SBA and Treasury Release Paycheck Protection Program Loan Forgiveness Application (Good News & Bad News)
To our clients and friends,
‘Twas the night before May 15th, when all through the office of Axtell Haller & Slachta Not a creature was stirring, not even a mouse;
The tax and SBA PPP loan files were securely stored in the cloud with care,
In hopes that good times soon would be here;
The AHS staff were nestled all snug in their beds,
While visions of the PPP Loan guidance danced in their heads;
When out on the internet there arose such a clatter,
We sprang from the bed to see what was the matter.
Away to the computer we ﬂew like a ﬂash,
Tore open the passwords and booted up the Dell.
The Spring moon illuminated the monitors and gave lustre to the e-mail received,
When, what to our wondering eyes should appear,
But an e-mail from the SBA and the Department of the Treasury,
With brand new mouses we quickly clicked on the message received and we knew in a moment it must be the SBA PPP Loan Forgiveness news!
More rapid than eagles the AHS staff came,
They whistled, and shouted, and called each other by name;
“Now, Eric! now, Katie! now, John and Janet! On, Angela! on, Bob! on, Beth and Mary and Spencer!
To the top of the SBA PDF!!
Now read away! Read away! Read away all!”
As tax returns before the wild deadlines ﬂy,
When they meet with an obstacle, mount to the task;
So up to the office the coursers they ﬂew,
With the sleigh full of questions, and ideas too.
And then, in a twinkling, we heard on the roof.
The prancing and pawing of the SBA hoofs.
As we drew in our heads, and were turning around,
Down the chimney the SBA PDF’s came with a bound.
All dressed in fine print from head to foot,
And the PDF’s were all tarnished with complexity and questions;
A bundle of rules they had ﬂung on our backs,
The PDF’s —how they twinkled! The rules how merry!
The examples were like roses, the notes like a cherry!
The little words were drawn up in small font,
And the words were as white as the snow;
The SBA PDF’s were chubby and plump, like a jolly old elf,
And we laughed when we saw them, in spite of ourselves;
A wink of the eye and a twist of the page,
Soon gave us to know we had everything to dread;
We spoke not a word, but went straight to work,
And ﬁlled the Word document with guidance; then turned with a jerk,
And giving a nod, up the chimney the AHS Team rose;
They sprang to their sleigh, to their team gave a whistle,
And away they all flew like the down of a thistle,
But we heard them exclaim, as they drove out of sight, “Happy PPP Loan Forgiveness to all, and to all a good-night.”
Now that we have had a little fun, let us return to the process of what must be done to get your SBA PPP loan forgiven. On May 15th the SBA, in consultation with the Department of Treasury, released the Paycheck Protection Program (PPP) Loan Forgiveness Application and detailed instructions for the application. A copy of the PDF can be accessed on our website and can be downloaded from the SBA website.
SBA will also soon issue regulations and guidance to further assist borrowers as they complete their applications, and to provide lenders with guidance on their responsibilities.
“The form and instructions include several measures to reduce compliance burdens and simplify the process for borrowers, including:
- Options for borrowers to calculate payroll costs using an “alternative payroll covered period” that aligns with borrowers’ regular payroll cycles.
- Flexibility to include eligible payroll and non-payroll expenses paid or incurred during the eight-week period after receiving their PPP loan.
- Step-by-step instructions on how to perform the calculations required by the CARES Act to confirm eligibility for loan forgiveness.
- Borrower-friendly implementation of statutory exemptions from loan forgiveness reduction based on rehiring by June 30.
- Addition of a new exemption from the loan forgiveness reduction for borrowers who have made a good faith, written offer to rehire workers that was declined.”
We have reviewed the eleven pages of instructions and forms and the following commentary will attempt to identify the highlights and point out changes that may either be different from the original SBA guidance or provide some additional clarity to our interpretations of the limited guidance previously received.
I prepared a preliminary draft of this article on Saturday the 16th and then attempted to apply the guidance and instructions based on my understanding of the rules to an actual client situation. After re-reading the rules and reviewing an article that Tony Nitti had posted for Forbes, it was clear that I had to go back and revise my initial draft and to change the client worksheets that I prepared on Saturday.
The instructions certainly helped provide clarity to open questions that we had, but it also identified several instances where our previously communicated guidance needed to be changed.
The preparation of the SBA Loan Forgiveness Application is not going to be easy and will take you some time to prepare accurately.
Accordingly, let us get started with the PPP loan forgiveness process.
SBA PPP Loan Overview
Before we do a deeper dive into some of the changes it is important to briefly review the key components of the SBA PPP loan as well as the basic loan forgiveness concepts.
- The PPP loan application was based on a standard formula most of our clients used. It was 2.5 times the average monthly qualified payroll costs as determined from the 2019 tax returns. For the Schedule C filer with no employees it was based on the 2019 Schedule C income divided by 12 and multiplied by 2.5.
- Qualified payroll cost included gross wages and cost of providing employee health insurance coverage.
- The loan could be forgiven if the loan were used for qualifying costs during the 8-week period starting at day of funding.
- Gross payroll
- Medical insurance benefits
- Non-payroll costs such as rent, utilities and qualifying interest expense.
- If the total expenditures in the 8-week period exceeded the loan amount, and at least 75% of the expenditures were for payroll, the loan may be forgiven. If the 75% payroll test were not met, there was a high probability that not all the loan would be forgiven.
- Other key terms and questions included:
- The 8-week covered period starting with the day the loan was funded.
- Questions about what was meant by the “paid and incurred” phrase used in the original SBA guidance.
- The importance of Full time Equivalents (FTE’s) in determining loan forgiveness as it relates to measuring the average FTE’s in the following periods:
- During the 8-week period
- From February 15, 2019 to June 30, 2019, or
- From January 1, 2020 to February 29,2020
- Limits on employee compensation to $100,000
The above is not a complete list but are the primary components used in completing the PPP Loan Forgiveness Application.
The PPP Loan Forgiveness Application Form (SBA Form 3508)
The application consists of 11 pages of which 4 pages will need to be completed and submitted to the lender within 90 days after the end of the 8-week Covered Period. The application consists of the following:
- Pages 1-2: The instructions to complete the” PPP Loan Forgiveness Calculation Form”
- Page 3: The one-page PPP Loan Forgiveness Calculation Form that computes the amount of loan forgiveness.
- Page 4: The borrower certification page as to the accuracy of the application.
- Page 5: Instructions for the PPP Schedule A
- Page 6: The PPP Schedule A includes totals from the PPP Schedule A worksheet that includes the following categories:
- Payroll costs
- Average FTE’s
- Owners compensation
- Pages 7-8: Instructions for the PPP Schedule A Worksheet
- Page 9: The PPP Schedule A Worksheet that includes required employee information
- Pages 10-11: Instructions for what documents that will be required to be submitted.
Your first impression may be that this should be easy. All I must do is submit three pages and some documentation and the bank will be satisfied. However, based on what we are seeing, this process is more difficult and will take significant time to complete. If you have no employees and filed a Schedule C form, this will be much easier to complete.
Highlights and Guidance: SBA PPP Loan Forgiveness Instructions
The following represent our comments and observations related to the SBA Loan Forgiveness Instructions. It is our initial conclusions and there is a good chance we may not be entirely accurate with our opinions. Keep that in mind as we wait for additional SBA guidance. The page reference below is referenced to the 11-pages included in the Loan Forgiveness Application.
Page 1: Covered Period:
Enter the eight-week (56-day) Covered Period of your PPP loan. The first day of the Covered Period must be the same as the PPP Loan Disbursement Date. For example, if the Borrower received its PPP loan proceeds on Monday, April 20, the first day of the Covered Period is April 20 and the last day of the Covered Period is Sunday, June 14.
This is consistent with prior guidance.
Page 1: Alternative Payroll Covered Period:
For administrative convenience, Borrowers with a biweekly (or more frequent) payroll schedule may elect to calculate eligible payroll costs using the eight-week (56-day) period that begins on the first day of their first pay period following their PPP Loan Disbursement Date (the “Alternative Payroll Covered Period”).
- 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.
- Borrowers who elect to use the Alternative Payroll Covered Period must apply the Alternative Payroll Covered Period wherever there is a reference in this application to “the Covered Period or the Alternative Payroll Covered Period.”
- However, Borrowers must apply the Covered Period (not the Alternative Payroll Covered Period) wherever there is a reference in this application to “the Covered Period” only.
This is new and it should make it easier for or clients and should eliminate having to run another payroll within the 8-week period to capture the payroll for wages “incurred” in this period. There is additional commentary that discusses the payroll periods below that we will comment on.
The language does add some complexity to the calculations in that you now may have two separate periods to do the calculations where the instructions instruct you to do so. For example, you can use the “Alternative Period” for payroll but must use the “Covered Period” for non-payroll costs.
Page 2: Summary of Costs Eligible for Forgiveness:
Borrowers are eligible for loan forgiveness for the following costs:
Page 2: Eligible payroll costs:
- Borrowers are generally eligible for forgiveness for the payroll costs paid and payroll costs incurred during the eight-week (56-day) Covered Period (or Alternative Payroll Covered Period) (“payroll costs”).
- 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.
- 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.
- Otherwise, payroll costs must be paid during the Covered Period (or Alternative Payroll Covered Period).
- For each individual employee, the total amount of cash compensation eligible for forgiveness may not exceed an annual salary of $100,000, as prorated for the covered period.
- Count payroll costs that were both paid and incurred only once.
Based on our interpretation of “payroll costs paid, and payroll costs incurred” this is how we would calculate the payroll costs for the 8-week period.
- In the initial payroll post PPP funding, it appears you can include payroll for wages paid for days worked prior to the 8-week period. For example, if the first payroll following PPP funding includes two weeks of wages and only the second week is in the 8-week covered period you would still be able to count 100% of the wages.
- If the last payroll that falls into the 8-week covered period does not include wages up to and including day 56 you then get to use the next payroll to account for those wages that fall into the 8-week period.
- We have not gone through all the scenarios, but it appears this language may result in more than 8-weeks of payroll being counted. This seems too good to be true and this might change with final guidance.
Page 2: Eligible nonpayroll costs:
- Nonpayroll costs eligible for forgiveness consist of:
- covered mortgage obligations: payments of interest (not including any prepayment or payment of principal) on any business mortgage obligation on real or personal property incurred before February 15, 2020 (business mortgage interest payments).
- covered rent obligations: business rent or lease payments pursuant to lease agreements for real or personal property in force before February 15, 2020 (business rent or lease payments); and
- covered utility payments: business payments for a service for the distribution of electricity, gas, water, transportation, telephone, or internet access for which service began before February 15, 2020 (business utility payments).
- An eligible nonpayroll cost 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.
- Eligible nonpayroll costs cannot exceed 25% of the total forgiveness amount.
- Count nonpayroll costs that were both paid and incurred only once.
Based on our interpretation, the rules basically mirror the same concept as accounting for the payroll costs. However, there is a question that we do not have an answer for.
- Do you have to prorate any non-payroll costs paid in the “Covered Period” that are in full or in part incurred prior to the loan funding? It appears that the “paid or incurred” language may result in an amount higher than what would be calculated if you just used the “incurred” language.
- We would suggest doing an analysis on each non-payroll expenditure to prorate the cost pre and post funding and keep the documentation in anticipation of additional guidance.
Page 5: Instructions for PPP Schedule A:
The “PPP Schedule A” is used for computing the qualified payroll costs. The instructions do provide some clarity and guidance to questions that we have had and have communicated in our prior postings. Line item reference and guidance is as follows:
- For lines 6 through 9, during the Covered Period or the Alternative Payroll Covered Period:
- Line 6: Enter the total amount paid by the Borrower for employer contributions for employee health insurance, including employer contributions to a self-insured, employer-sponsored group health plan, but excluding any pre-tax or after-tax contributions by employees.
- Line 7: Enter the total amount paid by the Borrower for employer contributions to employee retirement plans, excluding any pre-tax or after-tax contributions by employees.
- Line 8: Enter the total amount paid by the Borrower for employer state and local taxes assessed on employee compensation (e.g., state unemployment insurance tax); do not list any taxes withheld from employee earnings.
- Line 9: Enter any amounts paid to owners (owner-employees, a self-employed individual, or general partners). This amount is capped at $15,385 (the eight-week equivalent of $100,000 per year) for each individual or the eight-week equivalent of their applicable compensation in 2019, whichever is lower.
Based on our interpretation, we have the following comments and/or questions that are referenced to the instructions above for lines 6-9 of the PPP Schedule A.
- Line 6: It appears that you will not be able to deduct 100% of your health insurance costs if you do not pay for 100% of the health insurance cost. In other words, if your monthly group health insurance premium is $4,000 and you cover 75% of the employee cost only $3,000 will be included as payroll costs.
- Line 7: The same rules will apply if you have a 401K plan and are making an employee match. To the extent paid, the match would qualify.
- There is no guidance on annual profit-sharing plan contributions that are determined after the end of the year. Based on this guidance, it does not appear they would be included unless declared and paid during the “Covered Period”.
- Line 8: This is just clarity that payroll is gross payroll and you do not include the employer portion of FICA or Medicare. However, state unemployment taxes would be an allowable expense.
- Line 9: This provides some clarity and guidance on owner compensation. Based on our reading this is what we would conclude:
- If owner compensation was less in 2019 that amount must be used in the computation.
- An increase in owner compensation during the 8-week covered period will probably not be allowed.
- If the owner compensation was more than $100,000 in 2019 and you keep that compensation the same during the 8-week period, no adjustment will be required
- For Line 11 “Enter the Borrower’s total average weekly full-time equivalency (FTE) during the chosen reference period.” For purposes of this calculation, the reference period is, at the Borrower’s election, either:
- February 15, 2019 to June 30, 2019.
- January 1, 2020 to February 29, 2020; or
- In the case of seasonal employers, either of the preceding periods or a consecutive twelve-week period between May 1, 2019 and September 15, 2019.
- For each employee, follow the same method that was used to calculate Average FTE on the PPP Schedule A Worksheet. Sum across all employees during the reference period and enter that total on this line.
This is the same guidance as we have previously received. However, as a reminder make sure you go through the calculations. In the calculations for “1-3” above you want to use the lowest number. This becomes your “denominator” in your calculations, and this may be extremely important if your FTE count is less when computed for the 8-week measuring period.
Page 7: Instructions for PPP Schedule A Worksheet:
This is the worksheet that must be completed to determine Full Time Equivalents (“FTE’s”). The applicant can complete the PPP Schedule A Worksheet or obtain an equivalent report from the Borrower’s payroll system or payroll processor. A summary of what needs to be included and our related comments are as follows:
- Page 7: Employee’s Name: Separately list each employee. Do not include any independent contractors, owner-employees, self-employed individuals, or partners.
- Page 7: Employee Identifier: Enter the last four digits of each employee’s Social Security Number.
- Page 7: Cash Compensation: Enter the sum of gross salary, wages, tips, commissions, paid leave (vacation, family, medical or sick leave, not including leave covered by the Families First Coronavirus Response Act), and allowances for dismissal or separation paid or incurred during the Covered Period or the Alternative Payroll Covered Period.
- For each individual employee, the total amount of cash compensation eligible for forgiveness may not exceed an annual salary of $100,000, as prorated for the Covered Period; therefore, do not enter more than $15,385 in Table 1 or Table 2 for any individual employee.
- Page 7: Average FTE: This calculates the average full-time equivalency (FTE) during the Covered Period or the Alternative Payroll Covered Period. For each employee, enter the average number of hours paid per week, divide by 40, and round the total to the nearest tenth.
- The maximum for each employee is capped at 1.0. 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.
- The above calculation will be used to determine whether the Borrower’s loan forgiveness amount must be reduced due to a statutory requirement concerning reductions in full-time equivalent employees. Borrowers are eligible for loan forgiveness for certain expenditures during the Covered Period or the Alternative Payroll Covered Period.
- However, the actual loan forgiveness amount that the Borrower will receive may be less, depending on whether the Borrower’s average weekly number of FTE employees during the Covered Period or the Alternative Payroll Covered Period was less than during the Borrower’s chosen reference period (see Instructions to PPP Schedule A, Line 11).
- The Borrower is exempt from such a reduction if the FTE Reduction Safe Harbor applies. See the FTE Reduction Safe Harbor instructions below.
This is a significant change in what we thought the FTE calculation would be and provides clarity and simplification. In summary:
- The definition of an FTE is 40 hours and not the 30 hours we were speculating it might be.
- The applicant will also have an option of using a “.5” for anyone not working 40 hours. There does not appear to be any limit on what a part-time employee was paid or how many hours they were working to receive the .5 FTE measurement.
- We are assuming the same rules would apply for purposes of determining the denominator as previously discussed.
- Page 7: Salary/Hourly Wage Reduction: This calculation will be used to determine whether the Borrower’s loan forgiveness amount must be reduced due to a statutory requirement concerning reductions in employee salary and wages.
- Borrowers are eligible for loan forgiveness for certain expenditures during the Covered Period or the Alternative Payroll Covered Period.
- However, the actual amount of loan forgiveness the Borrower will receive may be less, depending on whether the salary or hourly wages of certain employees during the Covered Period or the Alternative Payroll Covered Period was less than during the period from January 1, 2020 to March 31, 2020.
- If the Borrower restored salary/hourly wage levels, the Borrower may be eligible for elimination of the Salary/Hourly Wage Reduction amount.
- Borrowers must complete this worksheet to determine whether to reduce the amount of loan forgiveness for which they are eligible.
- Complete the Salary/Hour Wage Reduction column only for employees whose salaries or hourly wages were reduced by more than 25% during the Covered Period or the Alternative Payroll Covered Period as compared to the period of January 1, 2020 through March 31, 2020.
- Page 8: FTE Reduction Exceptions: Indicate the FTE of:
- (1) any positions for which the Borrower made a good-faith, written offer to rehire an employee during the Covered Period or the Alternative Payroll Covered Period which was rejected by the employee; and
- (2) any employees who during the Covered Period or the Alternative Payroll Covered Period
- (a) were fired for cause,
- (b) voluntarily resigned, or
- (c) voluntarily requested and received a reduction of their hours.
- In all these cases, include these FTEs on this line only if the position was not filled by a new employee. Any FTE reductions in these cases do not reduce the Borrower’s loan forgiveness.
This is similar to prior guidance but adds clarity. It is extremely important to document your files if you have made an offer to re-hire but have been turned down. To meet this exception, it must be in “writing”, and we do not believe an e-mail communication will meet the definition. However, an employee communication via an e-mail response to your written offer to rehire will probably suffice to document the files that they refused to return to work.
- Page 8: FTE Reduction Safe Harbor
- A safe harbor under applicable law and regulation exempts certain borrowers from the loan forgiveness reduction based on FTE employee levels.
- Specifically, the Borrower is exempt from the reduction in loan forgiveness based on FTE employees described above if both of the following conditions are met:
- The Borrower reduced its FTE employee levels in the period beginning February 15, 2020, and ending April 26, 2020; and
- The Borrower then restored its FTE employee levels by not later than June 30, 2020 to its FTE employee levels in the Borrower’s pay period that included February 15, 2020.
This is a significant safe harbor provision but confusing. In summary:
- If you restore your workforce by June 30th you should meet the exception if you had an employee reduction from February 15th to April 26th.
- If you did not reduce your workforce during this period, the safe harbor does not apply
- How do you count your FTE’s if you hire everyone back on June 30th?
- Do they have to be working the same # of hours?
- Do we assume they receive an FTE count based on what they worked before?
- What if it is a new employee or a new position?
As you can see, there remains some questions on how this safe harbor will be applied.
Conclusion: Highlights of this Guidance:
Other than our attempt to add some humor in our introduction the following are the main items to take away from this communication:
- The forms are complicated and confusing. However, we are here to help you with the forgiveness application.
- We expect further guidance from the SBA but are not expecting they or Congress will make it easier.
- We now can select payroll periods more closely aligned with our 8-week measuring period. Based on the guidance it does not appear you will have to run a separate payroll at the end of the 8-week time. However, it may be of benefit to not use the “alternative covered period” if you get to use payroll costs in the initial pay period that pre-dates the start of the 8-week measuring period.
- The language of “paid or incurred” seems to eliminate having to use the “accrual method” to measure qualifying non-payroll costs. It appears you get to include costs paid during the 8-week covered period and then pick up additional costs after the 8-week period if a portion of the costs were “incurred” during the 8-week period as long as they are paid in the next traditional billing cycle.
- The definition of an FTE is 40 hours. For anyone else working less than a 40-hour week you can use a “.5”
- Qualifying group medical insurance must be reduced to the extent of any employee reimbursement.
- Owners must use the lower of 2019 compensation or the 2020 compensation paid during the 8-week covered period. In other words, it does not appear you can give yourself a raise to maximize the loan forgiveness if your 2019 compensation was less than $100,000.
- What about family members who are on the payroll and are related. Will the “attribution” rules apply in determining increases in compensation that fall into the 8-week measuring period?
- We are not sure if bonuses paid during the 8-week covered period will be allowed. The lack of language in the instructions saying you cannot do it would imply that you can. However, document your files to support the reason for any bonuses paid during this period.
- Still a question if you can include a profit-sharing contribution if it has not been paid during the 8-week period.
- We still have a problem with how partners are to be treated as it relates to health insurance and retirement plan contributions. Partners are treated as “self-employed” like a Schedule C owner and the medial insurance and retirement plan costs cannot be counted. If you are an owner/employee of an S Corporation you can include the owner’s health insurance as qualified payroll costs. Not sure if the SBA guidance will change but this does create a “fairness” issue.
- If you still owe employees compensation pre-funding period it appears you can pay them and have those expenses qualify as payroll costs.
- It does not appear that the accrued interest on the PPP loan will be part of the forgiveness. Accordingly, plan on paying the accrued interest.
- The employee FTE calculations will be straight forward.
- The computation of the calculations to determine whether any employees had a drop in their compensation by more than 25% during the 8-week period could be time consuming. There are several measuring periods that come into play and the guidance for the hourly workers calculations will be needed. Extremely confusing!
- The documentation required will be significant and requires accurate payroll records.
- Other possible changes that will require an act of Congress may include:
- Expansion of the “8-week covered period”.
- Elimination of the 75% payroll requirement.
- Increasing the loan length to 5-years if a portion of the loan is not forgiven.
All we can say is stay tuned and we hope this update helps!
Amy, Linda, Rod, and the AHS team: Angela, Bethe, Bob, Jonel, Juli, Katie, Mary, Eric, Eileen, Phil, Rick, Spencer, Tracey, Chantel, Angie, Bobbi, Janet, John, Dave & Dan