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Understanding the PPP Loan Forgiveness Application – and an Application Calculator
May 21, 2020
The U.S. Small Business Administration (“SBA”) has released the PPP Loan Forgiveness Application with respect to the Paycheck Protection Program (“PPP”). The SBA is also expected to release additional guidance on the forgiveness application and related matters. Below we discuss some key forgiveness and application considerations to keep in mind as you review the PPP Loan Forgiveness Application and start preparing for the PPP loan forgiveness process.
In addition, download Burns & Levinson’s PPP Loan Forgiveness Application Calculator, created to assist companies with processing the calculations in the PPP Loan Forgiveness Application and related PPP Schedule A. Please carefully review this advisory and the cautionary statements in the calculator regarding its use.
Some key forgiveness questions answered by the PPP Loan Forgiveness Application
- 25% Non-Payroll Costs Cap. It appears based on the way the application is designed, the requirement that at least 75% or more of the PPP loan be used on payroll costs will be interpreted to pertain to forgiveness only. Based on such interpretation, payroll costs must equal at least 75% of the amount forgiven, and any non-payroll qualifying costs in excess of 25% will just not being forgiven. This seems to indicate a favorable result to PPP applicants as the alternative would have been to cause the entire PPP loan to be unforgiven (and potentially subject to immediate repayment).
- Paid and Incurred. The application has clarified that a company can apply for forgiveness as to costs that are paid during the applicable eight week period, as well as those that are incurred but not paid during eight week period so long as paid and paid on or before the next regular payroll date or billing date after the eight week period, in each case subject to the overall limitations.
- FTE. The application provides companies two alternatives when calculating average full-time equivalency (FTE). A Company can choose either to enter the average number of hours paid per week, divide by 40, and round the total to the nearest tenth, for each employee (with a maximum for each employee at 1.0), or use a simplified method that assigns a 1.0 for employees who work 40 hours or more per week and 0.5 for employees who work fewer hours may be used at the election of the Borrower. A company will have two use the same selected method throughout the application so should carefully assess each alternative to determine which provides the most advantageous outcome as to forgiveness.
- Alternative Payroll Covered Period. The application established an alternative eight week period for companies to consider using with respect to certain payroll and related calculations. This was done out of administrative convenience to allow borrowers with a biweekly (or more frequent) payroll schedule to calculate eligible payroll costs using the eight-week period that begins on the first day of their first pay period following their PPP Loan disbursement date (the “Alternative Payroll Covered Period”), as opposed to the eight-week period that begins on the loan disbursement date (the “Covered Period”). Borrowers who elect to use the Alternative Payroll Covered Period must apply the Alternative Payroll Covered Period consistently as provided in the application and certain calculations, such as non-payroll expenses, will be calculated for the Covered Period only.
- FTE Reduction Exceptions. Further expanding on guidance issued by the SBA prior to the application being released, to ensure that a borrower’s forgiveness is not reduced in relation to certain FTE reductions,the application provides that a borrower’s forgiveness amount will not be reduced with respect to (1) any positions for which the borrower made a good-faith, written offer to rehire an employee during the applicable period which was rejected by the employee; and (2) any employees who during the applicable period (a) were fired for cause, (b) voluntarily resigned, or (c) voluntarily requested and received a reduction of their hours.
Some key forgiveness provisions that still need clarity (as of May 22, 2020)
- Salary/wage Comparison. With respect to the forgiveness reduction analysis tied to salary and wages, the application refers to comparing average annual salary and hourly wages during the period between January 1, 2020 and March 31 2020 vs. the average annual salary and hourly wages during the applicable eight week period. The initial application does not provide any additional details as to the intended method to determine the averages.
- Alternative Payroll Covered Period. To elect the Alternative Payroll Covered Period, a borrower must use a biweekly (or more frequent) payroll schedule. There is no guidance on if all employees/owners etc. have to be on biweekly or more frequent in order to use the Alternative Payroll Covered Period.
Unforgiveable? Stay mindful of the ways that your loan may not be forgiven – and ways you can maximize forgiveness
Here are a few ways that all or a portion of your PPP loan may not be forgiven:
- Breach, Default, or Misrepresentation. All or a portion of your PPP funds may be deemed unforgivable due to a breach or default under the SBA promissory note or a misrepresentation in respect to your PPP loan application or any of the related materials, including as to eligibility.
- Use of Proceeds. If you use the loan proceeds for anything other than payroll costs and qualified mortgage interest, rent, and utilities payments, then the amount used for the other allowable use, such as to pay interest on other qualified debt, may not be forgiven. Also to the extent your PPP funds are used for any non-permitted use then they will need to repaid immediately, such as payment of excess compensation, principal debt balances, federal withholding taxes, foreign compensation, or using loans funds for certain qualified sick and family leave wages for which credit is allowed under the Families First Coronavirus Response Act.
- Reduction in FTE. If your average number of FTE reduce from the baseline, your PPP forgiveness amount is reduced in proportion to such reduction if you are unable to avail yourself of the applicable FTE restoration/cure/rehiring rules. Even if your FTE count reduces which would otherwise proportionally lower your forgiveness amount, the CARES Act has a provision that disregards such reduction in the event that you did have a FTE headcount reduction between February 15, 2020 and April 26, 2020, and such reduction is restored in full through FTE replacement or rehiring by June 30, 2020.
- Employee Wage Cuts. Remember that the amount forgiven will be reduced by the amount of any reduction during the eight week period of greater than 25% in total salary or wages of any employee that made less than $100,000 annualized in 2019, and you are unable to avail yourself of the salary/wage restoration/cure rules. Even if the result of the 25% salary/wage calculations would otherwise lower your forgiveness amount, the CARES Act has a provision that disregards such reduction in the event that the applicable employees whose rate of salary/wages was decreased between February 15, 2020 and April 26, 2020, have such rate restored in full by June 30, 2020.
In terms of trying to maximize forgiveness, consider:
- FTE.Of the two methods to calculate FTE, do the analysis using each method to ensure you utilize the method that maximizes forgiveness.
- Choose Your Baseline Test Period. You need to determine your FTE baseline by first counting your FTEs for the applicable baseline test period. A company can pick baseline test periods between either (a) February 15, 2019 through June 30, 2019 or (b) January 1, 2020 through February 29, 2020. Seasonal employers should use the 2019 period. Do the analysis using each period to ensure you utilize the method that maximizes forgiveness.
- Eight Week Covered Period. To the extent eligible, of the Covered Period and Alternative Payroll Covered Period, do the analysis using each period to ensure you utilize the period that maximizes forgiveness.
- Be mindful of safe harbors and exceptions to forgiveness reductions. If you have had salary/wage or FTE reductions that would otherwise reduce forgiveness, determine the extent to which salary/wage or FTE restoration rules or applicable safe harbors apply or make changes accordingly to maximize forgiveness within any required timeframes, such as June 30.
- Documentation and Monitoring Use of Loan Proceeds. Place the PPP loan proceeds in a separate deposit account to ensure you can properly track the use of proceeds. Prioritize payroll, as at least 75% of loan proceeds must be used for payroll expenses in order to be eligible for full forgiveness. Coordinate with any third parties that process payroll (such as payroll processing company or leasing company) to ensure that the PPP loan proceeds are utilized to make the payments.
- Timing of submitting Forgiveness application. If possible, wait until after June 30, 2020 to submit the application, as both the salary/hourly wage and FTE reduction safe harbors are calculated as of June 30, 2020. Waiting would allow a company to determine whether it qualifies for either safe harbor as well as make any related hiring or compensation increases prior to such date to maximize forgiveness.
Processing the PPP Loan Forgiveness Application
The application includes four items, including the PPP Loan Forgiveness Calculation Form and PPP Schedule A, each of which will need to be provided to your PPP lender. The application also includes a PPP Schedule A Worksheet, to be completed for all employees to assist with properly calculating the PPP Schedule A items, and an optional demographical information form. While the PPP Schedule A Worksheet, or some equivalent file, must be completed and retained for six years following the later of repayment of forgiveness, these latter two items do not need to be provided to the lender.
You will need to submit a forgiveness request to your lender that includes a certification during the submission period which will be described in your loan documents. It is expected to be either July 1 through August 15, 2020, or the period between 60 and 90 days following your loan disbursement.
The application also provides clarity on certain documents that will need to be submitted with the application as well as some that must be maintained by the borrower but not submitted. These include the following, but see the application for more specific details:
Submitted to PPP Lender:
- PPP Loan Forgiveness Calculation Form and PPP Schedule A
- Documentation verifying the eligible cash compensation and non-cash benefit payments (Bank account statements and tax forms (or equivalent third-party payroll service provider reports)
- Payroll tax filings reported, or that will be reported, to the IRS (typically, Form 941)
- State quarterly business and individual employee wage reporting and unemployment insurance tax filings reported, or that will be reported, to the relevant state
- Payment receipts, cancelled checks, or account statements documenting the amount of any employer contributions to employee health insurance and retirement plans
- Documentation verifying certain FTE calculations (which may include at borrower’s election: payroll tax filings, state quarterly business and individual employee wage reporting and unemployment insurance tax filings).
- Documentation verifying qualification and eligible payments as to non-payroll expenses.
Retained but not submitted to PPP Lender:
- PPP Schedule A Worksheet or its equivalent
- Documentation supporting the listing of each individual employee in PPP Schedule A Worksheet Tables, including the salary/hourly wage reduction calculations
- Documentation regarding any employee job offers and refusals, firings for cause, voluntary resignations, and written requests by any employee for reductions in work schedule
- Documentation supporting the FTE reduction safe harbor
- All records relating to the borrower’s PPP loan, the PPP loan application, documentation supporting the Borrower’s certifications as to the necessity of the loan request and its eligibility for a PPP loan, the Borrower’s loan forgiveness application, and documentation demonstrating the Borrower’s material compliance with PPP requirements.
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About the Authors: Chad Porter, Mark Manning, Amanda Adam
Chad Porter is a partner in Burns & Levinson’s Finance, Middle-Market M&A and Private Equity, Securities Law, and Business & Transactions groups. He specializes in mergers and acquisitions, commercial financing arrangements, private equity investments and transactions, securities transactions and compliance, general business affairs, and business disputes. He can be reached at cporter@burnslev.com or 617.345.3686.
Mark Manning is a partner in Burns & Levinson’s Corporate, Venture Capital & Private Equity, and Intellectual Property Groups. Clients look to Mark Manning to achieve the best results in their most complex commercial transactions and internal business and legal issues. He regularly leads merger and acquisition transactions on behalf of both buyers and sellers, providing him with deep insight into what drives both sides of a deal – a perspective that helps him efficiently facilitate practical solutions to issues that keep deals from getting done. He can be reached at mmanning@burnslev.com or 617.345.3468.
