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SBA Provides Details on PPP Loan Forgiveness

posted May 18, 2020, 12:56 PM by Adam Chandler   [ updated May 19, 2020, 8:06 AM ]
After many weeks of uncertainty, the Small Business Administration has finally published an application for forgiveness of loans issued under the Paycheck Protection Program, which answers many of the questions raised by the statute and clarifies what was previously unclear.  You can download the application from the SBA website here.

Here are some of the major the issues that have been clarified by the forgiveness application:

What is the Covered Period?

PPP loan funds must be paid during the "covered period," which the statute defines as the eight weeks immediately following loan disbursement.  While the application maintains this definition, it also allows for the use of an "Alternative Payroll Covered Period," which allows borrowers with a biweekly or more frequent payroll schedule to use an eight-week period beginning with the first pay period following PPP loan disbursement for certain expenses, including payroll expenses.

How to Handle the Last Pay Period?

The CARES Act stated that an employer could receive forgiveness for costs incurred and payments made during the eight-week covered period.  This left uncertainty as to how employers should handle payroll for the final week of the covered period, where the costs are incurred when the employee works but may not be paid until a pay day outside the covered period.  The application takes the logical approach to this problem and states that payroll costs incurred but not paid during the last pay period of the covered period are eligible for forgiveness if paid on or before the next regular pay day.  Similarly, if rent or utilities are paid in arrears, those too can be considered incurred during the covered period and paid on or before he next regular billing date, even if it is after the covered period.

Enforcement of 25% Limit on Non-Payroll Costs

In its Interim Final Guidance, the SBA introduced a requirement that no more than 25% of the PPP loan amount could be used on non-payroll costs.  How exactly this would be interpreted or implemented was not clear at the time.  The application makes clear that, if dividing payroll costs by 0.75 yields a smaller number than all of the costs added together, this smaller number will be the forgiven amount.  This calculation, in effect, limits non-payroll costs to one-third the total payroll costs (or 25% of the total amount forgiven.  For example, if an employer received a $100,000 loan and only spent $60,000 on payroll costs and $40,000 on non-payroll costs, the employer would divide $60,000 by 0.75, which equals $80,000.  Only $80,000 of the $100,000 loan would be forgiven, $60,000 of which (or 75%) would be payroll costs, and $20,000 (or 25%) would be non-payroll costs.

Calculation of Full-Time Equivalents

PPP loan forgiveness will be reduced in proportion to the reduction in an employers full-time equivalents.  Unfortunately, the statute did not define a full-time equivalent.  Under the application, employers can choose make this determination in one of two ways.  First, it can take the average number of hours worked per week (max 40), divide that number by 40, and round to the nearest tenth.  Second, it could choose to assign any employee averaging over 40 hours per week the number 1.0 and assign any employee averaging less than 40 hours per week the number 0.5. 

FTE Reduction Safe Harbor

Employers who have reduced their payrolls or cut salaries during the pandemic have a safe harbor to rehire employees or restore salaries by June 30, 2020.  Employers also will not be penalized for reductions in FTEs when the employer made a good-faith, written offer to rehire the employee during the covered period and the employee refused, or when the employee voluntarily resigned, was fired for cause, or voluntarily requested a reduction in hours.

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