On May 15, 2020, the release of the Paycheck Protection Program (PPP) Loan Forgiveness Application was announced by the Small Business Administration. The release of this application includes substantial changes to the calculation and tracking of the loan forgiveness.  Here are some highlights:

Alternative Payroll Covered Period

The PPP Loan Forgiveness Application offers the option of utilizing an Alternative Payroll Covered Period to borrowers with a biweekly (or more frequent) payroll cycle.  These borrowers can elect to calculate payroll costs using the eight-week (56 day) period that begins on the first day of their first pay period following the PPP loan disbursement date.

Incurred AND Paid Becomes Incurred OR Paid

This application brings more clarification to the “incurred and paid” guidelines mentioned in the CARES Act. Payroll costs are considered paid on the day that paychecks are distributed or an ACH transaction is originated.  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. Non-payroll costs (mortgage interests, rent obligations, and utilities) 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 after the end of the Covered Period).

Full-time Equivalent (FTE) Employee Calculation

A reduction in forgiveness exists if the average weekly FTEs during the Covered Period or Alternative Payroll Covered Period is lower than the lower of the average weekly FTEs during the period of EITHER February 15, 2019 through June 30, 2019 OR January 1, 2020 through February 29, 2020. Under the new guidance, borrowers must calculate FTEs by entering the average number of hours paid per week per employee, divide by 40, and round the total to the nearest tenth. The maximum for each employee is capped at 1.0. A simplified method assigning 1.0 FTE for all employees who work 40 hours or more per week and 0.5 for employees who work fewer hours may be also used.

Reduction in Wages

The application issues guidance that if a reduction in wages is in excess of 25% the reduction MUST be evaluated separately by each employee. The calculation of the employee’s salary or hourly wage compares the average annualized salary or hourly wage by employee during the Covered Period or Alternative Payroll Covered Period and compares it to the average annualized salary or hourly wage during the period from January 1, 2020 through March 31, 2020. If the average is less than 75% of the average during the first quarter of 2020, a reduction applies.

Safe Harbor for Reduction in FTEs or Wages in Excess of 25%

Following previous regulations, safe harbors remain in place that provide exemptions for the reductions in FTEs and the reduction in wages in excess of 25% as discussed above. The PPP loan forgiveness application clarifies how to determine if the safe harbor is met and provides additional ways to meet the safe harbor requirements.

Documents to be Submitted and Documents to be Retained

The application identifies documentation that must be submitted with the application to support payroll costs, FTE calculations, and nonpayroll costs. It also provides a list of documentation that is required to be maintained but is not required to be submitted with the application.

Here are some questions that were not answered in the new guidance:

  • What is the deadline for the PPP Loan Forgiveness Application?
  • Are bonuses able to be counted as cash compensation?
  • What if the borrower’s business was subject to local orders that required it to be closed and the borrower was not able to pay its employees during the Covered Period or the Alternative Payroll Covered Period?
  • What type of transportation, telephone or internet access payments qualify as a covered utility for purpose of loan forgiveness?
  • How do the Salary/Hourly Wage Reduction Safe Harbor and the FTE Reduction Safe Harbor work when the June 30, 2020 safe harbor date is during a borrower’s covered period or Alternative Payroll Covered Period?

Clients on annual service agreements will receive a substantial fee discount for any services related to loan forgiveness applications and the PPP program. If you would like to discuss how to understand the PPP loan forgiveness or need assistance with any COVID-19 relief programs, please contact us.

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