PPP Loan Forgiveness Application Released

4 minute read

Now that the Paycheck Protection Program (PPP) has been successfully connecting businesses with needed funding, Treasury and the Small Business Administration (SBA) has taken the next steps in program development. For weeks borrowers have been waiting for information related to loan forgiveness to guide them through the closing weeks of their Covered Period. On Friday, May 15, the long-awaited forgiveness application and guidance were released, providing answers to many questions and providing details on calculations and other essentials. Information on required documentation, the introduction of the FTE Reduction Safe Harbor, explanation of owner compensation forgiveness, and more. Given the complexity of the update, JLK Rosenberger has provided a summary of the key information and changes below.

• New Alternative Covered Period – There is now an Alternative Covered Period which borrowers may leverage when calculating loan forgiveness. Since some companies issue payroll bi-weekly or even more frequently, they are now allowed to calculate eligible payroll costs using the 8-week period that begins on the first day of the first pay period following the loan disbursement date. This means if a borrower received funds on April 6, but the first day of the pay period following disbursement is April 10, then the first day of the Alternative Covered Period would be April 10, and the last day would be June 11.
• Eligible Payroll Cost Determination – It is known that borrowers are generally eligible for forgiveness for payroll costs paid and incurred during the Covered Period. However, the guidance clarified that payroll costs are considered paid on the day paychecks are distributed, or an ACH transaction is initiated. Since payroll costs are deemed to be incurred on the day the pay is earned, costs incurred but not paid during the last pay period before the end of the Covered Period are also eligible for forgiveness if paid on or before the next regular payroll date. Otherwise, all payroll costs must be paid during the Covered Period.
• Eligible Non-Payroll Costs – It has been known that certain non-payroll costs, including covered mortgage and rent obligations, as well as, utility payments are eligible for forgiveness. However, what is new is the requirement that expenses must be paid or incurred during the Covered Period and paid on or before the next regular billing date (even when the billing date is after the Covered Period).
• 75% / 25% Expense Allocation – The new guidance confirms that borrowers applying for forgiveness must use no less than 75% of funds on payroll expenses and no more than 25% on eligible non-payroll costs. Since this was not stated explicitly in the CARES Act, many have been waiting to see if the requirement would be maintained, which it has been.
• Required Payroll Expense Documentation – As part of the Loan Forgiveness Application, borrowers must submit the following payroll documentation, including:
  • Bank statements or payroll service reports documenting the amount of cash compensation paid to employees.
  • Tax forms for the periods that overlap with the Covered Period, including payroll tax filings (IRS Form 941), and state quarterly business and individual employee wage reporting and related unemployment insurance tax forms.
  • Any receipts, canceled checks, or account statements showing the amount of employer contributions to health insurance and retirement plans included in the forgiveness amount.
• Required Nonpayroll Expense Documentation – Borrowers must also submit verification showing the existence of these expenses prior to February 15, 2020, and payments made, including:
  • Business mortgage interest payments should include a copy of the lender amortization schedule and canceled checks verifying payment.
  • Business rent or lease payments should consist of a copy of the current lease agreement and receipts/canceled checks verifying payment.
  • Business utility payments, including copies of invoices from February 2020 and evidence of payments made, including canceled checks or payment receipts.
• $100K Salary Cap – The guidance clarifies the $100K cap by stating that the total amount of cash compensation eligible for forgiveness may not exceed an annual salary of $100,000, as prorated for the covered period. This means loan forgiveness for cash compensation is limited to $15,385 per employee.
• Full-Time Employee (FTE) Reduction Safe Harbor – The Safe Harbor program is designed to provide relief to borrowers unable to maintain FTE for reasons outside of their control. This includes any position for which a written offer to rehire an employee during the Covered Period was rejected, those who were fired for cause, voluntarily resigned, or requested and received a reduction in work hours. In these situations, the new guidance clarifies that such a reduction does not impact the borrower’s loan forgiveness amount.
• Owner Compensation – The guidance provides important insight into owner compensation forgiveness that covers owner-employees, the self-employed, or general partners. The forgiveness amount is limited to the lower of $15,285 (the Covered Period equivalent of $100,000) or the 8-week equivalent compensation in 2019.

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There is a bevy of new and complex information to consider with the new loan forgiveness application. While it is expected there will be more updates and guidance, these details provide an excellent starting point for Texas and California businesses. If you have questions about the information outlined above or need assistance with another COVID-19 issue, JLK Rosenberger can help. For additional information call us at 818-334-8625, or click here to contact us.