Expertise Beyond the Numbers

Breaking Down the SBA’s Paycheck Protection Program Loan Forgiveness Application

Updated 7/2/2020 at 9:05am ET

UPDATE 7/2: Congress has voted to extend the deadline to apply for forgivable Paycheck Protection Program loans. Businesses now have until Aug. 8 to apply for the aid. President Trump is expected to sign the bill.


SC&H’s Key Takeaways

  • The SBA is allowing an alternative covered period which begins the date of the borrower’s first payroll after the date they received PPP funding
  • Eligible payroll costs include both those that are incurred and those that are paid during the covered period
  • Nonpayroll costs must still be less than 25% of your forgiveness amount, however some costs may be paid after the covered period ends, as long as they were incurred during the 8 week period
  • Employees who quit, were fired for cause, or refuse to come back to work will not negatively impact loan forgiveness calculations

On May 15, 2020, the SBA issued an application that must be completed and submitted to the lender of the PPP loan to request forgiveness. The application and its instructions help clarify several important questions. The following items provide for administrative flexibility for the payment of eligible costs.

  1. Payroll Periods — As an administrative convenience, the SBA is allowing borrowers with bi-weekly payrolls (or more frequent) to use a payroll period that starts with the first day of the pay period following the PPP loan’s disbursement date in calculating eligible payroll costs over the eight week (56 day) period. This guidance does not address companies with semi-monthly or monthly payroll, which suggests that a special payroll run should be considered to meet the “payment requirement” language in the law.
  2. Nonpayroll Costs — Covered mortgage interest expense, rents, and utility payments that are incurred during the 8 week covered period can be paid during the covered period or paid on or before the next regular billing date, even if that next regular billing date is after the 8 week covered period. Covered rent and interest payments include payments related to real and personal property for agreements in effect at February 15, 2020.

The safe harbor exemption from the reduction of the loan forgiveness for rehiring employees by June 30th is also discussed. The application provides tables to assist in determining whether the safe harbor criteria are met. The instructions for the tables list the following clarifications:

  1. The computation to determine full-time equivalency is based on a 40-hour week. The calculation also allows for a simplified method that will allow for a .5 (one-half) FTE for employees who work less than a 40-hour week. The simplified method can be used at the election of the borrower.
  2. The borrower who restores the employee wages and the full-time equivalents by June 30, 2020 meets the exemption and will not have its loan forgiveness reduced. The application instructions provide the following guidance – specifically, the Borrower is exempt from the reduction in loan forgiveness based on FTE employees if both of the following conditions are met: (1) the Borrower reduced its FTE employee levels in the period beginning February 15, 2020, and ending April 26, 2020; and (2) the Borrower then restored its FTE employee levels by no later than June 30, 2020 to its FTE employee levels in the Borrower’s pay period that included February 15, 2020.

The SBA outlines the documentation the borrowers need to provide the lender and documents the borrower must maintain in its files. The documentation includes bank account statements, payroll reports, leases showing their existence on February 15, 2020, and cancelled checks or payment verification, which includes dates of payment. The application imposes a six-year statute of limitations for documentation review which starts on the day the loan is forgiven or repaid in full.

The application provides a series of representations the borrower is required to make to request loan forgiveness. Included in the representations is a statement that the information provided to the lender is true in all material respects and that a false statement made to obtain forgiveness is punishable by a fine of up to $1,000,000 and/or imprisonment. The borrower is also required to state the tax documents submitted to the lender are consistent with those that the borrower has, or will, submit to the IRS and to state agencies.

For borrowers whose loan is in excess of $2,000,000, they must check a box on the forgiveness application to make this disclosure. This $2,000,000 threshold includes loans to affiliated entities based on the SBA’s Interim Final Rule published on April 15, 2020. Borrowers that exceed this threshold should expect enhanced scrutiny on the certification of need and the related forgiveness application, based on the April announcements made by SBA Administrator Jovita Carranza and Treasury Secretary Steven Mnuchin.

While the guidance provided by the application and its instructions helps, additional clarification is still needed, and the 8-week period is running. Here are some of those items:

  • For health and retirement payments which would be included in payroll costs, the application only includes payment, not costs incurred. Retirement plan contribution has not yet been defined; can payments on 2019 contributions count? Current year retirement plan contributions are often made later in the year or even in the following year, how will this expense be treated?
  • Borrowers who restore their FTEs and the employees’ wages before June 30th are allowed an exemption from an overall reduction in the forgiveness. There is no guidance as to whether the restored employees and their wages must be maintained for a minimum period.

The SBA noted that it will soon issue regulations and additional guidance for borrowers on completing the forgiveness form, as well as guidance for lenders detailing their responsibilities. We’re keeping an eye out for these updates and/or new guidance and will update this article once this information becomes available.

In the meantime, if you have any questions for the SC&H Group Team, please reach out to us directly through our website.