Paycheck Protection Program Loan Forgiveness Application: Key Insights

General

• Application Forms: The Application includes (i) the application form, (ii) two supporting schedules: PPP Program Schedule A and PPP Program Schedule A Worksheet and (iii) an optional demographic information form. We recommend completing the Application in the following order: (1) PPP Program Schedule A Worksheet, (2) PPP Program Schedule A and (3) the application form.
• Loans Larger Than $2 Million: A borrower must check a box on the Application if the borrower, together with its affiliates, received loan proceeds with an original principal amount in excess of $2 million. This suggests that any borrower who received more than $2 million risks getting audited by the SBA, regardless of whether the borrower returned a portion of the funds.
• Deadlines: The Application includes an “Expiration Date” of October 31, suggesting that October 31 is the deadline for borrowers to submit their Applications to their respective lenders.
• Documentation: Borrowers must provide information regarding every employee, including cash compensation, hours worked and last four digits of Social Security numbers.
• Documentation Retention: Borrowers must retain the documentation set forth in Exhibit B in its files for six years after the date the loan is forgiven or repaid in full and permit authorized representatives of the SBA, including representatives of its Office of Inspector General, to access such files upon request.
• Limitations: Forgiveness on cash compensation for employees (including owner-employees, self-employed individuals and general partners) is limited to eight weeks’ worth of 2019 compensation and is capped at $15,385 per individual. This does not limit other payroll costs, including health insurance premiums, employer contributions to retirement plans and the employer’s share of state and local taxes assessed on the employee’s compensation. 

Costs Eligible for Forgiveness

• Costs eligible for forgiveness are limited to payroll costs to retain employees, business mortgage interest payments, business rent or lease payments¹  or business utility payments.² The Application does not provide any further clarity regarding what constitutes “payroll costs” and instead refers to the definition in the Interim Final Rule on Paycheck Protection Program (85 FR 20811).³
• The requirement that at least 75 percent of the loan proceeds must be spent on payroll costs has not been relaxed.
• In calculating payroll costs to determine the forgiveness amount, borrowers may elect to use either (i) the eight-week (56-day) period beginning on the loan disbursement date (the Covered Period) or (ii), if the borrower has a biweekly (or more frequent) payroll schedule, the eight-week (56-day) period beginning on the first day of the first pay period following the loan disbursement date (the Alternative Payroll Covered Period). Note that borrowers must use the Covered Period (not the Alternative Payroll Covered Period) when calculating the amount of business mortgage interest payments, business rent or lease payments and business utility payments.
• Borrowers can seek forgiveness for payroll costs paid or incurred during the Covered Period or the Alternative Payroll Covered Period (as applicable). Payroll costs are considered paid on the day that paychecks are distributed or the borrower originates an ACH credit transaction. Payroll costs are considered incurred on the day that the employee’s pay is earned. 

Loan Forgiveness Reduction for Headcount Reductions

• The Application provides two alternative methods for determining full-time equivalent employees (FTE), which will determine whether a borrower is subject to a reduction in forgiveness:
  • Option 1: For each employee, determine the average number of hours worked per week during the Covered Period or the Alternative Payroll Covered Period and divide by 40, then round to the nearest tenth. The maximum for each employee is capped at 1.0.
  • Option 2: Alternatively, borrowers may use a simplified method by assigning a 1.0 for employees who work 40 hours or more per week and 0.5 for employees who work fewer than 40 hours per week.

• The amount of loan forgiveness may be reduced if the borrower’s average FTE per month during the Covered Period (or the Alternative Payroll Covered Period) is lower than its average FTE in either (at the borrower’s election) (i) the period of February 15 through June 30, 2019, or (ii) the period of January 1 through February 29, 2020.
• Safe Harbor: The Application provides a safe harbor for borrowers who engaged in a headcount reduction between February 15 and April 26, 2020, and who restore their FTE employee levels by June 30, 2020, to their total FTE prior to February 15, 2020. Borrowers who meet this safe harbor will not be subject to a loan forgiveness deduction based on headcount reduction.
  • A borrower’s forgiveness amount will not be affected by a headcount reduction that was the result of employees (i) who were fired for cause, (ii) who voluntarily resigned, (iii) who voluntarily requested and received a reduction of their hours or (iv) to whom the borrower made a good-faith, written offer to rehire that the employee declined.

Loan Forgiveness Reduction for Salary/Hourly Wage Reductions

• The amount of loan forgiveness may be reduced if the borrower reduced an employee’s salary/hourly wages by more than 25 percent during the Covered Period or the Alternative Payroll Covered Period as compared to the first calendar quarter (January 1 through March 31, 2020) and that employee (i) had an annualized pay rate of $100,000 or less in 2019 or (ii) was not employed by the borrower in 2019. Note that any salary/hourly wage reduction for employees who made more than an annualized pay rate of $100,000 in 2019 does not affect loan forgiveness.
• Safe Harbor: The Application provides a safe harbor for borrowers who reduced salary/hourly wages by more than 25 percent for applicable employees between February 15 and April 26, 2020, and reverses the reduction in pay rates of the affected employees by June 30, 2020. In other words, if an employer has reduced salaries between February 15 and April 26, 2020, the amount of forgiveness will not be affected if the employer restores the salaries to pre-existing levels before June 30, 2020.

Supporting Documentation

• Supporting documentation must be submitted with the Application. A full list of the required supporting documentation is available here as Exhibit A.
• Borrowers must maintain records of certain supporting documentation for at least six years after the loan is forgiven or repaid in full. Borrowers must permit the SBA and its authorized representatives to access the documents upon request. A full list of the supporting documentation borrowers are required to maintain is available here as Exhibit B.

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¹The Application clarifies that lease payments for personal property leases (e.g., copiers, computers and other equipment) can be included in this calculation.

²“Business utility payments” includes payments for electricity, gas, water, transportation, telephone or internet access to the extent the service was in place before February 15, 2020.

³The Interim Final Rule on Paycheck Protection Program provides that “payroll costs” include compensation to employees (whose principal place of residence is the United States) in the form of salary, wages, commissions or similar compensation; cash tips or the equivalent (based on employer records of past tips or, in the absence of such records, a reasonable, good-faith employer estimate of such tips); payment for vacation, parental, family, medical or sick leave; allowance for separation or dismissal; payment for the provision of employee benefits consisting of group healthcare coverage, including insurance premiums, and retirement; payment of state and local taxes assessed on compensation of employees; and for an independent contractor or sole proprietor, wages, commissions, income or net earnings from self-employment or similar compensation. “Payroll costs” exclude compensation of employees whose principal place of residence is outside of the United States; compensation of an individual employee in excess of an annual salary of $100,000, prorated as necessary; federal employment taxes imposed or withheld between February 15 and June 30, 2020, including the employee’s and employer’s share of FICA (Federal Insurance Contributions Act) and Railroad Retirement Act taxes, and income taxes required to be withheld from employees; and qualified sick and family leave wages for which a credit is allowed under sections 7001 and 7003 of the Families First Coronavirus Response Act.