Paycheck Protection Program (PPP) Loan Forgiveness Application released
Working with the Department of the Treasury, the Small Business Administration (SBA) has issued the Paycheck Protection Program’s (PPP’s) Loan Forgiveness Application, along with in-depth instructions on how to complete it. Further guidance is expected in the days ahead for companies completing the application, as well as additional regulations and guidance for lenders.
The application and accompanying instructions specify how loan recipients can apply for PPP loan forgiveness and allow companies to complete the detailed calculations to determine forgiveness amounts. The 11-page application package summarizes eligible and non-eligible payroll costs, indicates the documents that must be submitted by borrowers with the PPP loan forgiveness application, and provides step-by-step directions for completing the forms.
Read on for highlights of the guidance and information in the application packet. You can also register now to access our on-demand webinar that provides more information on each of these points and walks through the loan forgiveness computation.
Forgivable costs and amounts
Forgivable costs include…
- Eligible payroll costs, as defined by the April 2 Interim Final Rules
- Amounts paid to owners (owner-employees, a self-employed individual, or general partners), capped at the lower of 1) $15,385 (the eight-week equivalent of $100,000 per year) for each individual; or 2) the eight-week equivalent of their applicable compensation in 2019
- Covered mortgage, rent, and utility obligations – payments on such obligations, lease agreements, or services incurred or in place before Feb. 15, 2020
- Covered mortgage and rent obligations include both real and personal property
The ratio of forgivable costs remains at 75% eligible payroll costs, 25% eligible nonpayroll costs.
The SBA will reduce the amount forgiven by any Economic Injury Disaster Loan advance that was received.
Loans in excess of $2 million received by Borrowers and their affiliates will be subject to particular review. Certain waiver of affiliation rules apply.
Timing of forgivable costs
The application defines two options for calculating covered payroll costs:
- Covered Period: “…The eight-week (56-day) Covered Period of your PPP loan. The first day of the Covered Period must be the same as the PPP Loan Disbursement Date.
- Alternative Payroll Covered Period: “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.”
In certain places in the application, Borrowers must apply only the Covered Period. Borrowers who choose to use the Alternative Payroll Covered Period must apply that period wherever the application references “the Covered Period or the Alternative Payroll Covered Period.”
The application defines how payroll and nonpayroll costs paid and incurred during the applicable period may be forgiven; e.g., amounts eligible for forgiveness may include pay earned during the period but not paid until after, or utilities related to periods prior to the 8-week period. However, costs that were both incurred and paid may be counted only once; no “double-dipping.”
See the full application for specific information on when costs are counted as incurred or paid.
Definition of a Full-Time Equivalent Employee
- “For each employee, enter the average number of hours paid per week, divide by 40, and round the total to the nearest tenth.”
- Simplified method - Assign a 1.0 for employees who work 40 hours or more per week, and 0.5 for employees who work fewer hours
- Listen to our on-demand webinar for discussion of which method might be most beneficial for your business.
Definition of Cash and Non-Cash Compensation
Cash compensation is capped at $15,385 per employee and includes:
- Gross salary, gross wages, gross tips, and gross commissions
- Paid leave (vacation, family, medical or sick leave; not including leave covered by the Families First Coronavirus Response Act)
- Allowances for dismissal or separation for each individual
Non-cash compensation includes payment of:
- The provisions of group health care benefits, including employer contributions to a self-insured, employer-sponsored group health plan, but excluding any pre-tax or after tax contributions by employees
- Contributions to retirement benefit plans, excluding any pre-tax or after-tax contributions by employees
- State or local tax assessed on the compensation of employees
Reductions in loan forgiveness
In general, employers are subject to a reduction in their PPP loan forgiveness amount corresponding with reductions in their average number of full-time equivalent employees during the covered pandemic period, unless they eliminate that reduction – i.e., rehire those employees. The CARES Act lays out a specific calculation for determining these circumstances.
The package establishes that this calculation will not include:
- Any positions for which the Borrower made a good-faith, written offer to rehire an employee
- Any employees who were fired for cause, voluntarily resigned, or voluntarily requested and received a reduction of their hours.
The package also includes guidance related to the reduction in forgiveness amounts connected to reductions in salary.
The application package also includes:
- Documentation requirements: Which payroll and nonpayroll documentation and other files must be submitted to lenders, versus which must simply be maintained.
- Certifications, including certifications that calculations are correct and appropriate and that the required documentation has been submitted.
- Penalties for false statements may include: “Imprisonment of not more than five years and/or a fine of up to $250,000, two years and/or a fine of not more than $5,000; and, if submitted to a Federally insured institution, by imprisonment of not more than thirty years and/or a fine of not more than $1,000,000.”
Further guidance needed
We believe further guidance from the Treasury is deemed necessary for the items noted below:
- Payroll Costs
- Retroactive bonuses from the prior year
- Amounts paid to owners
- Definition of owner-employee – threshold for ownership percentage
- Attribution rules – family members of an owner
- Businesses that began in 2020
- Net self-employment income in 2019 being lower than guaranteed payments paid to general partners due to business operating losses
- Noncash Compensation
- Amounts paid on behalf of owners-employees/self-employed individuals/general partners eligible for forgiveness
- Discretionary Profit Sharing Contributions – can these be prorated over the eight weeks?
- Covered rent obligations – eligibility of CAM or Real Estate Taxes to be included as a permissible and forgivable expense
- Requirements by Borrowers to maintain employees after the Covered Period or June 30, 2020
- Retention of unused Loan Funds for Borrowers that did not retain or maintain payroll for the Covered Periods
- Permitted use of unused Loan Funds after forgiveness
We will provide additional guidance as it becomes available.
Any advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues. Nor is it sufficient to avoid tax-related penalties. This has been prepared for information purposes and general guidance only and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.
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