PPP Loan Forgiveness Application: 6 Key Takeaways

By May 22, 2020 June 2nd, 2020 CARES Act
PPP Loan Forgiveness Application - 6 Key Takeaways

On Friday, May 15, 2020, the U.S. Small Business Administration (SBA) released the Paycheck Protection Program (PPP) Loan Forgiveness Application (Form 3508) and instructions on their official website. The two pieces modify and clarify guidance previously issued by statute, interim rules and/or frequently asked questions (FAQs).

Under this newly released, official guidance, borrowers will have two options to calculate payroll costs, including use of a loan support period that matches with the applicant’s payroll schedule. We expect the SBA to issue further regulations and other guidance in the weeks to come.

In the meantime, we have identified five key takeaways from the PPP loan forgiveness application and coinciding instructions.

1. Covered period

The guidance confirms that the eight-week (56 day) covered period begins on the PPP loan disbursement date. The instructions also allow borrowers with a biweekly (or more frequent) payroll schedule to elect to use an “alternative payroll covered period” to determine eligible payroll costs only. The alternative payroll covered period is the eight-week period beginning on the date of the first pay period following the loan disbursement date.

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The idea behind the alternative payroll covered period is to provide a covered period option which better aligns with the borrower’s pay periods. This means eligible payroll costs (subject to the $100,000 annualized cap) that are incurred and paid during the covered period, or the alternative covered period, generally are eligible for forgiveness.

However, for eligible non-payroll costs (i.e., mortgage interest, rental/lease payments and utilities), the borrower must use the eight-week covered period beginning on the date of loan disbursement.

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2. $2 million certification

Any borrower who receives a PPP loan in an original amount in excess of $2 million, must affirmatively check a box on the PPP Loan Forgiveness Application (Form 3508). This comes in light of the SBA FAQ #46, released on May 13, 2020, indicating:

“Any borrower that, together with its affiliates, received PPP loans with an original principal amount of less than $2 million will be deemed to have made the required certification concerning the necessity of the loan request in good faith. SBA has determined that this safe harbor is appropriate because borrowers with loans below this threshold are generally less likely to have had access to adequate sources of liquidity in the current economic environment than borrowers that obtained larger loans. This safe harbor will also promote economic certainty as PPP borrowers with more limited resources endeavor to retain and rehire employees. In addition, given the large volume of PPP loans, this approach will enable SBA to conserve its finite audit resources and focus its reviews on larger loans, where the compliance effort may yield higher returns.

“Importantly, borrowers with loans greater than $2 million that do not satisfy this safe harbor may still have an adequate basis for making the required good-faith certification, based on their individual circumstances in light of the language of the certification and SBA guidance.”

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3. Payroll costs

As noted above, the loan forgiveness application allows an eligible PPP borrower to elect the “alternative payroll covered period.” This alternative payroll covered period allows an eligible borrower to align the beginning of the eight-week (56-day) period to the first day of its first pay period following the PPP loan disbursement date for determining eligible payroll costs.

A borrower must have a biweekly or more frequent payroll schedule to be eligible to elect to use this alternative payroll covered period. In addition, if the borrower elects the alternative method, it must use the alternative payroll covered period to determine eligible payroll costs throughout the loan forgiveness application, unless use of the normal covered period is mandated.

The application provides an example of the alternative method in practice:

For example, if the Borrower received its PPP loan proceeds on Monday, April 20, and the first day of its 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.

The application also clarified that eligible payroll costs are considered incurred on the date the employee’s pay is earned, and are considered paid on the day that paychecks are distributed or when the borrower originates an ACH credit transaction. The instructions further provide that eligible payroll costs that are incurred but not actually paid during the 56-day covered period (or the alternative payroll covered period, if eligible and elected) are still eligible for forgiveness provided that the amounts are actually paid on or before the next regular payroll date.  Otherwise, eligible payroll costs must be incurred and paid during the applicable 56-day covered period.

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4. Non-payroll eligible costs

Unlike payroll costs, a borrower cannot elect the alternative payroll covered period for purposes of determining eligible non-payroll costs (i.e., covered mortgage interest, rent/lease, utilities). Up to 25% of a borrower’s PPP loan forgiveness amount may be comprised of eligible non-payroll costs, which are either (i) paid during the covered period, or (ii) incurred during the covered period and paid on or before the next regular billing date, even if that billing date is after the conclusion of the covered period All eligible non-payroll costs must relate to obligations existing prior to February 15, 2020, and prepayments of non-payroll costs before they are incurred are not eligible costs.

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5. Full-time equivalent employees (FTEE)

Measurement

The application explains how to measure full-time equivalent employees (FTEEs) (referred to in Form 3508 as “full-time equivalency” or “FTE”). Ultimately, the calculation is based on a 40-hour workweek (not a 30 hour work week as otherwise prescribed by SBA or AICPA guidance). To compute the FTEEs, take the number of hours paid per week during the covered period, divide by 40, and round the total to the nearest tenth. The instructions limit the maximum for each employee to 1.0.

In a simplified method a borrower can assign a 1.0 to an employee that works 40 hours or more per week and a 0.5 to an employee that works fewer than 40 hours per week.

PPP Loan Forgiveness Reduction

As many are aware, the PPP loan forgiveness amount is proportionately reduced by the borrower’s FTEE headcount during the covered period (or alternative payroll covered period, if applicable), unless FTEE headcount is restored to Feb. 15, 2020 levels by June 30, 2020. However, any headcount reductions that come under the following exceptions will not result in FTEE headcount reduction for purposes of reducing the amount of PPP loan forgiveness if not filled by a new employee:

  1. Any positions for which the borrower made a good-faith, written offer to rehire an employee during the covered period which was rejected by the employee.
  2. Any employees who, during the covered period (a) were fired for cause, (b) voluntarily resigned, or (c) voluntarily requested and received reduced hours.

If FTEE headcount is not restored to the level on February 15, 2020 by June 30, 2020, then the loan forgiveness amount is proportionately reduced.

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6. Salary/hourly wage reduction

The PPP loan forgiveness amount may also be reduced if the borrower cuts the salary or hourly wage (as applicable) of employees whose annualized compensation is less than $100,000 by more than 25% during the covered period (or the alternative covered period) compared to the first calendar quarter of 2020.

However, there is a safe harbor. If, by June 30, 2020, the employer restores employees’ average annual salaries/hourly wage to at least 75% of the average salary/hourly wage between February 15 – April 26, 2020,  then there would be no reduction in the PPP loan forgiveness amount.

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What are the components of the application?

The loan forgiveness application consists of three mandatory components (and one optional). The three required segments are as follows:

1. Schedule A Worksheet (or an equivalent report from the borrower’s payroll system or payroll processor). The borrower completes a majority of the analysis on this worksheet, including computing eligible compensation for each employee, determining the number of FTEs, and calculating salary/wage and FTE reduction amounts. Do not include independent contractors, owner-employees, self-employed individuals and partners in the computation.

2. Schedule A. Schedule A pulls information from the Worksheet and adds amounts for group healthcare benefits, retirement benefits and state/local tax withholding. These amounts are in addition to the maximum compensation per employee. Schedule A also includes amounts paid to owner-employees and partners.

3. Loan Forgiveness Calculation Form. The calculation form reports mortgage interest paid or incurred during the covered period, business rent or lease payments, and business utility payments.

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How can Squar Milner help?

Not only is the application necessary for borrowers to obtain forgiveness, but it also provides much-needed clarity for a number of borrower situations.

However, there are certainly questions for which we continue to seek the answers and borrowers should consult with their Squar Milner advisors in light of the additional guidance.

Still have questions about how the Payment Protection Program applies to your specific business?

Let's Connect!

KEY CONTACTS

Caroline Banzali
Partner, Tax Services

cbanzali@squarmilner.com

Pauline Dumas
Principal, Consulting Services

pdumas@squarmilner.com

Disclaimer: This material has been prepared for informational purposes only, and is not intended to substitute for obtaining accounting, tax, or financial advice from a professional tax planner or financial planner. All information is provided “as is,” with no guarantee of completeness, accuracy, timeliness or of the results obtained from the use of this information.

Paycheck Protection Program Loan Forgiveness Series | Part III

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