Article written by:
Rebekah Smith, CPA, CFF, CVA, MAFF
   Director of Forensic & Dispute Advisory Services
Dustin Minton, CPA, MBA
   Director, Restaurant Services
Jeremy Bronson
   Director, Accounting & Business Advisory Services

Late Friday, May 15, 2020, the Small Business Administration (“SBA”) issued the highly anticipated Paycheck Protection Program (“PPP”) loan forgiveness guidance in the form of an application and instructions.

The loan forgiveness application and instructions include several changes that are designed to simplify the process and provide guidance to borrowers. Below is a recap of the key provisions:

  • Alternative Payroll Covered Period: For borrowers with a biweekly or more frequent payroll schedule, the borrower can elect to calculate eligible payroll costs using the 8-week period that begins on the first day of their first payroll following the PPP loan disbursement. For example, if the borrower received their 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 is Sunday, April 26, and the last day of the alternative payroll period is Saturday, June 20 (8 weeks or 56 days).
  • Payroll Incurred or Paid: The clarification on payroll suggests hybrid cash and accrual treatment. Note the $100,000 pro-rata cap and other payroll definitions still apply. Further, for owners, the language also indicates that (emphasis added) “…any amounts paid to owners (owner-employees, a self-employed individual or general partners)… are capped at either the pro-rated $100,000 amount of $15,385 or the 8-week equivalent of their applicable compensation in 2019, whichever is lower.”
    • Paid: Borrowers are generally eligible for forgiveness for the payroll costs paid or payroll costs incurred during the 8-week 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. Further, the language also seems to indicate that partner and owner compensation needs to be paid as it states (emphasis added) “…enter any amounts paid to owners (owner-employees, a self-employed individual, or general partners).”
    • Incurred but not paid: Payroll costs incurred but not paid during the borrower’s last pay period of the 8-week period are eligible for forgiveness if paid on or before the next regular payroll date. Otherwise, costs must be paid during the 8 weeks.
  • $2 Million PPP Loan Amount Threshold: The $2 million threshold will be measured on a consolidated basis with the entities’ affiliates. Meaning that even if all of the affiliated loans are under $2 million, if the total of all affiliate loans exceeds $2 million, there is a disclosure required on the application.
  • Nonpayroll Costs: The standard for rent and lease payments, business mortgage interest and utilities will be based on the cash payments made during the covered period and costs incurred during the covered period and paid when regularly due.
  • Prepayment Disallowed: As suspected, pre-payment is specifically prohibited.
  • FTEE Calculation: A full-time equivalent employee (“FTEE”) will be based on 40 hours per week. GBQ had previously believed this to be a similar definition to the Affordable Cares Act where an employee would be considered full-time if they worked 30 hours. However, this should not have a significant impact as the 40 hours impacts the baseline calculation and the 8-week period calculation. 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 and, if elected, should be used for both comparative periods.
    • This requires a strategic analysis by the company to determine which method of counting FTEs will be more advantageous.
  • FTE Safe Harbor Provision: The borrower is exempt from the reduction in loan forgiveness based on FTEEs if both of the following conditions are met: (1) the borrower reduced its FTEE levels in the period beginning February 15, 2020, and ending April 26, 2020; and (2) the borrower then restored its FTEE levels to its FTEE levels in the borrower’s pay period that included February 15, 2020, and no later than June 30, 2020.
    • Note: This represents a different baseline point for the June 30, 2020 cure date than was originally interpreted from the CARES Act.
  • Attempted Rehire Exclusion: Treasury Frequently Asked Questions (“FAQ”) #40 indicates that an employer would not be penalized for an employee who declined to return to work. The application and guidance reaffirm and expand upon this by providing a reduction in the baseline FTEE for any positions that the employer made a good-faith, written offer to rehire an employee that was rejected by the employee and any employees who were (a) fired for cause, (b) voluntarily resigned or (c) voluntarily requested and received a reduction of their hours and the positions were not refilled.
    • The application guidance expands on Treasury FAQ #40 to include those employees fired for cause, voluntarily resigned, or those who asked for lesser hours or positions. This change is certainly a more friendly interpretation for the borrower. Borrowers are required to maintain copies of correspondence and other documents that evidence refusals of offered positions and the reasons for other terminations.
  • Salary/Hourly Wage Reduction Defined: This calculation has been one of the more confusing calculations and the application and guidance do provide clarity.  This calculation will be used to determine whether forgiveness must be reduced due to a salary/hourly wage reduction of more than 25% during the 8-week period or the alternate payroll period as compared to the first quarter of 2020, on average. See this chart for a description of the calculation.
    • The application guidance does clarify that the evaluation of hourly employees’ wages is based on their hourly wage, not total wages.
  • Salary/Hourly Safe Harbor: There continues to be a safe harbor for the salary/hourly wage reduction. So long as the salary/hourly wage reduction is restored by June 30, 2020, then no reduction in forgiveness will be applied.
    • The application 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.

We have created a chart comparing our previous interpretation of the PPP loan and any changes as a result of this newly issued guidance. Additionally, we are pleased to host a webinar on Tuesday, May 19th, exploring the forgiveness application and updated guidance.

The SBA indicated that it would soon issue further guidance and regulations to assist borrowers in completing their debt forgiveness application. This is good news for borrowers and advisors alike because while the application clarifies much of the calculation, there are still several unanswered questions.

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