What do employers need to know about the PPP loan forgiveness application?
Attorney Q&A with Rich Johnson and Bob Luttrell
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.
In this LINC Q&A video, McAfee & Taft business lawyers Rich Johnson and Bob Luttrell discuss the process of calculating the loan forgiveness amount, what documentation is need and what pitfalls applicants should be aware of.
Q: Can you give us an overview of how we got here?
Rich Johnson: So, for those of you who aren’t familiar with the Paycheck Protection Program, it’s a program that the SBA kicked off in response to COVID-19. It was established by the CARES Act, and its intention is to help small businesses with certain working capital needs, including payroll cost and some other limited things. It started in early April, and we went through a round of funding that went very quickly, and then there was a second allocation and there’s still money left for that second allocation. So if it’s something that you can benefit from and you haven’t taken advantage of it yet, there is still time to do that. A unique feature of that that borrowers have found very beneficial is the fact that the loan amount is forgivable if certain conditions are met, and that’s kind of what we’re here to talk about today … is for those borrowers who have received funding, the forgiveness application, and to kind of walk everyone through how that’s going to work. We still have some time because the relevant period that we’re going to be talking about is an eight-week period after funds were first allocated. And so even for those borrowers who got money at the very beginning, there’s still a week or more left before that period runs.
Q: What documentation do employers need to gather in anticipation of applying for forgiveness?
Rich Johnson: So just have your records in order and be ready to go once your covered period is over and it’s time to go apply for this forgiveness. I think everyone’s going to be in a hurry to get those I’s dotted and those T’s crossed and get that done. You’ll want to have your basic loan information together, which are things like your taxpayer identification number, your SBA loan number, the number that your lender assigned to your loan, and your loan amount. You’re also going to want to have your payroll records for payroll costs in order because a huge element of determining how much is forgivable is related to payroll cost, so you’ll want to have that available for not only your covered period, which again is that eight-week period following the allocation of funds, but also for certain reference periods, and those reference periods are February 15th of 2019 through June 30th of 2019, and also January 1, 2020, through February 29th of 2020. So you’re going to want all of these records for all of those time periods together. And the information that will be relevant with respect to payroll costs are things like names of all of the employees and the last four numbers of their Social Security numbers, gross salary information to include commissions, paid leave, and any separation payments you’ve made. In this payroll cost you can also include contributions made to retirement plans and payments made on behalf of employees for health insurance. So you’ll want to have that information together as well. There’s also a credit to be given for amounts paid towards certain payroll taxes for the employers … so the employee’s portion of certain state and local payroll taxes. So you’ll want to have that information available. If you have part-time employees, you’re also going to want to track this information for the period from February 15, 2020, through April 26th of 2020. That period is specific to part-time employees. And with all this information, you not only want to have the information, but you want to have some supporting documentation, such as bank account statements, or third-party payroll reports, different tax statements, and then the receipts or canceled checks. So we’ve talked about this eight-week period that starts on the first date of funding. If you make payments to your employees weekly or biweekly, your eight-week period that you’re going to be concerned about is actually going to start the first day of the payroll period that follows your allocation. A little bit more complicated, and a little bit different than the other, but again, we’re tying everything to payroll cost so I think that makes sense and isn’t unexpected. Earlier I mentioned that this was to provide working capital assistance for payroll cost and certain other expenses. Those other expenses are mortgage interest payments on mortgages that were in place prior to enacting of the program, and also lease and rent payments for leases that were in place prior to COVID-19, and also certain utility payments. So to the extent that you want to lump those costs into the amount that you can get forgiven, you need to have good records ready so that you could substantiate those expenses.
Q: How do you calculate your “Cash Compensation” for each applicable period for each employee?
Bob Luttrell: You have to start by figuring out what payroll costs are included. And payroll costs are paid on the day paychecks are delivered to the employee or the day when the employer originates an ACH transaction to pay the employee. Now it’s not clear whether that’s an ACH transaction that the employer originates or whether it’s one that pays the employee. So if you have a payroll company in between, it appears that it’s going to be when the payroll company makes the transfer to the employee’s account as the day on which those payroll expenses are paid. The other issue is when are those costs incurred. And they’re incurred the day they’re earned. And since we’re talking about forgiveness, they’re eligible for forgiveness if they’re paid on the next pay period. Maximum compensation for any employee is capped at $15,385 over the eight-week period. That’s equivalent to an annual salary of $100,000, so any salaries above that are not included. And then there is a Schedule A Worksheet, table one in the application form. So when you start gathering your payroll costs and gathering your information for EFTs, which we’ll discuss in a minute, it’s better if you use that table each time because then you’ll have all of the information collected in a place where you can then transfer it to the application. As I said, you’re also going to need an average FTE for each employee. The SBA has decided that we’re going to work on employee-only basis, and there are two ways to do that. First, full-time employees are one FTE. For each part-time employee, you can take the number of paid hours a week, divide by 40, round to the nearest tenth, and use that number. Or you can take a one for full-time employees and .5 for all part-time employees who work less than full time. You can calculate it both ways, figure out what’s the most desirable result.
Q: How should you pick a “reference period” and “forgiveness calculation period” for payroll costs?
Bob Luttrell: You have several options about which periods to use, and you can pick the most favorable period for your calculation. So you have now all the information necessary to calculate that information, and so you want to do that, as I said, in the table so you can look at them across periods. The loan forgiveness amount is going to be reduced proportionately by any reduction in FTE between whatever reference periods you choose and what the covered period or the alternative payroll-covered period. So you’re going to have all these laid out in front of you. So you’re going to compare the FTE and the reference period to the covered period. If they are the same or they’ve increased over that time, there’s no reduction based on FTE. If they have decreased, then the forgiveness amount decreases proportionately. And the loan forgiveness amount will be reduced by certain reductions in salary or hours. There’s an SBA method of calculation for each employee that’s set out in the application, and you’re just going to have to go through the math for each employee. That’s a relatively clear calculation method. Then, if you have a biweekly or more frequent pay period, you may be able to compare FTE over the alternative payroll-covered period. So then you get the covered period or the alternative payroll-covered period, and you compare those to the reference periods, and you figure out which of those two seem to work better. You get the more favorable of the two. So you have to go through this same process of calculating FTEs for the alternative payroll coverage period and then you just choose the best. The downside is that if the alternative payroll-covered period is chosen, then you have to use that in calculation of FTE and salary and hour wage reduction. So you need to calculate them both on the same basis.
Q: How do you calculate reductions in eligible forgiveness amount?
Rich Johnson: So, for the reduction we’re going to look at a couple of different things. You’re going to compare your full-time employees for periods prior to COVID-19 to the full-time employees you had during COVID-19. And there’s a calculation, and the SBA has provided some information for how we should do that. That is going to be based on actual employees as opposed to strictly on an average basis, and fired, furloughed, departed employees will be counted for this unless during the covered period that they decline or they voluntarily resigned, they were fired for cause, and that position wasn’t filled by another employee. There is a safe harbor, and there’s more information on that safe harbor on our website if you wanna take a look at that there. It’s probably a little bit more in-depth than we have time for here today. In addition to a reduction related to full-time employees, there’s also a reduction if employees have had their salary reduced. And again, that’s something that you can find some more information about on our website.
Q: What else do I need to do to complete this process?
Bob Luttrell: You’re gonna have to go ahead and calculate your forgiveness amount. You’ve got all the information necessary to do that. The SBA application is relatively straightforward in that respect. The thing that you have to remember is though, that 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 date. So presumably these costs will be pro rata based on utility bills over the covered period with evidence of a payment later. The non-payroll costs may not exceed 25% of the total forgiveness amount. Calculating it on that basis, it’ll tell you what your eligible forgiveness amount is and how much of it will be forgiven.
Q: What should employers contemplate when undertaking this process?
Bob Luttrell: There are several issues. One is that you’re gonna certify under penalty of perjury that all of your numbers are correct. You can miss whether or not you have the right FTE calculation if people have been fired or furloughed. You have to certify that you’re initially eligible for the loan. So all of those things are kind of pitfalls that you have to look for and be careful about as you’re completing the application and submitting it for forgiveness.
Rich Johnson: A lot of the rules are very complex. We tried to break them down here in an easy little sound byte, but this isn’t something that you just wanna rely on this video or a few articles you may find on the internet. It can be very in-depth and complex, and like I said, it’s something you wanna get right. So, always better to be safe than sorry, and contacting your legal professionals, your accounting professionals, your banking professionals to make sure you do that is always a good idea.