SBA Releases Complicated PPP Loan Forgiveness Application and Expanded FAQ

(Parker Tax Publishing May 2020)

Last Friday, the Small Business Administration (SBA) released the Paycheck Protection Program (PPP) Loan Forgiveness Application, along with detailed instructions for the application. In conjunction with the issuance of this application, the SBA also issued an expanded Frequently Asked Questions (FAQs) on the PPP loans (PPP FAQs document). In addition to answering questions about loan forgiveness, the expanded PPP FAQs document addresses numerous other issues and promulgates a safe harbor with respect to the required certification that a PPP loan was necessary to support the recipient's ongoing operations.

The CARES Act (Pub. L. 116-136), which was signed into law on March 27, 2020, included a Paycheck Protection Program (PPP). The program authorized the Small Business Administration (SBA) to guarantee $349 billion in new loans to eligible businesses and nonprofits affected by coronavirus/COVID-19. Congress subsequently added another $310 billion to the program. Loans under the PPP may qualify for tax-free loan forgiveness and that debt forgiveness is not includible in income. Maximum loan amounts, subject to a $10 million limit, are set at 2.5 times the borrower's average monthly payroll costs. Loan proceeds can be used for payroll costs, utility payments, rent, and interest on certain mortgages.

On May 15, the SBA, in consultation with the Department of the Treasury, released the Paycheck Protection Program (PPP) Loan Forgiveness Application, along with detailed instructions for the application. The SBA also issued 17 pages of PPP frequently asked questions (FAQs), which include guidance on eligibility and certification requirements, information that lenders need to collect, as well as rules relating to the $10 million maximum loan amount. For a discussion of key items in the expanded FAQ addressing issues other than loan forgiveness, see the final section of this article.

Observation: As the AICPA and many practitioners have observed, the SBA PPP Forgiveness Application is extremely complicated and will be quite time-consuming for any practitioner completing it for a client. According to the SBA, borrowers and lenders may rely on the guidance provided in the PPP FAQs document as SBA's interpretation of the CARES Act and of the Paycheck Protection Program Interim Final Rules (PPP Interim Final Rules). The government will not challenge lender PPP actions that conform to this guidance, and to the PPP Interim Final Rules and any subsequent rulemaking in effect at the time.

The loan forgiveness form and instructions outline, for PPP borrowers, how to apply for forgiveness of the PPP loans in a manner that is consistent with the CARES Act that created the program. The form and instructions include several measures which the SBA said are aimed at reducing compliance burdens and simplifying the process for borrowers, including:

(1) Options for borrowers to calculate payroll costs using an "alternative payroll covered period" that aligns with borrowers' regular payroll cycles

(2) Flexibility to include eligible payroll and non-payroll expenses paid or incurred during the eight-week period after receiving their PPP loan

(3) Step-by-step instructions on how to perform the calculations required by the CARES Act to confirm eligibility for loan forgiveness

(4) Borrower-friendly implementation of statutory exemptions from loan forgiveness reduction based on rehiring by June 30

(5) 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

The loan forgiveness application and instructions released by the SBA last Friday are designed to help small businesses and self-employed individuals seek forgiveness at the conclusion of the PPP's eight-week covered period, which begins with the disbursement of the loan to the small business.

Observation: It should be noted that the application and instructions are a work in progress as the SBA said that it will soon be issuing regulations and additional guidance to further assist borrowers as they complete their applications. The SBA also said that it will be providing lenders with additional guidance on their PPP responsibilities.

Summary of Loan Forgiveness Calculation

The total amount of loan forgiveness is the smaller of:

(1) eligible payroll costs divided by 0.75;

(2) the entire PPP loan amount; or

(3) for the Covered Period (defined below), the sum of total eligible payroll costs plus business mortgage interest payments, business rent or lease payments, business utility payments, less the loan forgiveness reduction required for salary/hourly wage reductions in excess of 25 percent for certain employees (see discussion in Schedule A, below) multiplied by either (i) the full-time equivalency (FTE) reduction quotient (total average FTE divided by the average FTE during the borrower's chosen reference period), or (ii) 1 if the FTE safe harbor is met (see discussions below under PPP Schedule A - Reductions of Loan Forgiveness and Safe Harbors That Prevent Reduction of Loan Forgiveness Amount).

Eligible Payroll Costs

The application begins with a calculation of eligible payroll costs incurred during the Covered Period or the Alternative Payroll Covered Period. The Covered Period is defined as the eight-week (56-day) Covered Period of a taxpayer's PPP loan. The first day of the Covered Period must be the same as the PPP Loan Disbursement Date.

The Loan Disbursement Date is the date the borrower received the PPP loan proceeds from the lender. If loan proceeds were received on more than one date, the Loan Disbursement Date is the first date on which the borrower received the PPP loan proceeds.

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 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. Thus, payroll costs incurred during the loan period are eligible for forgiveness even if the paycheck date falls outside the eight-week loan period.

Example: Joe's Restaurant 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.

For administrative convenience, PPP 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. This is known as the Alternative Payroll Covered Period.

Example: Joe's Restaurant 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 for Joe's Restaurant 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 the PPP loan forgiveness 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 the application to "the Covered Period" only.

Gray Area The loan forgiveness application assumes that the loan disbursement date is the same as the date the loan was funded by the lender. However, this might not be the case where a borrower did not use his or her financial institution to apply for the PPP loan. If the borrower used another institution, it would take at least a day or two to transmit the funds from that institution to the borrower and an error in this date could make a difference in the amount that qualifies for forgiveness.

Included in eligible payroll costs is the total amount paid to owner-employees, a self-employed individual, and general partners.

Observation: Because there is no definition of the term "owner-employee," some practitioners have questioned whether the term only refers to sole proprietors and partners, or whether it also includes corporate shareholders. Another issue is whether attribution rules apply to spouses and whether a 1-percent shareholder is considered an owner-employee.

As noted in the SBA Interim Final Regulations on PPP, payroll costs for employers other than independent contractors or sole proprietors include payments for the provision of employee benefits consisting of group health care coverage and retirement. However, payroll costs for independent contractors or sole proprietors do not include retirement payments.

Gray Area: While Line 7 of PPP Schedule A of the loan forgiveness form includes as payroll costs employer contributions to employee retirement plans, some have questioned whether that includes 2019 contributions to employee pension or retirement plans or only 2020 contributions.

The CARES Act excludes from the definition of payroll costs any employee compensation in excess of an annual salary of $100,000. Practitioners questioned whether that exclusion applied to all employee benefits of monetary value. In FAQ 7, the SBA answered no. The exclusion of compensation in excess of $100,000 annually applies only to cash compensation, not to non-cash benefits, including:

(1) employer contributions to defined-benefit or defined-contribution retirement plans;

(2) payment for the provision of employee benefits consisting of group health care coverage, including insurance premiums, and

(3) payment of state and local taxes assessed on compensation of employees.

Eligible Non-Payroll Costs

Non-payroll costs eligible for loan forgiveness include the following:

(1) covered mortgage obligations, which are 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");

(2) covered rent obligations, which are 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

(3) covered utility payments, which are 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").

In order to be part of the amount forgiven, 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 percent of the total forgiveness amount. Nonpayroll costs that were both paid and incurred are counted only once.

Observation: Because the instructions for covered utility payments say that such payments apply to costs for service that began before February 15, 2020, it's unclear what would happen if a business owner changed utility providers after February 15, 2020, at the same business location or started service at a new business location after February 15. Additionally, where amounts are paid during the covered period for mortgage, rent, or utility services that are provided during the covered period as well as after the covered period, do such amounts have to be prorated?

PPP Schedule A - Reductions of Loan Forgiveness

Part of the loan forgiveness calculation involves a calculation of the number of employees at the time of the loan application, the number of employees at the time of the loan forgiveness application, and a computation of the FTE and/or payroll rate reductions in the amount of the loan that may be forgiven.

As part of the loan forgiveness application, borrowers must calculate the average FTE during the Covered Period or the Alternative Payroll Covered Period. For each employee, the borrower must calculate the average number of hours paid to that employee per week, divide that amount 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.

Observation: Some borrowers had hoped that the term "full-time" might mean an employee working 30 hours a week as some agencies use. For example, healthcare.gov defines a full-time employee as any employee who works an average of at least 30 hours per week for more than 120 days in a year. But the loan forgiveness application clarifies that full time means 40 hours or more per week.

This FTE calculation is then used to determine whether the borrower's loan forgiveness amount must be reduced as a result of reductions in FTE 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. The chosen reference period is, at the borrower's election, either:

(1) February 15, 2019 to June 30, 2019;

(2) January 1, 2020 to February 29, 2020; or

(3) 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.

A borrower is also required to calculate a Salary/Hourly Wage Reduction amount. This calculation is used to determine whether the borrower's loan forgiveness amount must be reduced as a result of reductions in employee salary and wages. While borrowers are eligible for loan forgiveness for certain expenditures during the Covered Period or the Alternative Payroll Covered Period, 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 are required to complete the PPP Schedule A Worksheet to determine whether to reduce the amount of loan forgiveness for which they are eligible.

Safe Harbors That Prevent Reduction of Loan Forgiveness Amount

There are two safe harbors which can prevent the reduction of the loan forgiveness amount. The first is the FTE Reduction Safe Harbor. Under the FTE Reduction Safe Harbor, the borrower is exempt from the reduction in loan forgiveness based on FTE employees if both of the following conditions are met:

(1) the borrower reduced its FTE employee levels in the period beginning February 15, 2020, and ending April 26, 2020; and

(2) 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.

The second safe harbor is the FTE Reduction Exception. Under this exception, the borrower must 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 were fired for cause, voluntarily resigned, or voluntarily requested and received a reduction of their hours. Any FTE reductions in such cases, where the position was not filled by a new employee, do not reduce the borrower's loan forgiveness.

Observation: The instructions provide that the FTE Reduction Exception does not apply where, for example, a worker who resigned is replaced by another worker. But the instructions do not address what happens if a new worker with less experience replaces a former worker with a lot of experience who was paid more than the replacement worker. Is the borrower's loan forgiveness not reduced in this situation?

Documentation Requirements

Finally, an abundance of documentation is required in order to complete the SBA's loan forgiveness application. For payroll costs, borrowers must provide documents 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:

(1) bank account statements or third-party payroll service provider reports documenting the amount of cash compensation paid to employees.

(2) 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: (i) payroll tax filings reported, or that will be reported, to the IRS (typically, Form 941); and (ii) state quarterly business and individual employee wage reporting and unemployment insurance tax filings reported, or that will be reported, to the relevant state.

(3) 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)).

For FTE calculations, at the election of the borrower, the following documentation is required:

(1) the average number of FTE employees on payroll per month employed by the Borrower between February 15, 2019 and June 30, 2019;

(2) the average number of FTE employees on payroll per month employed by the Borrower between January 1, 2020 and February 29, 2020; or

(3) 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. 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.

For nonpayroll costs, the following documentation verifying existence of the obligations/services before February 15, 2020, and eligible payments from the Covered Period is required:

(1) for business mortgage interest payments: (i) copy of lender amortization schedule and receipts or cancelled checks verifying eligible payments from the Covered Period; or (ii) 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;

(2) for business rent or lease payments: (i) copy of current lease agreement and receipts or cancelled checks verifying eligible payments from the Covered Period; or (ii) lessor account statements from February 2020 and from the Covered Period through one month after the end of the Covered Period verifying eligible payments;

(3) for business utility payments, a copy of invoices from February 2020 and those paid during the Covered Period and receipts, cancelled checks, or account statements verifying those eligible payments.

In addition, the loan forgiveness application instructions require borrowers to maintain the following documentation which is not required to be submitted:

(1) documentation supporting the listing of each individual employee in PPP Schedule A Worksheet Table 1, including the "Salary/Hourly Wage Reduction" calculation, if necessary.

(2) 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.

(3) documentation regarding any employee job offers and refusals, firings for cause, voluntary resignations, and written requests by any employee for reductions in work schedule.

(4) documentation supporting the PPP Schedule A Worksheet "FTE Reduction Safe Harbor."

In addition, the borrower is required to retain all records relating to the borrower's PPP loan, including documentation submitted with the PPP loan application, documentation supporting the borrower's certifications as to the necessity of the loan request and the borrower's eligibility for a PPP loan, documentation necessary to support the borrower's loan forgiveness application, and documentation demonstrating the borrower's material compliance with PPP requirements.

Finally, 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.

Highlights from Expanded FAQ

As previously noted, the SBA also expanded its PPP FAQs. These FAQs cover a multitude of guidance with respect to rules for both borrowers and lenders. Some of the key items addressed are:

(1) documentation that lenders must review in making the SBA PPP loans, such as a good faith review of the borrower's calculations and supporting documents on average monthly payroll costs;

(2) PPP lenders are allowed to accept scanned copies of signed loan applications and documents containing the information and certifications required by SBA Form 2483 and the promissory note used for the PPP loan, as well as any form of E-consent or E-signature that complies with the requirements of the Electronic Signatures in Global and National Commerce Act;

(3) a clarification that it is the borrowers and not the lenders responsibility to determine which entities are affiliates with respect to getting an accurate headcount for employees;

(4) businesses are eligible for the PPP loans even if they have more than 500 employees, as long as they meet the definition of a "small business concern";

(5) payroll documentation provided by a Professional Employer Organization qualifies as acceptable PPP loan payroll documentation;

(6) amounts paid to an independent contractor or sole proprietor by an eligible borrower must be excluded from the eligible business's payroll costs; and

(7) an affirmation that an employer that had to repay its PPP loan and did so by the safe harbor deadline of May 14, 2020, is eligible for the employee retention credit.

Finally, in FAQ 46, the SBA provides a safe harbor with respect to how it review borrowers' required good-faith certification concerning the necessity of the loan request. 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.

Observation: According to the SBA, this safe harbor is necessary because borrowers with loans below the $2 million 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 the SBA to conserve its finite audit resources and focus its reviews on larger loans, where the compliance effort may yield higher returns.

Borrowers with loans greater than $2 million that do not satisfy the safe harbor in FAQ 46 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. The SBA previously stated that all PPP loans in excess of $2 million, and other PPP loans as appropriate, will be subject to review by SBA for compliance with program requirements set forth in the PPP Interim Final Rules and in the Borrower Application Form. If the SBA determines in the course of its review that a borrower lacked an adequate basis for the required certification concerning the necessity of the loan request, the SBA will seek repayment of the outstanding PPP loan balance and will inform the lender that the borrower is not eligible for loan forgiveness. If the borrower repays the loan after receiving notification from SBA, the SBA said that it will not pursue administrative enforcement or referrals to other agencies based on its determination with respect to the certification concerning necessity of the loan request.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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