On Friday evening May 15th, the SBA published a proposed final PPP forgiveness application, totaling 11 pages. It faced heavy criticism over the weekend – nevertheless, it’s the first official forgiveness document available for the Paycheck Protection Program loans.
The application provides some clarity with substantial instructions and supporting schedules, however, many of the concerns we’ve received from clients were not addressed. We expect additional guidance from the SBA and Treasury, and potentially changes or updates to the application. The White House and Congressional leaders on both sides of the aisle have expressed the need to relax the rules of the program — the question remains how quickly this will transpire, given some Borrowers may be preparing for the forgiveness process in just a few weeks.
Below is a quick summary of important highlights from the application and instructions:
- We knew the 8-week ‘Covered Period’ begins when the PPP funds are received, however, this application allows companies to use an “Alternative Payroll Covered Period” that aligns with the start of their next payroll cycle (for administrative convenience). For example, if the Borrower received its PPP loan proceeds on Monday, April 20, and the first day of its first pay period following its PPP loan disbursement is Sunday, April 26, the first day of the Alternative Payroll Covered Period is April 26 and the last day of the Alternative Payroll Covered Period is Saturday, June 20. Note: this alternative period does not apply to non-payroll costs.
MKS Comments: This brings comfort to those that were worried about timing of their first payroll run. However, it adds unnecessary complexity to those who adopt the alternate period and have to track non-payroll costs on a different timeline.
- If a Borrower does not spend 75% of the PPP loan on payroll costs, the maximum amount that can be forgiven is the amount spent on payroll costs divided by .75. For example, if PPP amount funded is $100,000, but the Borrower is only able to spend $50,000 on payroll costs during the Covered Period (or Alternative Payroll Covered Period), then the maximum amount of forgiveness would be $66,667 ($50,000 /.75).
MKS Comments: This answers a big question about the need to spend 75% of the ENTIRE loan on payroll costs. You don’t! Forgiveness will be calculated on the amount the Borrower actually spends. Great news for those that may have accidentally inflated the original loan amount or may not have enough eligible costs to use up all the loan proceeds.
- Flexibility to use payroll costs paid vs. incurred. 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 (even if payment is subsequent to end of 8-week period).
MKS Comments: We advise using a cash basis approach until the end of the 8-week period, at which point you could include all payroll costs incurred up until day 56. You can count payroll costs that were both paid and incurred only once (no double counting).
- Similarly, eligible non-payroll costs 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 the billing date is after the Covered Period.
- Amounts paid to owners (owner-employees, self-employed individuals, general partners) are capped at the LOWER OF $15,385 per individual OR the 8-week equivalent of their applicable compensation in 2019. For example, if a self-employed individual’s business income was $50,000 in 2019, the amount of their PPP would have been $10,417 ($50,000 / 12 x 2.5). The amount they can pay themself during the 8-week period is capped at $7,692 ($50,000 / 52 x 8).
MKS Comments: This was an unexpected ruling, and seems to negatively impact any self-employed/contractors who didn’t have at least $100,000 of profits in 2019 – those that did can comfortably proceed compensating themselves up to $15,385 over the covered period, but many Borrowers are now subject to limitations in what they can expect to be forgivable. We hope this gets fixed!
- Bonuses or hazard pay — while clearly limiting the amount of owner-employee compensation as noted above, the application and previous authoritative guidance does not explicitly prohibit bonuses, hazard pay or compensation in excess of 2019 amounts to employees.
MKS Comments: Borrowers who may have difficulty using the full loan or reaching the 75% payroll cost threshold may want to consider this perceived loophole. Our team notes this is an aggressive strategy with no precedent, but a temporary increase in employee pay seems to fit within the spirit of the program. Please remember that no individual may be compensated during the covered period over and above the annualized $100,000 cap of $15,385.
- Average Full-Time Equivalent (FTE) calculation – clarified that 40 hours a week (not 30 hours) is a full-time equivalent. A full-time employee, working 40 hours/week or more, is considered 1.0. Someone working an average of 10 hours/week would be considered .25 (rounded to .3). A simplified method is permitted that assigns a 0.5 for all part-time employees, at the election of the Borrower.
MKS Comments: The simplified method appears to be Borrower friendly. It would be advantageous to use the simplified method to calculate the base period FTE if your typical part-time employee works between 20 and 40 hours a week (because they would each be rounded down to .5, lowering your base period FTE amount).