SBA And Treasury Release PPP Loan Forgiveness Application
On May 15, 2020, the Small Business Administration (“SBA”) and Department of Treasury jointly released the application for forgiveness of a Paycheck Protection Program (“PPP”) loan (the “Application”). While the SBA has yet to directly address certain questions regarding forgiveness calculations, the Application indicates the positions that the SBA will likely take. This article summarizes such positions, but borrowers should be cognizant that the Application provides that a borrower’s eligibility for loan forgiveness will be evaluated in accordance with the PPP regulations and guidance issued by SBA through the date the Application is made.
- Calculator. Many borrowers and lenders may find that the most helpful aspect of the Application is the “Payroll Costs Calculator.” This will likely be a helpful tool for many, although questions remain as to certain rules and interpretations. Borrowers should complete the Application carefully because borrowers must certify, among other things, that the amounts disclosed on the Application represent “eligible” costs and reflect “all applicable reductions.”
- Incurred vs. Paid. For “payroll costs”, the Application allows borrowers with a biweekly (or more frequent) payroll schedule to elect one of two periods to calculate eligible payroll costs. The first period (the “Payroll Covered Period”) provides that the first day of the Covered Period must be the same as the PPP Loan Disbursement Date. The second period allows a borrower to use the 8-week period that begins on the first day of their first pay period following its PPP Loan Disbursement Date (the “Alternative Payroll Covered Period”). These alternatives allow borrowers to shift their 8-week covered periods for purposes of “payroll costs.” Significantly, the SBA further allows borrowers to include payroll costs incurred but not paid during the Borrower’s last pay period of the Covered Period (or Alternative Payroll Covered Period) so long as those “incurred” costs are paid on or before the next regular payroll date. This is an expansion of the language in the CARES Act, which suggested that costs must be both incurred and paid during the Covered Period in order to be eligible.
- Limitations on Amounts Paid to Owners. The amount paid to owner-employees, self-employed individuals, or general partners is capped at the lower of (a) $15,385 (the eight-week equivalent of $100,000 per year) for each individual or (b) the eight-week equivalent of their applicable compensation in 2019.
- Clarification on Wage Reduction Rule. The CARES Act provides that forgiveness will be reduced dollar-for-dollar if the wage or salary paid to any employee is less than 75% of such employee’s wage or salary during the most recently completed fiscal quarter. Many borrowers had struggled with the calculation required under this rule, as it looks at compensation on a gross basis. The Application provides some relief in this regard, as it provides for a calculation based on a comparison of the employee’s average annual salary or hourly wage between January 1, 2020 and March 31, 2020 to the average annual salary or hourly wage during the Payroll Covered Period or Alternative Payroll Covered Period.
Specifically, the Application provides the following calculation for determining any wage reduction to an employee:
- Enter average annual salary or hourly wage during Covered Period or Alternative Payroll Covered Period
- Enter average annual salary or hourly wage between January 1, 2020 and March 31, 2020
- Divide the value entered in a. by b.
- If c. is 0.75 or more, there has been no wage reduction.
The calculation also reflects the safe harbor for borrowers that reduced wage levels prior to April 26, 2020 but restored wage levels prior to June 30, 2020.
- Clarification on FTE Reduction Rule. Borrowers likewise struggled to apply the FTE Reduction Rule without a definition of “FTE Employees.” The Application, however, appears to resolve this problem by instructing the borrower to make the following calculation: “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 Application also expands the exception set forth in FAQ #40 (regarding offers to rehire) to ignore from FTE calculations employees that (a) were fired for cause, (b) voluntarily resigned, or (c) voluntarily requested and received a reduction of their hours. The Application does not make clear whether such exceptions would likewise apply to the wage reduction rule.
While the Application provides some clarification, it leave open various questions regarding defined terms, calculations, and exceptions. If you have any questions regarding the SBA PPP loans, or other aspects of the CARES Act, please contact a Baird Holm LLP attorney.