Article written by:
Rebekah Smith, CPA, CFF, CVA, MAFF
Director of Forensic & Dispute Advisory Services
Dustin Minton, CPA, MBA
Director, Restaurant Services
Director, Accounting & Business Advisory Services
The passage of the Paycheck Protection Program (“PPP”) Flexibility Act (“Flexibility Act”) earlier this month made changes to the PPP loan program that seemingly required a new forgiveness application form and related instructions. Yesterday, the Small Business Administration (“SBA”) issued a revised forgiveness application and related instructions.
At first glance, the form is shorter – five pages compared to 11 pages for the original form. However, a closer look reveals that the form is only five pages because the instructions are now in a separate, seven-page document instead of included within the form.
The revised forgiveness application and instructions are very similar to the former; the key differences and important points to note are summarized below:
- Payroll Costs as a Percentage of Forgiveness Amount: One of the Flexibility Act’s key provisions reduced the percentage of payroll expenses to total forgiveness from 75% to 60%, thus providing additional flexibility to spend PPP loan proceeds on non-payroll expenses. The new application form and instructions reflect this change (line 10 of page 1).
- Calculation of Forgiveness Amount: Perhaps the most noteworthy part of the new application form is not a change at all. The amount of forgiveness is still the lesser of:
- The total amount spent on forgivable expenses less the pay rate adjustment amount, if any, the net of which is multiplied by the FTEE ratio (line 8 of page 1);
- The amount of the PPP loan (line 9 of page 1), and;
- Total payroll costs divided by .6 (line 10 of page 1).
The fact that this formula stayed the same is good news for borrowers who want to use the 24-week covered period. Because the amount spent over the 24-week period is likely to be larger than the loan amount, the impact of the FTEE ratio is reduced.
For example, a borrower with a $1,000,000 loan and a 75% FTEE ratio would receive $750,000 of forgiveness over eight weeks even assuming all $1,000,000 of the loan proceeds were spent. That same borrower spending $3,000,000 ($1,000,000 every 8 weeks) over the 24-week period would receive 100% forgiveness of their PPP loan because 75% of $3,000,000 ($2,250,000) is still more than the $1,000,000 loan amount. In fact, this borrower could see its FTEE ratio decline to 33% over the longer period and still receive 100% forgiveness ($3,000,000 * 33% = $1,000,000).
- Compensation Paid to Owner-employees or Self-employed Individuals/General Partners: The new application instructions (see page 3) include additional guidance related to compensation paid to owners for borrowers choosing a 24-week covered period. The new instruction (emphasis added) is:
“For Borrowers using a 24-week Covered Period, this amount is capped at $20,833 (the 2.5-month equivalent of $100,000 per year) for each individual or the 2.5-month equivalent of their applicable compensation in 2019, whichever is lower.”
This guidance provides for some additional, forgivable compensation for owners but not a full 24 week pro-rata portion of the $100,000 compensation cap. The instructions related to owner’s compensation for an eight-week period are unchanged.
- Limit on per Employee Cash Compensation: The new application instructions (see page 4) state (emphasis added), “For each individual employee, the total amount of cash compensation eligible for forgiveness may not exceed an annual salary of $100,000, as prorated for the Covered Period. For an eight-week Covered Period, that total is $15,385. For a 24-week Covered Period, that total is $46,154.”
This is also good news for borrowers electing a 24-week period as the cap on cash compensation per employee has tripled to correspond to the three times longer 24-week period.
- Amounts for Group Health, Retirement and Employer Taxes Assessed on Payroll: The original form and instructions asked for the “amount paid” for these lines items. The new form now includes the words “paid or incurred” – consistent with the language regarding cash compensation (see page 3, lines 6, 7 and 8). This would suggest that “accrued” expenses for the end of the covered period could also be included in the forgiveness amount.
However, the new application instructions for these lines (see page 3) include only the word “paid,” so while the wording on the application is inconsistent, the directions seem to set forth the intent. The difference in language may be moot for borrowers using a 24-week period, as they may have enough in other paid expenses that they do not need to include “incurred” costs to achieve complete forgiveness.
- Transportation Expenses: Unfortunately, there is no new guidance in the revised form and instructions regarding the definition of “transportation” in the utilities category of forgivable expenses. We will have to continue to wait for further guidance to define “transportation.”
- Change in Safe Harbor Date: The original application provided for a safe harbor if FTEE reductions or wage rate reductions were restored by June 30, 2020. The wording of the Flexibility Act changed all CARES Act references from “June 30, 2020” to “December 31, 2020” – including, apparently, the safe harbor date. The new application form and instructions provide needed – and helpful – clarity on this point:
- The safe harbor date for both the FTEE (see page 4, step 4 of the form) and wage rate reductions (see page 4, step 2c of the instructions) are now the earlier of the submission date of the forgiveness application and December 31, 2020.
This makes it clear that borrowers selecting an eight-week period do not have to wait until the end of the year (or even June 30, 2020) to submit their forgiveness application.
- New FTEE Safe Harbor Provision: The new application form and instructions include guidance consistent with the Flexibility Act’s new FTEE safe harbor regarding a borrower’s inability to return to prior levels of business activity due to COVID-19 related regulations or guidance. The certifications made by the borrower (see page 2 of the application) now include one specific to this new safe harbor. Borrowers electing this new safe harbor must certify:
“If the Borrower has checked the box for FTE Reduction Safe Harbor 1 on PPP Schedule A, the Borrower was unable to operate between February 15, 2020 and the end of the Covered Period at the same level of business activity as before February 15, 2020 due to compliance with requirements established or guidance issued between March 1, 2020 and December 31, 2020, by the Secretary of Health and Human Services, the Director of the Centers for Disease Control and Prevention, or the Occupational Safety and Health Administration, related to the maintenance of standards of sanitation, social distancing, or any other work or customer safety requirement related to COVID-19.”
In addition to the borrower’s certification, it must also maintain additional documents (see page 6 of the instructions) related to this new safe harbor (emphasis added):
“d. Documentation supporting the certification, if applicable, that the Borrower was unable to operate between February 15, 2020, and the end of the Covered Period at the same level of business activity as before February 15, 2020 due to compliance with requirements established or guidance issued between March 1, 2020 and December 31, 2020 by the Secretary of Health and Human Services, the Director of the Centers for Disease Control and Prevention, or the Occupational Safety and Health Administration, related to the maintenance of standards of sanitation, social distancing, or any other work or customer safety requirement related to COVID-19. This documentation must include copies of the applicable requirements for each borrower location and relevant borrower financial records.”
Unfortunately, this guidance is not particularly specific as to the documents that need to be maintained. We encourage borrowers who intend to use this safe harbor to document how their business was impacted by each specific regulation causing them to be unable to return to prior levels of business activity.
- Borrower’s Certifications (see page 2 of the revised form): The borrower’s certifications have been updated to reflect the changes described above, including, as also noted above, a new certification for borrowers claiming the new FTEE safe harbor.
- Documentation (see pages 6-7 of the revised instructions): As before, the revised instructions set forth a list of documents required to be submitted to the lender, as well as additional documents to be maintained by the borrower. As noted above, this includes a new requirement to maintain (but not submit) documents related to the new FTEE safe harbor.
There is also a new “EZ” forgiveness application that is still three pages long (with four pages of instructions). The EZ application is available for borrowers who meet one of the following three criteria:
- The Borrower is a self-employed individual, independent contractor, or sole proprietor, who had no employees at the time of the PPP loan application and did not include any employee salaries in their loan application.
- The Borrower did not reduce annual salary or hourly wages of any employee by more than 25 percent during the covered period, AND did not reduce the number of employees or the average paid hours of employees between January 1, 2020, and the end of the covered period.
- The Borrower did not reduce annual salary or hourly wages of any employee by more than 25 percent during the covered period, AND was unable to operate during the covered period at the same level of business activity as before February 15, 2020 due to compliance with COVID-19 requirements established, or guidance issued by, various federal agencies.
If one of these criteria is met, the EZ application form includes one page for the numbers, a page of certifications (including related to meeting the criteria for using the EZ application) and a page of demographic information. Borrowers not meeting one of the criteria will need to use the longer form that includes additional pages related to FTEE or wage rate reductions and related safe harbors.
If you have questions or would like GBQ’s assistance in preparing or reviewing your PPP loan forgiveness application, please do not hesitate to contact a member of GBQ’s SBA team – Rebekah Smith, Dustin Minton, or Jeremy Bronson.