On June 16, the Small Business Administration (SBA) released revised applications for the forgiveness of loans under the Paycheck Protection Program (PPP). The revised applications include substantial changes due to the recently enacted Paycheck Protection Program Flexibility Act.

In order to help you receive maximum forgiveness on your PPP loan, this article summarizes the current loan forgiveness rules based on the revised application and guidance from the SBA and Treasury Department.

Eligible Expenditures

To qualify for loan forgiveness, a borrower must spend its PPP funds on the following expenses:

Payroll Costs

• Salaries and wages, capped at an annualized limit of $100,000 per employee

• Health insurance costs, not including amounts paid for self-employed individuals, partners and S corporation owners

• Retirement benefits, not including amounts paid for self-employed individuals or partners

• State and local taxes on employees’ wages (primarily state unemployment taxes)

The revised forgiveness application limits forgivable compensation for employees who are owners, partners and self-employed individuals to $20,833 for a 24-week covered period and $15,385 for an eight-week covered period (we discuss covered periods below).

Non-Payroll Costs

• Mortgage interest, secured by real or personal property, on loans in effect on February 15, 2020

• Rent for real or personal property under leases in place before February 15, 2020

• Utilities, including electricity, gas, water, telephone, internet access and transportation

When calculating utility costs, applicants should note the SBA has provided almost no guidance on what transportation costs qualify as utilities. At this point, only one SBA document alludes to fuel cost for business vehicles. Also, non-payroll costs may constitute no more than 40% of forgivable expenditures.

Timing of Expenditures

A borrower is only eligible for forgiveness for expenses paid or incurred during the covered period. Options for defining the covered period include:

• A 24-week period, beginning when the borrower first receives PPP funds

• An eight-week coverage period ― borrowers who received PPP funding before June 5, 2020, may elect to use an eight-week coverage period, which was the rule before the Paycheck Protection Program Flexibility Act

For payroll purposes only, a borrower may elect to begin the covered period on the date that corresponds with the first pay period after receipt of PPP funds. Expenses that a borrower incurs before the beginning of its covered period but pays during the covered period are eligible for forgiveness. Expenses that a borrower incurs during its covered period but pays by its next scheduled payment date after the covered period ends are also eligible. However, a borrower may not include pre-paid expenses they have not yet incurred.

Reductions in Forgiveness

A borrowers’ loan forgiveness may be reduced if the borrower doesn’t maintain its compensation and staffing levels.

Reduction Based on Salaries or Hourly Wages

If a borrower reduces an employee’s salary or hourly wage by more than 25%, the amount of the reduction may be ineligible for loan forgiveness. To measure any reduction in compensation, the borrower should compare each employee’s average salary or hourly wage during the covered period (described above) to the employee’s average salary or hourly wage from January 1 to March 31, 2020.

The reduction in forgiveness based on compensation won’t apply if the borrower qualifies under a safe harbor rule. A borrower meets the safe harbor if the organization reduced an employee’s salary or hourly wage between February 15, 2020, and April 26, 2020, and it restored the employee’s salary or hourly wage to at least its February 15 level by the earlier of the date it applies for PPP forgiveness or December 31, 2020.

As previously mentioned, salaries and wages are capped at an annualized limit of $100,000 annually per employee. Therefore, a borrower should not consider any employee who was paid more than $100,000 (on an annualized basis) during any pay period in 2019 when calculating salary and wage costs in order to avoid a reduction in loan forgiveness.

Reduction Based on Full-Time Equivalents

If a borrower reduces its number of full-time equivalent (FTE) employees, it may have to reduce its PPP forgiveness by the percentage of the FTE reductions.

When calculating FTEs, borrowers should base FTE numbers on a 40-hour week. A single employee cannot be counted as more than 1.0 FTE. For simplicity, a borrower may treat any employee who works 40 hours or more as 1.0 FTE and any employee who works less than 40 hours as 0.5 FTE. Furthermore, calculations should be made by comparing average FTEs during the covered period to one of two reference periods: February 15, 2019 – June 30, 2019 or January 1, 2020 – February 15, 2020.

A borrower may exclude an employee from the FTE calculation under two exceptions:

• The borrower made a good-faith written offer to rehire the employee or to restore the employee’s reduced hours; the employee rejected the offer; and the borrower was unable to hire a similarly qualified replacement by December 31, 2020

• The borrower terminated the employee for cause or the employee voluntarily resigned or requested a reduction in hours. This exception only applies if the borrower didn’t fill the employee’s position

Additionally, a borrower may avoid the FTE test under two safe harbor rules:

• The borrower can document that during the period from February 15, 2020, through the end of its covered period it was unable to return to its level of business as of February 15 because of compliance with rules from the Department of Health and Human Services, Centers for Disease Control, or Occupational Health and Safety Administration related to COVID-19

• The borrower reduced its FTEs between February 15, 2020, and April 26, 2020, and restored its FTEs to their February 15 level by the earlier of its application for PPP forgiveness or December 31, 2020

Application Process

A borrower should apply for PPP forgiveness with its lender within 10 months of the end of its covered period. In addition to the standard forgiveness application, the SBA provided a simplified application for borrowers who aren’t subject to the compensation and FTE exceptions. Links to both applications and their instructions are below:

Regular application and instructions

Simplified application and instructions

A borrower should attach the following supporting documents to the application:

• Bank statements or payroll service statements supporting cash compensation

• Payroll tax returns (generally Forms 941 and state unemployment tax returns) including the covered period

• Receipts, cancelled checks or statements supporting health insurance and retirement costs

• Documentation of the borrower’s FTEs during the selected reference period (may include federal or state payroll filings)

• Documentation of mortgage interest:

o Lender’s amortization schedule and cancelled checks or

o Account statements from February 2020, all months in the covered period and one month after the end of the covered period

• Documentation of rent:

o A copy of the lease and cancelled checks for payments during the covered period or

o Account statements from February 2020, all months in the covered period and one month after the end of the covered period

• Documentation of costs for utilities:

o February 2020 invoices and receipts, cancelled checks or account statements for all payments in the covered period

According to the application instructions, a borrower must maintain all PPP loan and forgiveness documents for six years from the date the loan is paid or forgiven. The borrower must make documents available to the SBA upon request. The instructions specify that the borrower should not attach, but should maintain, the following documents:

• Documentation of any salary or wage reduction

• Documentation of any employee paid more than $100,000 in 2019

• Support for the borrower’s statement that its business activity was less than its February 2020 level

• Documentation that the borrower restored FTEs or compensation to meet safe harbors

As borrowers near the end of their original eight-week coverage periods, they should consider their qualifications for loan forgiveness and whether or not the extended 24-week period will fit their needs better. They should also begin to compile the documentation and information they will need when applying for forgiveness.

If you have additional questions about your application or need help deciding what options are best for you, please don’t hesitate to contact us.

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