Navigating the SBA PPP loan forgiveness application
On the evening of May 15, 2020, the SBA released its long-awaited Paycheck Protection Program Loan Forgiveness Application and Instructions. Completing the application is fairly straightforward. But to complete the application in a way that enhances forgiveness, there are a number of choices that the borrower must make, choosing among various time periods. The interrelationship among those time periods bears directly on the forgiveness amount.
In addition, a choice has to be made when to apply for forgiveness. If FTE or salaries or hours have dropped, it may be better to wait for additional hiring and salary increases to improve the number.
Rather than try to describe what the application requires, the following is designed to assist with information gathering and calculation requirements to make the choices necessary to completion of the application. It is designed to assist borrowers who are entities, individuals, sole proprietorships, independent contractors or partnerships.
You will need to have at hand:
A. Business Legal Name, DBA or Tradename (if applicable) and Business TIN (EIN, SSN): Enter the same information as on your Borrower Application Form.
B. Business Address/Business Phone/Primary Contact/E-mail Address: The same information as on your Application Form, unless there has been a change in address or contact information.
C. SBA PPP Loan Number: The loan number assigned by SBA at the time of loan approval. Request this number from the Lender if necessary.
D. Lender PPP Loan Number: The loan number assigned to the PPP loan by the Lender.
E. PPP Loan Amount: The disbursed principal amount of the PPP loan (that is the total loan amount received from the Lender).
F. EIDL Advance Amount: If you received an Economic Injury Disaster Loan (EIDL) advance.
G. EIDL Application Number: If you applied for an EIDL.
Step 1: Gather your records
A. Payroll costs
1. For all employers, you will need the name and the last four numbers of the SSN for every employee employed for the “Covered Period” which is the 56-day period from the date of the first advance. Employers do not count the first day and count the last day. You will also need:
a. for each individual employee, the gross salary, gross wages, gross tips, gross commissions, paid leave (vacation, family, medical or sick leave, not including leave covered by the Families First Coronavirus Response Act), and allowances for dismissal or separation paid or incurred (“Cash Compensation”);
b. the total employer contribution for employee health insurance, to employee retirement plans and for employer state and local taxes assessed on employee compensation (“Non Cash Compensation”; collectively with Cash Compensation, the “Payroll Costs).
c. for part-time employees, you will also need the average number of hours paid per week and the number of hours worked, but not paid to the end of the Covered Period and for the period February 15, 2020 through April 26, 2020 (the “Control Period”).
2. For all employers, you also need Cash Compensation information for the periods (a) February 15, 2019 to June 30, 2019 and (b) January 1, 2020 to February 29, 2020 (each a “Reference Period”).
3. For employers with weekly or bi-weekly pay periods, you will need the same information for the “Alternative Payroll Covered Period” which is the 56-day period from the first day of the pay period following the date of the first advance. Employers do not count the first day and count the last day.
4. For seasonal employers, you will need the same information for the period May 1, 2019 to September 15, 2019 (also a “Reference Period”).
5. Documentation verifying the eligible Payroll Costs consisting of each of the following:
a. Bank account statements or third-party payroll service provider reports documenting the amount of cash compensation paid to employees.
b. Tax forms (or equivalent third-party payroll service provider reports) for the periods that overlap with the Covered Period or the Alternative Payroll Covered Period:
i. Payroll tax filings reported, or that will be reported, to the IRS (typically, Form 941); and
ii. State quarterly business and individual employee wage reporting and unemployment insurance tax filings reported, or that will be reported, to the relevant state.
c. Payment receipts, cancelled checks, or account statements documenting the amount of any employer contributions to employee health insurance and retirement plans.
B. Non-payroll costs
Documentation verifying existence of mortgages, leases and utility services prior to February 15, 2020 and eligible payments from the Covered Period or from the first billing period after the Covered Period is required.
1. Business mortgage interest payments: Copy of lender amortization schedule and receipts or cancelled checks verifying eligible payments from the Covered Period; or lender account statements from February 2020 and the months of the Covered Period through one month after the end of the Covered Period verifying interest amounts and eligible payments. These are payments on any indebtedness or debt instrument incurred in the ordinary course of business that—
a. is a liability of the borrower;
b. is a mortgage on real or personal property; and
c. was incurred before February 15, 2020;
2. Business rent or lease payments: Copy of current lease agreement and receipts or cancelled checks verifying eligible payments from the Covered Period; or lessor account statements from February 2020 and from the Covered Period through one month after the end of the Covered Period verifying eligible payments. These are any payment of any rent pursuant to a leasing agreement for real or personal property in force before February 15, 2020
3. Business utility payments: Copy of invoices from February 2020 and those paid during the Covered Period and receipts, cancelled checks, or account statements verifying those eligible payments. These are any business payment for a service for the distribution of electricity, gas, water, transportation, telephone, or internet access for which service began before February 15, 2020.
Step 2: Calculate your “Cash Compensation for each applicable period for each employee.
A. “Payroll costs” are “paid”:
1. the day that paychecks are delivered or
2. the day on which the employer originates an ACH transactioni.
B. “Payroll costs” are “incurred” the day they are earned and eligible for forgiveness if they are paid on the next pay period.
C. The maximum compensation for any employee is capped at $15,385 (the eight-week equivalent of an annual salary of $100,000). The IFR (2.e.ii and Example 2) would “Subtract compensation amounts in excess of an annual salary of $100,000. The FAQs (Q 7) say that the $100,000 limit only applies to cash compensation, not non-cash benefits such as employer contributions to defined benefit plans or defined compensation plans, payment for employee benefits consisting of group health care coverage, including insurance premiums and payment of state and local taxes assessed on compensation of employees. The Instructions follow the FAQs.
D. Comparison will be easier if the information for each period is gathered in the form of the PPP Schedule A Worksheet Table 1.
E. Also in the Table 1 format, for each part-time employee for each period, take the average number of hours paid per week, divide by 40, round to the total nearest tenth and enter that as “Average FTE.” Or, use 1 for full time employees and .5 for employees who work less than full time at your election. You can calculate both ways to see what gives the most desirable result.
Step 3: Pick a Reference Period and, if applicable, a forgiveness calculation period for Payroll Costs:
A. The loan forgiveness amount will be reduced proportionally by reduction in FTE between the chosen Reference Period and the Covered Period or the Alternative Payroll Covered Period.
1. Compare FTE in Reference Periods to the Covered Period.
a. If FTE are the same or have increased there will be no reduction.
b. If FTE decrease, the forgiveness amount will decrease proportionally.
B. The loan forgiveness amount will be reduced by certain reductions in salary or hours.
The SBA method of calculation for each employee is set out below.
C. For employers with bi-weekly or more frequent pay periods, choose the more favorable of the Covered Period (the 56-day period from the date of the first advance) or the Alternative Payroll Covered Period (the 56-day period from the first day of the pay period following the date of the first advance). That will generally be the period with the fewest employees and the lowest compensation or the period during which the most of the current employees were employed at their present salaries. If the “Alternative Payroll Covered Period” is chosen, it will be used in the calculation of FTE and salary/hours wage reductions.
Step 4: Calculate reductions in eligible forgiveness amount. Reductions in FTE will proportionally reduce the forgiveness amount. While reductions in salary or hours will be deducted from the eligible payroll costs.
1. Pick a “reference period.” For regular employers this is the more favorable of either (a) February 15, 2019 to June 30, 2019 or (b) January 1, 2020 to February 29, 2020. Seasonal employers can also choose the period between May 1, 2019 and September 15, 2019.
2. Determine the number of FTE for the “Covered Period” or the “Alternative Payroll Covered Period”, as applicable.
a. The SBA has determined that this calculation is by a particular employee, not strictly on an average basis. Fired or furloughed or departed employees must be counted unless:
i. the employer has made a written offer to rehire during the Covered Period or the Alternative Payroll Covered Period, as applicable, which was rejected;
ii. the employee voluntarily resigned or requested a reduction in hours; or
iii. the employee was fired for cause; and
iv. the position was not filled by a new employee.
b. The number of hours used to calculate FTE must be used consistently.
3. Determine if the “FTE Reduction Safe Harbor” is available.
a. Calculate the average FTE between February 15, 2020 and April 26, 2020.
b. Calculate the total FTE in the pay period inclusive of February 15, 2020.
c. Calculate the total FTE as of June 30, 2020.
d. If the FTE as of June 30, 2020 is greater than or equal to the FTE for the February pay period, the safe harbor is satisfied and the FTE is counted.
1. The SBA has determined that this number is calculated on an average basis per employee. The SBA method of calculation and determination of the safe harbor is set out below and is the same as used to calculate FTE.
Step 5: Calculate your forgiveness amount.
A. Having completed the above steps, you are ready to fill out the forgiveness application.
B. Non-payroll costs. Eligible non-payroll costs are those paid during the Covered Period or those incurred during the “Covered Period” and paid on or before the next billing dateii. The non-payroll costs may not exceed 25% of the total forgiveness amount.
Salary Reduction Calculation
Step 1. Determine if pay was reduced more than 25%.
a. Enter average annual salary or hourly wage during Covered Period or Alternative Payroll Covered Period: ___________________
b. Enter average annual salary or hourly wage between January 1, 2020 and March 31, 2020: ___________________
c. Divide the value entered in 1.a. by 1.b.:. ___________________
If the quotient in 1.c. is 0.75 or more, enter zero in the column above box 3 for that employee; otherwise proceed to Step 2.
Step 2. Determine if the Salary/Hourly Wage Reduction Safe Harbor is met.
a. Enter the annual salary or hourly wage as of February 15, 2020: ___________________.
b. Enter the average annual salary or hourly wage between February 15, 2020 and April 26, 2020: ___________________.
If 2.b. is equal to or greater than 2.a., skip to Step 3. Otherwise, proceed to 2.c.
c. Enter the average annual salary or hourly wage as of June 30, 2020: ___________________.
If 2.c. is equal to or greater than 2.a., the Salary/Hourly Wage Reduction Safe Harbor has been met – enter zero in the column above box 3 for that employee. Otherwise proceed to Step 3.
Step 3. Determine the Salary/Hourly Wage Reduction.
a. Multiply the amount entered in 1.b. by 0.75: ___________________
b. Subtract the amount entered in 1.a. from 3.a.: ___________________ .
If the employee is an hourly worker, compute the total dollar amount of the reduction that exceeds 25% as follows:
c. Enter the average number of hours worked per week between January 1, 2020 and March 31, 2020: ___________________
d. Multiply the amount entered in 3.b. by the amount entered in 3.c. ___________________. Multiply this amount by 8: ___________________. Enter this value in the column above box 3 for that employee.
If the employee is a salaried worker, compute the total dollar amount of the reduction that exceeds 25% as follows:
e. Multiply the amount entered in 3.b. by 8: ___________________ . Divide this amount by 52: ___________________. Enter this value in the column above box 3 for that employee.
i SBA guidelines do not specify if this date is the day the ACH is sent to the payroll processor or the day the payroll processor initiates an ACH to the employee’s account.
ii Presumably these costs will be pro rated based on utility bills after the end of the Covered Period