SBA and US Treasury release PPP Loan Forgiveness Application

The long awaited PPP Loan Forgiveness Application including instructions was issued by the SBA and US Treasury over the weekend and can be found on the SBA and U.S. Treasury web-sites and at this link PPP Loan Forgiveness Application

To request forgiveness of PPP loan proceeds, a borrower must file SBA Form 3508, Paycheck Protection Program Loan Forgiveness Application.  The application has four components:

1. PPP Loan Forgiveness Calculation Form;
2. PPP Schedule A;
3. PPP Schedule A Worksheet; and
4. (Optional) PPP Borrower Demographic Information Form.

Borrowers are required to submit items (1) and (2) to their lender and retain item (3) as well as additional support in their internal records for six years.

The Application also includes a page of certifications to sign and four-and-a-half pages of instructions providing some clarity, but a number of important questions remain open.

As expected, the application and instructions provide for four categories of costs that are eligible for forgiveness:

1. Payroll costs;
2. Business mortgage interest payments;
3. Business rent or lease payments; and
4. Business utility payments.

While forgiveness is generally available for costs incurred with respect to these items during the borrower’s “Covered Period,” (which is the eight-week period that begins on the date the PPP loan was disbursed,) some flexibility has been added to the guidance to simplify the calculation.  As with prior guidance, the requirement that at least 75% of the forgiven amount be attributable to payroll costs has not changed.

Below are what we believe are some the key highlights that will impact our clients.

1. The option to use an Alternative Payroll Covered Period for borrowers with a biweekly or more frequent payroll schedule, which starts with the first payroll after receiving the PPP funds instead of the date the loan was dispersed.
2. Payroll costs are considered paid on the day that paychecks are distributed or that the borrower originates an ACH credit transaction.
3. Payroll costs are considered incurred on the day that the employee earned the pay.
4. Payroll costs incurred during the last pay period are included if paid on or before the next regular payroll date even if that is beyond the 8-week period.
5. An eligible nonpayroll cost must be paid during the Covered Period or incurred during the Covered Period and paid on or before the next regular billing date, even if the billing date is after the Covered Period. Eligible nonpayroll costs cannot exceed 25% of the total forgiveness amount. This appears to allow businesses the flexibility to include bills that were already due when the covered period started.
6. Once the maximum forgiveness is determined based on how a business has spent the PPP funds there is an additional test a company must meet related to measured reductions in full-time equivalents (FTE). The new guidance, provides that a borrower is exempt from this reduction if certain exceptions are meet or a FTE Reduction Safe Harbor applies. One important exception provides that a borrower is not penalized for FTE reductions that result from the following circumstances:
   • reductions related to any positions for which the borrower made a good-faith, written offer to rehire an employee during the Covered Period or the Alternative Payroll Covered Period that was rejected by the employee; and
   • reductions related to any employees, who during the Covered Period or the Alternative Payroll Covered Period
     • were fired for cause,
     • voluntarily resigned, or
     • voluntarily requested and received a reduction of their hours.

7. The SBA has clarified that a full-time equivalency (FTE) employee will be calculated based on a 40-hour workweek. Borrowers are allowed a simplified calculation method option if they choose, to assign 1.0 to employees who work 40 hours or more and 0.5 to employees who work fewer than 40 hours. Businesses that are close with regards the FTE calculation, may need to run the calculation both ways.

We believe the following are important questions that remain definitively unanswered pending subsequent regulations or FAQs:

The new guidance as written leads many to believe the instructions now allow for the inclusion of all payroll costs paid or incurred. If correct, the door would be open to including payroll costs incurred before the 8-week period, as well as costs incurred through the end of the 8-week period.

Regarding retirement benefits, the instructions indicate that the total “amount paid by [the] Borrower for employer contributions to employee retirement plans” will be entered in the calculation worksheet. While it is clear that this will be based upon the 8-week covered period or the alternative payroll covered period,” there is no indication as to whether the amount that is paid by Borrower can include contributions attributable to an entire year, or even 2019 and 2020 combined.

While the current definition of utilities to include electricity, gas, water, transportation, telephone, or internet access seems clear on the surface, in practice further detailed definitions of each of these utility categories are needed in many specific circumstances.

If rent includes common area maintenance and property taxes, do these commonly bundled costs have to be removed?