTEs.
What if I offer to hire back an employee but they reject my offer? If you make a good-faith written offer to hire back an employee who rejects the offer, you may continue to include that FTE for purposes of the FTE reduction formula and the re-hire safe harbor. Documentation of the offer must be submitted with your forgiveness application.
What about employees that quit or that I terminate for cause? The instructions provide that FTE reductions due to (a) termination for cause, (b) voluntary resignation or (c) voluntary reduction in hours will not reduce your loan forgiveness. Documentation must be submitted supporting any such instances.
How do I calculate wages for the wage-based reduction of the forgiveness amount? The instructions for PPP Schedule A Worksheet provide detailed steps to calculate any wage-based reduction to forgiveness. The calculation is based on each individual employee who is employed during the Covered Period (or the Alternative Covered Period) and who received compensation in 2019. Note that any employee who received annual compensation at a rate in excess of $100,000 per year in 2019 is entirely excluded from this calculation. (Example: An employee who received a raise from an annual salary rate of $90,000 to $110,000 per year, effective Oct. 1, 2019, is not included in this calculation.)
Like the FTE-based reduction formula, there are instructions for application of the safe harbor for restoration of wages that may have been cut between Feb. 15 and April 26. To qualify, these wage reductions must be restored at June 30, 2020. Documentation must be submitted in support of the restoration of wages.
What do I need to submit with my application for it to be accepted as complete? You should check with your lender, who may have more specific guidance. The instructions provide that your application must include:
- The Loan Forgiveness Calculation Form
- PPP Schedule A
- Documentation supporting your calculation of payroll costs, including statements from your bank or payroll service provider, IRS Form 941 (Payroll Tax) and state quarterly wage and unemployment insurance filings, and payment receipts or statements documenting payments to health insurance and retirement plans.
- Documentation supporting determination of FTEs during the base period used for the FTE formula, including IRS Form 941 (Payroll Tax) and state quarterly wage and unemployment insurance filings that cover the applicable period.
- Documentations supporting non-payroll costs:
- Business mortgage interest payments: lender amortization schedule and receipts or canceled checks; or lender account statements.
- Business rent or lease payments: Copy of current lease agreement and receipts or canceled checks; or lessor account statements.
- Business utility payments: Copy of invoices and receipts, cancelled checks, or account statements.
What documentation am I required to keep even if not submitted with my application?
- PPP Schedule A Worksheet together with:
- Documentation supporting the listing of each individual employee in PPP Schedule A Worksheet Tables 1 and 2, including the “Salary/Hourly Wage Reduction” calculation, if necessary.
- 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.”
I borrowed more than $2 million in PPP loans. Are there extra requirements for my business? While Treasury has indicated it will audit all businesses that borrowed more than $2 million under the PPP, the only extra requirement on the application is to check a box on the Loan Forgiveness Calculation Form indicating that you received more than $2 million in PPP loans.
How do I complete the application? You may complete the form available on the Treasury’s website or you may complete a form provided by your lender.
When must I submit the application? No dates are provided in the instructions. You may submit the application as soon after the applicable eight-week period as you are able to obtain all the necessary information and documentation.
How long will it take to receive a response to my application? The CARES Act requires lenders to provide you their decision on your request for forgiveness within 60 days after you submit your application.