Now that you have your Paycheck Protection Program loan, what steps should you take to ensure you receive the forgiveness you expect from your bank and the SBA?
We created this two-part article as a resource to assist you with the forgiveness process. Part one of the article focuses on the process and steps you might consider implementing to manage the forgiveness process. Part two contains a summary of requirements borrowers must meet to obtain forgiveness. This section also includes a link to the Loan Forgiveness Application and related instructions. The application, released late on Friday, May 15, 2020, goes a long way in resolving many of the open questions on the forgiveness process. Even with these clarifications, banks and borrowers will need additional clarity to finalize the application process.
The guidance from the SBA to banks and borrowers is evolving and we will add to and edit this article as new information becomes available. While your bank should always be the main source for final forgiveness guidelines, please remember they are working hard to navigate through some unanswered questions as well.
Part 1 – Actions to Consider as Part of the PPP Forgiveness Process
- Take the time to develop a plan and a budget that includes the projected date and amount of the expenses you expect to be included in your PPP forgiveness application. Map out the expected eligible expenses in a spreadsheet and track the dollars as they are spent.
- Create a virtual or physical folder and save copies of all supporting documents as the funds are spent. If you have a document at hand and are not sure if it will be needed, add it to the folder. This will make the process for gathering supporting documentation much easier as your eight-week period comes to a close.
- As you set up your eight-week PPP budget, keep in mind that your loan was based on roughly 10 weeks of payroll and all forgivable amounts must be spent within 8 weeks of the first disbursement of loan funds. Additionally, 75% of the loan amount must be spent on payroll costs if you plan to take full advantage of the forgiveness aspect of the program.
- Stay in regular communication with your banker. This is an evolving process and banks do not have all the information or expectations from the SBA. Regular communication with your banker will ensure you stay up to date on the latest developments and it will also allow you to share your plans with them. While they still need additional guidance from the SBA, having their support on your plans will be an important part of the forgiveness process. Keep in mind that your banker is on your side in this process. Banks do not want to manage and collect on small loan balances that will result when only a portion of your loan is forgiven. Their goal will be loan forgiveness. With this in mind, use them as a resource to ensure you are following the process before you reach the end of the 8-week forgiveness period.
- Keep the original goal of the program in mind as you make decisions on how your PPP loan funds are spent. The program was established to keep employees working – the intent was not to increase compensation, but rather maintain it. In the absence of guidance related to some types of spending, focusing on the program goals will help ensure you make choices that are easier to defend when seeking forgiveness. If a compensation program was not in place on February 15, 2020, it may be difficult to support if it is added during the eight-week period.
- Take a close look at your financial forecast as you develop a plan for your PPP funds. 100% forgiveness depends on spending 10 weeks of payroll expense on allowable expenses within an 8 period of time. Based on your current sales results and staffing levels, you may determine it makes more sense for your business to use the funds over a 12 to 16 week period to support your necessary staffing levels. This may limit you to only partial forgiveness, however the additional working capital of the remaining loan balance may be just what your business needs to survive through the crisis and keep your team employed.
Part 2 – Summary of Borrower Requirements to Obtain Loan Forgiveness
The Paycheck Protection Program Loan Forgiveness Application was released on Friday, May 13, 2020.
Forgiveness, in full or in part, of your PPP loan will be based on several factors. The list of considerations below is based on the guidance we have been able gather and is not an exhaustive list. Although the PPP Loan Forgiveness Application has been released, this is still an evolving process and we will make our best effort to keep this article updated. More current information may be available directly from the SBA or your bank.
The Covered Period is the 56 day period beginning on the first day loan proceeds are disbursed to the Borrower. (Example – If you received your proceeds on Monday, April 20th, the first day of the Covered Period will be April 20th and the last day of the Covered Period is Sunday, June 14th.)
Alternative Payroll Covered Period
Borrowers that pay biweekly or more frequently may elect an Alternative Payroll Covered Period that aligns with the first day of the pay period following loan disbursement. This alternative period may only be used for calculating eligible payroll. All other eligible expenses will use the Covered Period outlined above. (Example – If you received your proceeds on Monday, April 20th and the first day of your next pay period begins on Sunday, April 26th, the first day of the Alternative Payroll Covered Period will be April 26th and and the last day of the Alternative Payroll Covered Period will be Saturday, June 20th.) Borrowers that elect to use the Alternative Payroll Covered Period must use this same period anytime there is a reference to “the Covered Period or the Alternative Payroll Covered Period”. Borrowers must apply the Covered Period (not the Alternative Payroll Covered Period) when the application only references the “Covered Period.”
One of the factors that will impact forgiveness is whether the funds are spent on allowable expenses during the eight-week covered period or alternate covered period.
Expenses eligible for forgiveness include:
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.
Eligible Payroll Costs include:
- Gross wages including salary, wages, and tips up to a maximum amount of $15,385 per individual (based on Section III(1)(f)(i )of the SBA Interim Final Rule Regarding Requirements for Certain Pledges)
- Gross wages does include time paid for sick, vacation, parental, medical, or family leave. (This does not include pay required by the FFCRA – see the list of ineligible expenses below)
- Employer paid healthcare expenses (the employee portion of your healthcare expense is included in gross wages)
- Employer matching for retirement contributions
- State unemployment taxes
- Owner compensation replacement (based on Section III(1)(b) of SBA Interim Final Rule Regarding Rules for Additional Eligibility Requirements)
Payroll expenses that are not eligible for forgiveness include:
- Qualified sick or FMLA payments made to employees through the FFCRA. Since these payments are eligible for immediate credit on your 941 payments or by using Form 7200, the CARES Act expressly excludes these payments from the forgiveness calculation of a PPP loan. (question 8 of the SBA’s FAQ document)
- Employer social security, Medicare, and federal unemployment payments
- Payments to independent contractors (1099 payments)
Owner compensation may not exceed eight weeks worth of 2019 compensation and is capped at $15,385 per individual. This applies to owner-employees, self-employed, and individual/general partners.
Eligible Nonpayroll Costs
- 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”)
- 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.
Borrowers are limited to spending no more than 25% of the loan proceeds on non payroll expenses. Any non payroll expenses greater than 25% will reduce the amount of loan forgiveness available to the borrower.
Salary & Hourly Wage Reductions
The PPP Schedule A Worksheet included with the Loan Forgiveness Application provides a calculation that reduces loan forgiveness based on any salary or wage reductions greater than 25%. The actual amount of loan forgiveness the Borrower will receive may be reduced if the salary or hourly wages of individual 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 will complete the worksheet on pages 7 and 8 of the Loan Forgiveness Application to determine if the loan forgiveness amount will be reduced due to salary or wage reductions.
One of the larger significant requirements for a Borrower to receive full forgiveness is their ability to maintain a consistent staffing level. This is will be measured by comparing your Full Time Equivalent (FTE) employee count to a prior period. The Loan Forgiveness Application states:
To calculate 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. 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 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
FTE Reduction Exception
The forgiveness process provides for certain reductions in the FTE requirements. A Borrower may reduce the number of required FTE’s if any of the following conditions are met:
- A good-faith written offer to rehire any employee during the Covered Period or the Alternative Payroll Covered Period is rejected by the employee
- Employee was fired for cause during the Covered Period or the Alternative Payroll Covered Period
- Employee voluntarily resigned during the Covered Period or the Alternative Payroll Covered Period
- Employee voluntarily requested and received a reduction in hours during the Covered Period or the Alternative Covered Period
FTE Reduction Safe Harbor
Borrowers are exempt from the forgiveness reduction calculations above if they meet both of the following conditions:
- The Borrower reduced its FTE employee levels in the period beginning February 15, 2020, and ending April 26, 2020
- 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
Documentation Required for Forgiveness
This list includes some of the documents that your bank may ask you to provide as part of your loan forgiveness application. Please check with your bank for a final list of required documents:
*PPP Loan Forgiveness Application
*PPP Schedule A
- Documentation verifying the eligible cash compensation and non-cash benefit payments from the Covered Period or the Alternative Payroll Covered Period consisting of each of the following:
- Bank account statements or third-party payroll service provider reports documenting the amount of cash compensation paid to employees.
- Tax forms (or equivalent third-party payroll service provider reports) for the periods that overlap with the Covered Period or the Alternative Payroll Covered Period:
- 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 that the Borrower included in the forgiveness amount (PPP Schedule A, lines (6) and (7)).
*Full Time Equivalents
Documentation showing (at the election of the Borrower):
- The average number of FTE employees on payroll per month employed by the Borrower between February 15, 2019 and June 30, 2019
- The average number of FTE employees on payroll per month employed by the Borrower between January 1, 2020 and February 29, 2020
- In the case of a seasonal employer, the average number of FTE employees on payroll per month employed by the Borrower between February 15, 2019 and June 30, 2019; between January 1, 2020 and February 29, 2020; or any consecutive twelve week period between May 1, 2019 and September 15, 2019
The selected time period must be the same time period selected for purposes of completing PPP Schedule A, line 11. Documents may include payroll tax filings reported, or that will be reported, to the IRS (typically, Form 941) and state quarterly business and individual employee wage reporting and unemployment insurance tax filings reported, or that will be reported, to the relevant state. Documents submitted may cover periods longer than the specific time period.
Documentation verifying existence of the obligations/services prior to February 15, 2020 and eligible payments from the Covered Period.
- Business mortgage interest payments: Copy of lender amortization schedule and receipts or cancelled checks verifying eligible payments from the Covered Period; or lender account statements from February 2020 and the months of the Covered Period through one month after the end of the Covered Period verifying interest amounts and eligible payments.
- Business rent or lease payments: Copy of current lease agreement and receipts or cancelled checks verifying eligible payments from the Covered Period; or lessor account statements from February 2020 and from the Covered Period through one month after the end of the Covered Period verifying eligible payments.
- Business utility payments: Copy of invoices from February 2020 and those paid during the Covered Period and receipts, cancelled checks, or account statements verifying those eligible payments.
Additional Documentation Borrowers Must Keep On File For Six Years
PPP Schedule A Worksheet or its equivalent and the following:
- Documentation supporting the listing of each individual employee in PPP Schedule A Worksheet Table 1, including the “Salary/Hourly Wage Reduction” calculation, if necessary
- Documentation supporting the listing of each individual employee in PPP Schedule A Worksheet Table 2; specifically, that each listed employee received during any single pay period in 2019 compensation at an annualized rate of more than $100,000
- 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 PPP Schedule A Worksheet “FTE Reduction Safe Harbor”
Borrowers must also maintain records relating to their PPP loan, including documentation submitted with their loan application, documentation supporting the certifications as to the necessity of the loan request and its eligibility for a PPP loan, documentation necessary to support the loan forgiveness application, and documentation demonstrating the material compliance with PPP requirements. The Borrower must retain all such documentation in its files for six years after the date the loan is forgiven or repaid in full, and permit authorized representatives of SBA, including representatives of its Office of Inspector General, to access such files upon request.
Good Faith Certification Safe Harbor
On May 13, 2020 the SBA released a safe harbor provision related to the good faith certification of the economic uncertainty for all borrowers that, together with their affiliates, received loans with original principal amounts of less than $2MM. The safe harbor deems that these borrowers have, in good faith, made the required certification concerning the necessity of the loan request. (question 46 of the SBA’s FAQ document) With this provision, the SBA has answered one of the more looming questions regarding a borrowers true eligibility to participate in the loan program and ultimately to receive forgiveness.
This summary has been provided as a courtesy and all information contained in this article should be confirmed through your bank or the SBA website.