On May 15, 2020, the Small Business Administration (SBA) and the U.S. Treasury Department published a Loan Forgiveness Application for the CARES Act Paycheck Protection Program (PPP). As with other aspects of the PPP, it raises more questions while answering others.
Similar to the PPP loan process, we see additional guidance being released once the public has had an opportunity to digest the highlights below and communicate questions to the SBA. When this additional guidance will be issued is uncertain, as the first forgiveness applications will not be due for another 2-3 weeks based on receipt of funds on or about April 10, 2020.
Here are some highlights of key topics arising from the text of the Loan Forgiveness Application and its related Instructions (together, the “Application”):
- Borrowers with a biweekly or more frequent payroll schedule may use an alternative eight-week covered period (the “Alternative Payroll Covered Period”) that begins on the first day of the borrower’s first payroll period following its loan disbursement date.
- Full time equivalent (FTE) employees are determined based on a 40-hour work week, with an option to treat all employees who work fewer than 40 hours in a week as one-half (1/2) of an FTE.
- Prepayments of business mortgage interest during the covered period are expressly NOT forgivable. Prepayments of other qualified costs (e.g., employee bonuses) are not addressed, although it appears owner bonuses to absorb a PPP shortfall are not allowed.
- Qualified non-payroll costs incurred during the covered period that are paid on or before the next billing date (even if paid after the covered period) are forgivable. Payments during the covered period of qualified non-payroll costs that were incurred prior to the covered period (e.g., deferred rent) may also be forgivable, but additional guidance is needed to clarify this point.
- Reductions in headcount do not include employees who refuse a written offer to come back to work, quit or were fired for cause.
- Reductions in salary or wages are calculated by comparing the employees’ respective average pay rates during the applicable covered period to their respective average pay rates during the applicable reference period.
- Borrowers will be required to provide proof to support payroll and non-payroll expenses paid during the eight-week period following the disbursement of PPP funds. The documentation can take of the form of bank statements, payroll records, federal and state payroll forms, payment receipts and/or cancelled checks, lease agreements and statements and utility invoices, as well as health insurance and pension contribution statements.
- Certification of the borrower’s authorized representative is required, attesting to the accuracy of the information included in the application.
- The borrower also needs to separately maintain, but not include with the application, proof that no amount of the PPP was used to pay salaries in excess of $100,000 annualized cap.
We strongly recommend reviewing the forgiveness application to understand all the requirements and to ensure you can produce the information when the time arises. As always, we’re here to help, so please reach out to any member of the Magone team.
Stay tuned — it’s going to get interesting.