Highlights from SBA Guidance on Forgiveness

by Megan Hiles
Photo of a woman sitting in front of an open laptop, holding a pen.

The SBA and Department of the Treasury have released the Paycheck Protection Program (PPP) Loan Forgiveness Application and detailed instructions. Most of our outstanding questions have been answered but a few still remain.

We’ve put together a summary of what you need to know regarding this additional guidance:

Aligning Eight Week Forgiveness Window to Payroll Schedule

  • The application introduces a new concept of an “Alternative Payroll Covered Period” for borrowers with a biweekly or more frequent payroll schedule. Borrowers who elect to use the Alternative Payroll Covered Period can calculate eligible payroll costs using the eight-week period that begins on the day following the borrower’s first pay period after their disbursement date. This alleviates a pain point for many borrowers whose payroll schedule did not align with the date of receipt of their PPP loan money.  If a borrower does not elect this alternative, they will follow an 8-week cash basis schedule from the date of funding for their payroll.

Timing of Eligible Payments

  • The application clarifies that “payroll costs” are considered incurred on the day the employee’s pay is earned. However, if payroll costs are incurred but not paid during the last pay period of the relevant eight-week forgiveness window, they are nevertheless eligible for forgiveness if they are paid on or before the next regular payroll date. Otherwise, they must be paid during the covered period or Alternative Payroll Covered Period.
  • The same principle applies to non-payroll costs, with it being permissible for such costs that are incurred during the covered period to be paid outside of the covered period so long as they are paid on or before the next regular billing date, even if it falls after the covered period.

FTE Measurements

  • To calculate FTEs, the SBA is not using the generally recognized threshold of 30 hours per week being an FTE. For forgiveness calculations, borrowers will take the average number of hours paid per week, divide by 40 and round to the nearest .1, capped at 1.0. Alternatively, there is a simplified method that allows the borrower to assign a 1.0 for employees who work at least 40 hours per week and 0.5 for employees who work fewer hours.
  • For purposes of the FTE count, borrowers will not be penalized for any employees to whom the borrower made a written offer to rehire that was rejected, that were fired for cause, voluntarily resigned or voluntarily requested and received a reduction of their hours. However these FTEs should not be considered a reduction if the former employee’s position was filled by a new employee.
  • Additionally, the application clarifies that the borrower is exempt from the reduction in loan forgiveness if both of the following conditions are met: (1) the borrower reduced its FTE employee levels between Feb. 15 and April 26, 2020; and (2) by June 30, 2020, the borrower restored its FTE employee levels to the same levels as in the pay period that included Feb. 15, 2020.

Payment Limitations

  • The limitation on forgivable cash compensation is $15,385 per individual, based on the $100,000 annualized cap.
  • The actual amount of loan forgiveness could be reduced if employee’s salary or pay rate is reduced by more than 25% in the 8 week period compared to the period of January 1, 2020 to March 31, 2020. If the borrowers restore salary/hourly wage levels, the Borrower may be eligible for the elimination of the Salary/Hourly Wage reduction amount.

Non-Payroll Costs

  • No prepayments of rent or mortgage interest are permitted.
  • Utilities are defined as 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.

AICPA Update

  • The AICPA responded to the loan forgiveness application with a news release Saturday, May 16, saying that while the document and instructions help address some administrative questions, they leave major issues unresolved. Specifically, the AICPA said, small businesses still need flexibility on when the eight-week loan forgiveness period should start, or they need to have the covered period extended to more than eight weeks.

Questions still to be clarified

  • Transportation costs that are included in utilities have not yet been defined by the SBA.
  • The SBA has not yet provided guidance on the FTE or Salary/Wage Safe Harbor if your 8-week period ends after June 30, 2020.
  • Guidance has not been provided on the payment of back rent incurred prior to the 8-week period.